Investing in Alcohol

A lot of people I know are always looking for a market beating investment.  Today a lot of people are buying companies that aren’t even making money at ridiculous prices.  Meanwhile an industry that has continuously beaten the market over long periods of time sits almost semi-ignored.  The industry, if you are wondering, is alcohol.  Investing in alcohol has proven to be one of the most lucrative places to invest in over multi decade periods.  Maybe because many people have to drown out that they lost money on the latest IPO whose price has no relation to its intrinsic value, but I digress.

One of the largest alcohol companies, Diageo, has been supplying the world with Guinness, Captain Morgan, Ciroc, and Crown Royal for decades, and in some cases centuries.  Between 1945 and 1992, Diageo, then called Guinness, compounded at 13.5%.  You wouldn’t have just crushed inflation, you crushed the market.  Turns out that when you turn water and barley into a gold concoction that messes with the chemicals in peoples brains, you have found a way to turn some money into a LOT of money.

How about a company that is located in the United States?  Look no further than Brown-Forman.  According to this Motley Fool article, Brown-Forman compounded at around 16% annually between 1986-2016.  That kind of compounding turned $10,000 into a little more than $850,000.  Investing in alcohol through Brown Forman bought you an ownership interest in Jack Daniels, Collingwood, and Old Forester.  By buying one of the best businesses in America, you got to enjoy a wonderful ride to financial independence.

 Why Investing in Alcohol has Worked so Well

Investing in alcohol has been proven countless times that in the past it has been a superior investment.  The returns on capital are extraordinary.  With much lower reinvestment needs than other businesses like steel mills, alcohol companies can send far more profit out to its shareholders.  Not only do the products form emotional connections that people form positive associations with, when they are down and out, people drink even more ensuring that even during economic downturns, the profits keep rolling in.

Another reason why sin stocks like alcohol have beaten the market is that for moral reasons, some people won’t invest.  If you have a relative killed by a drunk driver, I don’t think you will want to invest in alcohol.  Since many religions try to deter people from drinking, there are religious reasons to not invest.  All of them are perfectly valid, but when you look at the work by Jeremy Siegel, this drives stock prices down, and allows reinvested dividends a turbocharged effect that helps those businesses outperform.  Far to many people seem to think that only high tech can beat the market, but that simply hasn’t been the case in the past.

When somebody starts to invest, the common urge is to start by looking at industries or sectors that are growing at explosively hot rates that everybody says has the promise to turn every thousand dollars invested into millions overnight.  The images of a 20 something year old strutting around in a penthouse with six different European models on his arm after developing some new application for carbon nanotubes exerts an almost irrepressible urge in us to try to invest in the next company that will be the latest to unveil the next great doohickey.  However, this has never been a reliable way to get rich for investors.

So if high tech nanobots and new pharmaceutical drugs trying to use some proprietary technology that manipulates mRNA or what have you isn’t a path to wealth that can be consistently relied upon to generate wealth, then what is?  Well, I would encourage you to look at your pantry and refrigerator.  If you are like most people, there is probably alcohol there, and a better industry to invest in is hard to find.

Just a Quick Disclaimer

While I do own shares of Diageo, and think that it is currently a relatively compelling buy in today’s market, shares of Brown-Forman are currently overvalued.  The only reason it currently has a valuation of 18 is due to Brown Forman selling some brands artificially deflating its P/E ratio.  I should also note that my statements of Diageo only concern multi-decade holding periods.  As always this isn’t stock advice, and I don’t have a fiduciary duty to you.  Every stock in the world can fall 75% tomorrow, but that is part of the investing process, even if you are investing in alcohol.