Does it pay to be bad?

Why ‘investing in sin’ pays – and why you should always be careful when investing in collectibles.


When it comes to where to put your money, new research from experts Paul Marsh, Elroy Dimson and Mike Staunton shows that ‘sin’ is where it’s historically flourished. 

The findings come as part of a long-term research project conducted by the trio.

“Since 1999, Mike, Elroy and I have been working on a long term returns project,” explained Paul Marsh. “We now have a very comprehensive record of long-run rates of return on all the main asset classes around the world.”

The painstaking research saw the three academics assemble a database of 23 countries, looking back over 115 years of coverage on stocks, bonds, bills, inflation, currency and GDP. 

Describing the inspiration behind the enormous project Paul Marsh said: “The reason we wanted to do this was because when we started back in 1999, almost everything we knew about rates of return on equities, fixed income, cash, inflation and so on, came from the US. If you picked up a textbook in corporate finance or in investments, it would give you the US evidence and it would also give you the impression that American findings held good for the rest of the world – not just for the past but also for the future. 

“The way we thought about it was that the US has been a hugely successful economy during the 20th century. It’s been the superpower, not just in military terms, but also in terms of economics and finance. So it wouldn’t be surprising if, when we looked at the US, the returns that investors had enjoyed were rather good. What about the rest of the world? 

“What we wanted to do was globalise it and look at returns from the rest of the world. Not surprisingly, we found that US equity returns were amongst the very highest in the world. This has caused us to revise downward our estimate for the future equity risk premium – which is arguably, the most important number in finance.”

 More recently, Dimson, Marsh and Staunton have turned their attention to looking at long run industry returns since 1900, and this has led them to uncover some interesting results on the returns from ‘sindustries’ – that is, industries involved in the “sin” business such as tobacco, alcohol and gambling. 

Over the very long run, namely, the 115 years since 1900, they found that the best performing industry in the United States was tobacco. In the United Kingdom, the best performer was alcohol.  For the United Kingdom, the tobacco index did not start until 1919, but from then on, tobacco was also the best performing industry in the UK. 

The trio also looked at Dan Ahrens’s book, Investing in Vice: The Recession-Proof Portfolio of Booze, Bets, Bombs and Butts, along with the ‘Vice Fund’, which Ahrens launched following his book release. 

They tracked the returns on the Vice Fund, which Invested specifically in non-ethical industries including gambling, alcohol and tobacco, against those of the Vanguard FTSE Social Index Fund. They found that vice beat virtue by 1.7% per year. Elroy Dimson explained that “there’s quite a lot of supportive evidence from around the world from a range of different researchers in this area which also suggests that sin stocks have higher expected returns.” 

What’s the moral of the story? Does vice really pay? 

Dimson emphasised that it’s more complicated than that. 

“Why might sin pay?” he asked.  “Well, oddly enough, one explanation is that responsible investors are the cause of all this. If sufficient investors avoid vice businesses, that would depress their share prices. But if it depresses their share prices, these stocks will offer higher expected returns to those individuals who are not so troubled by their consciences. But there is another possibility.  The higher rewards may also be because the stock prices of sin companies are depressed because of an overhang from the risk of litigation, further regulation, and other setbacks.”

What lessons can be learnt from the research? And what should you do with your money based on the lessons from the past?

“At the outset, we’d say that it’s important to ask what the risks are that you face and which of those risks are rewarded. Equity risk has clearly been rewarded historically. In the fixed income world, maturity risk and credit risk have also yielded risk premia. In addition, there is a large range of other factor exposures about which we have written extensively.

“Even when risks carry an expected reward, you still have to ask what risks you can tolerate. You need to think about issues such as your age, income, wealth, needs, liabilities, motives for bequests and, in particular, what you would do in the bad times. You need to plan not only for what you expect to happen, but also for the unlikely events that could be painful. 

“You should also look out for “free lunches”.  First, you should diversify across stocks, countries and asset classes. This gets rid of risk free of charge. Second, think about tax breaks and the tax efficiency of your investment. Third, you can take advantage of “free” guarantees – which are often offered by governments to investors who deposit money or hold short-term bonds in banks and building societies.

“Fourth, you should also be minimising fees. Ultra-low-cost investing is now big business, and low cost ETFs and index funds abound.  Finally, plan to have liquidity when you need it. If you are able to realise the cash that you need at a time of your choosing, that’s much less costly than realising cash at the wrong time, when you have to pay for liquidity.”

Should you take a DIY approach to investment? 

“Should you do it yourself (DIY)?” ask Dimson, Marsh and Staunton. 

“At business school, we always try to teach people to do things for themselves. DIY investment can be “heavy” or “light”.  

DIY investment “heavy” can take a lot of time and be very absorbing. It involves buying stocks only after poring over their accounts and other information; or devoting large amounts of time to stamp, wine or art collections. Do this only if you enjoy it, you are good at it, and you have lots of time available.

But there’s also DIY investment “light”. This involves keeping it very simple and very cheap.  We all need a certain amount of cash, which we should keep to a minimum at today’s low real interest rates, and this could be supplemented by, say, a long government bond of a suitable maturity, plus a global ETF that will cost you almost nothing to run.

Finally, you may prefer to use advisors or managers. Before doing so, however, consider the costs of doing this, the potential conflicts of interest, the complexity this may involve, and whether your advisors really are capable enough. Also, make sure they are more concerned with your future wealth than their own.”

Comments (6)

Ali Baba 7 years and 6 days ago

The gambling industry is a case in point. I remember Southern Sun group in South Africa run by the indomitable Sol Kerzner as being particularly successful with Sun City (often disparagingly called Sin City), despite boycotts and the winding down of Apartheid, the creation of Bantustans inadvertently allowing a loophole to exist for gamblmg outside the Republics so called borders. Another example is the continued success and exponential growth of the industry in Macau, following the handover to China in 1999.

Ranjeet Guptara 7 years, 3 months and 14 days ago

Thank you, Elroy, Paul and Mike for the fascinating study. Inductively, the returns of the Tobacco sector have been strong. However, it would be interesting to use a deductive approach. Do you expect sin to continue to pay, given the health issues described for tobacco, and increasing regulatory constraints?

Elroy Dimson 7 years, 7 months and 2 days ago

John, Our study spans 115 years. You can read it in Chapter 2 of our Yearbook at Regards, Elroy + Paul + Mike.

Elroy Dimson 7 years, 7 months and 2 days ago

John, Our study spans 115 years. You can read it in Chapter 2 of our Yearbook at Regards, Elroy + Paul + Mike.

JohnB_MSc05 7 years, 7 months and 2 days ago

The 'responsible investor' answer is interesting but would only seem likely as an explanation for the relatively recent performance of these asset classes.