Buy 'sin stocks' and get filthy rich, says Wall Streeter who's done it

Buy 'sin stocks' and get filthy rich, says Wall Streeter who's done it

PoliticsMarch 30, 2017 By Reilly Capps

Among people with money, there's a huge and growing movement toward investing in stuff that will make the world a better, happier, cleaner place: solar power, clean water and organic food.

Gerry Sullivan isn’t playing the investing game like that. He manages a fund called the Vice Fund, which invests in four kinds of companies many people won't touch: alcohol, tobacco, gaming and defense. So cigarettes, bombs, handguns and beer are how he makes money — and he'd like to get into marijuana. Going on its 15th year, the fund has beaten the S&P 500 (which is sort of an average of all stocks). We talked by phone. 

How did you get the idea to do this?

The idea behind a "sin stock" portfolio has actually bounced around academic research for 30 some odd years. Over long periods of time, these types of stocks tend to outperform a benchmark index.

Why do you think that is?

These are stocks that are looked at as sins or vices by major funds, big public pension funds. They say as part of their mission that they're socially responsible, and so they'll exclude an investment in, say, Philip Morris. And when you exclude things from certain funds, that does certain things to its value.

Over the past 15 years, would I have done better, financially speaking, investing in vices than socially responsible funds?

Most likely yes.

What would have been the most profitable vice sectors over that time? Gaming or tobacco or alcohol or defense?

Without a doubt, the best performing is tobacco. Altria (formerly Philip Morris) has gone up 22 percent annually.

Does this say anything about humans? Like, that we pretend to be good, but with our dollars we do shady things?

I think what ultimately it works down to is, do they have a product that they can sell that people want to buy?

[Vice Fund manager Gerry Sullivan. Courtesy Photo.] 

Do you believe gambling, alcohol, tobacco and defense are, in fact, vices or sins?

I'm a libertarian, so I believe that it's up to one's individual choice. You have to go to the fine print of those beer ads, where they say, 'Please drink responsibly.' I don't think they're bad things to do, if you do it within reason. I used to think of defense as vice for republicans.

Will you get into marijuana?

I would love to own a marijuana company. But there's too few to choose from, and the prices are so extreme.

What stocks have people given you the hardest time about owning?

Smith and Wesson.

Is there anything you wouldn't buy?

Shares of Congress, if they were available. I wouldn't buy that.

Do you get shunned on Wall Street?

No, no.

Do you get any blowback at all?

I did a call in radio show in Utah, and the first caller said that I was going to hell.

Did it hurt your feelings?

No. It was a lot of fun. I'm out there a lot. I did a debate where I defended sin stocks versus these quote-unquote socially responsible funds. It was at the Javits Center in New York. Two-hundred fifty people in attendance. They were all in the corporate responsibility departments of companies. I had no idea that companies have that.

What did you say?

My pitch was vice vs. nice. We live in a fair society which allows some choice, and if these were truly bad products, they would be put out of business. They've been some very important parts of our history as a country.

Has Trump been good for the vice business?

Not as much as you'd think. Donald Trump doesn't drink. Donald Trump doesn't smoke. Actually, the fund underperformed from the election to the end of the year. You would think that defense would do better. But the money has gone into financial, energy and drugs.

Do you do a lot of vices, personally?

I drink. I don't gamble. I don't smoke tobacco. I have used guns for sport.

Brothels? Cocaine? Trips to southeast Asia for ping-pong shows?

Oh god no.

Overall, what have you learned from this endeavor?

What surprised me is that there's a lot more to these companies than I thought. The majority of them are very well run.

And it's fun. I have a U.S. patent on an investment strategy, and we had a fund built on it, and it was a great fund and did really well. But it was very boring and difficult to explain. Whereas the vice fund is very easy to explain.

At least judging by the fund, vice is still selling.

People find it works. They may have too much money in socially responsible funds.

So buy vice? Sell virtue?

Own a diversified portfolio. Buy both.