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Wisdom (26th March 2012)

Small change; What you should do if you hit the jackpot

The Straits Times 25th March 2012 2012 Singapore Press Holdings Limited Gambling, smoking and drinking may be bad, but they make excellent investments Some of my friends are adamant about not touching stocks of companies that promote sinful habits such as gambling, smoking or drinking. They say that people who invest in such stocks are helping to fund the immoral and unethical activities those companies engage in. As my former colleague Gabriel Chen noted in an earlier column, there are investors like himself who look for solid performance-driven companies and consider it a big plus if these are also socially responsible and do good things. But bottom line-driven investors will beg to differ. True, we have made great strides in the past two millennia in areas such as agriculture, transportation, medicine and technology. This has, in turn, led to a big improvement in living standards and quality of life. But as human beings, we remain as flawed as our ancestors - struggling with the same deadly sins such as greed, gluttony, anger, envy and lust. Of course, consumers will cut back on spending during an economic slowdown. But this does not mean that people will drop their bad habits in hard times. In fact, they may feel an even stronger urge to escape from their financial woes by smoking more, drinking more, or visiting the casino more frequently. It is also worthwhile noting that the companies issuing so-called sin stocks are deeply rooted in markets across the region. Deutsche Bank strategist Teoh Su-Yin, in a recent report on Asean sin stocks, notes that there are 26 listed stocks in South-east Asia whose businesses are linked to casinos, alcohol, gaming and smoking (CAGS). These stocks are worth between 9 per cent and 11 per cent of their respective stock markets' total value. Investing in sin stocks pays in a big way. Ms Teoh said that from 1990 to the end of last year, the CAGS stocks outperformed the rest of the market by about 5.2 per cent every year. Her colleague Ajay Kapur told investors looking for profitable investing ideas to simply buy a basket of stocks focusing on casinos, alcohol, gaming and smoking. He said this makes a powerful investment theme, as rising incomes in Asia put more money into consumers' hands.

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Looking at my own stock portfolio, I am not surprised at the two analysts' bullish call. Even though I do not deliberately go out of my way to buy into sin stocks, my portfolio is crammed so full of them that it will make an ethical investor squeal. I tumbled into sin stocks early on. One of my earliest investments was in an old cigarette firm, Rothmans Industries, which has since been taken private by tobacco giant British American Tobacco (BAT). The company's forerunner, Rothmans of Pall Mall, had marked an old friend's first foray into the stock market way back during the 1972 bull run when he was given a 'hot tip' by a colleague about an impending bonus share issue. When the bonus issue finally materialised, with the company rewarding shareholders with a new share for every five existing ones held by them, my friend made a few hundred dollars from selling the original 1,000 shares he owned, but kept the 200 bonus shares as a memento. That later grew into a tidy pile of shares in two firms - Rothmans Industries and Rothmans Malaysia, now renamed as BAT (Malaysia). I remembered the story when I had some savings to put into the stock market, after I started working many years back. Investing in Rothmans Industries helped me reap a regular dividend every year, until it was taken private in 1999 at three times the price I had paid for the shares a decade earlier. Then there is the enduring love affair which some investors have with gaming stocks. When Resorts World Sentosa, the casino resort operated by Genting Singapore, opened its doors two years ago, one of the first performances which I caught there was a concert by the popular Taiwanese singer Cai Qin. I can still recall my surprise at the hive of activity as I made my way to the carpark after the concert - a good number of people were alighting from buses to troop into the casino, even though it was close to midnight. Surely, if such a good crowd is going to the casino and if you are not a gambler yourself, the next best thing to do is to buy into the shares of the casino operator. One old businessman friend recounted he bought his first lot in Kuala Lumpur-listed Genting Berhad - the parent company of Genting Singapore - after visiting the mountain casino resort decades ago. That subsequently spawned other stock spin-offs such as Resorts World, Genting Singapore and Star Cruises shares, which multiplied the value of his initial investment many times over. That is on top of the rich dividend payout which he gets from the casino operator. And when Genting Singapore was listed in Singapore in 2005, he subscribed in a big way to its initial public offering. That turned out to be a shrewd bet, as the company subsequently clinched one of the two lucrative casino licences on offer here.

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His initial outlay in Genting Singapore had more than quadrupled in value in the past six years. In giving these examples, I must make it clear that I am not endorsing sin industries. I do not smoke and I drink a glass of wine or two only on festive occasions. My occasional forays to Marina Bay Sands and Resorts World Sentosa are confined to the excellent performances that are put up regularly there, rather than the casinos. Companies in such businesses have always been subject to strict regulations, and safeguards have been put in place to warn consumers of the dangers of smoking, gambling and alcohol. But rather than try to make grand moral statements on our investment portfolio which may end up giving us a whopping loss, we should try to maximise the returns by investing in companies with good business franchises. That should include sin stocks. engyeow@sph.com.sg There are 26 listed stocks in South-east Asia whose businesses are linked to casinos, alcohol, gaming and smoking. These stocks are worth between 9 per cent and 11 per cent of their respective stock markets' total value. -- ST FILE PHOTO

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