Sinful Investing: Is It For You?

If you are a strong proponent of socially responsible investing, you may find this article hard to fathom. There are definite advantages to investing in "clean" companies. But if there is one aspect of society that has endured the test of time: sin.

The Investopedia dictionary defines a sinful stock as follows: "Stock from a company that is associated with (or is directly involved in) activities considered unethical or immoral." The thing with ethics and morality, however, is that there is no universally accepted definition of what is or what is not ethical or moral. For example, one investor may view certain advertising campaigns as unethical and brand the product or the ad company itself a sinful investment. Another investor may see no ethical compromise in the situation. So when we talk about sinful investing, there is some gray area in defining a stock as sinful. (Consider learning the difference between being a "good" and "bad" investor by comparing socially responsible investing with sin stocks.)

However, there are some sectors of the economy that are generally considered sinful, such as gambling, alcohol, tobacco, sex and defense industries. Below we explore some of these so-called sinful industries.

Just one trip to Las Vegas or Atlantic City will show you the huge size of the gambling industry. In Vegas alone, there are numerous casino operators with market capitalizations in the multibillion-dollar range. In addition to the casino and hotel operators, there is the less sexy end of the business – maintaining the hardware to keep the casinos full. The industry also encompasses racetrack operators and sports-betting companies. One thing is clear: gambling is not going away anytime soon. If anything, gambling's popularity has soared in recent years with more and more online options for placing bets. (Learn more about how gambling and investing can go together in a different way by comparing investing and gambling.)

The profitability of beer, wine, and spirits has been something that companies have been capitalizing on for hundreds of years. While the majority of vineyards are private, there are plenty of brewers and distillers that are publicly traded.

Despite a firestorm of class-action lawsuits at the end of the millennium and the billions of dollars spent in settlement payouts, tobacco and cigarette companies remain profitable. Even if smoking has become less vogue in North America, the rest of the world continues to puff away. Huge markets remain for tobacco products for the foreseeable future.

The sex industry is so enormous, and much of it is underground, which makes it hard to find precise industry figures. But in recent years, a number of companies in the pornography industry, condom manufacturing and even makers of drugs designed to enhance a sexual experience have gone public. Just like gambling, the internet brings a whole new dimension to this business. It may be a taboo subject, but there are companies doing very well selling pornography on the internet (though most of these firms are not publicly traded). Even if you ignore the more brazen and visible operators, like Playboy and Hustler, there are a great many more innocuous industries that benefit from the sale of sex, such as hotel and cable operators that make handsome sums from their pay-per-view movies.

Although the defense industry represents one of those gray areas that we alluded to earlier, in most circles these stocks are considered sinful. The production of missiles, guns, tanks, and fighter jets can be interpreted in different ways – either you view it as destructive and harmful to the entire human race or just to those in the country where the arms are destined, or you may feel that it is simply a proactive measure for protecting one's nation. Regardless of your ethical or moral stance on the issue, there is no debate on the profitability of the manufacture, sale, and distribution of military equipment.

Industries that lure us with "naughty" temptations can offer a good place to park a portion of your portfolio. First of all, these companies provide relatively stable returns to investors, both in good times and bad. As the old saying goes, "What do you do to celebrate good times? Drink, smoke, gamble and have sex." And, what do you do during stressful and recessionary times? "Drink, smoke, gamble and have sex."

The returns provided by the companies related to these activities are often less prone to the cyclical downturns of the economy. They provide respectable returns in times of prosperity as well as welcome returns during market and economic slumps. For example, the S&P 500 fell nearly 20% between Jun 2001 and Jun 2002, while the major sin sectors gained between 8% (tobacco stocks) and nearly 20% (gambling stocks). In addition to being somewhat insulated from the cyclical nature of the economy, many sin stocks are renowned for providing consistent dividend payments.

The simple answer is returns. A great number of the companies in these industries have time and again turned a healthy profit and will continue to do so. By neglecting all of the companies within these industries you may restrict your portfolio's ability to make some solid gains. It's easy to understand why – many of these businesses revolve around addiction.

Gambling, tobacco, and alcohol are all habit-forming products or activities. Here is where the morality argument comes in. Few would debate that cigarette smokers or frequent gamblers are very loyal customers. But, is it ethical to keep on taking a gambler's money even though he or she has a serious problem? What about selling beer to an alcoholic? Clearly, there are no easy answers here and it's a decision each investor has to make personally.

Now we are not suggesting that a portfolio has to consist of only sinful stocks, but holding a portion of it in a balanced portfolio is worth considering. And just as in all industries, there will be firms that outperform others and by no means will all stocks involved in these types of businesses be prosperous, you will still have to do your homework to select the best ones. (To explore the realm of stock picking, explore key stock picking strategies.)

Investment firms have even made it easier for you to both invest in sinful companies and get instant diversification in the industry. Credit Suisse, First Boston, Merrill Lynch, and others offer mutual funds that invest along these lines – a socially-responsible investor's nightmare.

Just as fund families may offer a technology fund or an energy fund, investors now have access to diversification and professional management within the tobacco, gambling, alcohol, defense, and sex industries. You can be sure that a socially-conscious investor wouldn't even think of participating in these types of investments. But for some, investing means nothing more than finding companies that stand the test of time and make a lot of money. On the other hand, if you feel a company does not meet your social standards, speak up with your dollars and refrain from investing.

Whether or not you agree with sinful investing is a personal choice; however, human weaknesses and the lure of sinful pleasures are unlikely to disappear soon. If you have a long-term outlook and seek a little excitement, try adding a bit of peccadillo to your portfolio. For more insight, you might even look into the evolution of sinful investing.