How to Profit off Addicts
If you want to get rich, don't invest in things people want. Invest in things people need.
Of course, besides food, shelter, and safety, needs change. Those changing needs are often the most profitable, and the more people need, the more suppliers can profit.
History shows us that one of the most profitable needs of all is the need for an addictive drug. Before being shot by Colombian security forces, Pablo Escobar was one of the wealthiest men in the world, with a personal fortune near $25 billion. Thanks to an unstoppable demand for cocaine, Escobar rose from poverty by smuggling tons of cocaine into the United States back when the white powder was the drug of choice of American yuppies and junkies alike. Such is the wealth to be had in feeding addictions.
Tobacco companies have known for a long time how profitably supplying addicts can be, and the firms have become the dividend darlings that yield-hungry investors dream of. Reynolds American (NYSE: RAI), producer of Camel, Pall Mall, and Winston cigarettes through its R. J. Reynolds subsidiary, has been offering dividends of around 5 percent (usually much higher) since the middle of 2004, while its stockprice has climbed steadily despite lower cigarette smoking rates from 2005 to 2010. Meanwhile, stock in Reynolds increased nearly 4 percent--and that's including the market crash of 2008.
Thanks to nicotine's addictiveness, other tobacco producers have provided investors with a reliable stream of income. Even if there are less smokers, investors in Altria (NYSE: MO) can get dividends of 5.6 percent. Lorillard (NYSE: LO), maker of Newport and Kent cigarettes, has a dividend yield of 4.15 percent and rose nearly 10 percent Thursday on unexpectedly high revenues. Imperial Tobacco (PINK: ITYBY) has a yield of 4 percent, while Phillip Morris (NYSE: PM) and British American Tobacco (NYSEAMEX: BTI) have yields well over 3%. These are impressive figures for companies that produce a product that cannot be legally consumed in many public spaces.
With falling smoking rates in the developed world, tobacco companies have had to look for new markets to boost their bottom line, but that strategy cannot last forever. Likewise, with even China making nods towards a smoking ban, the days for tobacco companies are numbered in the long term--even if those numbers can be counted in decades and not years.
Tobacco has the smell of an old addiction, a fad that is passing its heyday, and while nostalgia may resurrect the martini and skinny tie thanks to 60's-themed Mad Men and its copycats, there is little hope of hipsters taking to the evil weed.
Today's children are less exposed to cigarettes than perhaps any other since cigarettes were invented. Since cigarette smoking was taken into consideration when determining a movie's rating, cigs are finding less staring roles than Gary Busey. A few years ago, when I was in an airport in London, I heard a young child point to a pack of cigarettes and ask her mother, "what is that?" In a few decades, that question will be harder to answer.
So if not tobacco, what are the addictions of the twenty-first century? Any internet user knows the answer to that: information. Studies have shown the reward of getting email has made checking for messages a compulsion, inspiring pop bloggers and journalists to teach readers how to disengage. The reward for a new message, and new information, is too irresistable. The urge for more information has resulted in the so-called "internet addiction disorder" and the resulting industry that promises to cure this disease for a price.
How does one invest in the information addiction that is dominating developed nations? There are three primary sectors involved: the companies that provide the tools to access the information (computer manufacturers), the companies that provide the service that transmits the information (internet service providers, cell phone network companies), and the companies that provide the servers and infrastructure that broadcasts the information in the first place (server and router companies). Each sector has seen explosive growth for decades.
Let's start with the transmitters. These can include telecom giants Verizon (NYSE: VZ), AT&T (NYSE: T), and Sprint (NYSE: S), which offered high dividends for years thanks to their history in the telecommunications sector, a traditionally dividend-heavy industry. With the exception of Sprint, which can't stop losing money, these companies have shown healthy growth for years.
Video games have also been a source of escape for over a generation, and the immersiveness of massive multiplayer online role-playing games proved fatal for one three month old baby in South Korea, when her parents forgot to care for her because they were too busy caring for their virtual daughter, named Anima.
World of Warcraft producer Activision Blizzard (NASDAQ: ATVI) is up over 1,400 percent since going public.
Social media is an addiction, too. A new study concluded that Twitter is harder to resist than tobacco, perhaps because the desire to check updates is too strong to ignore. The researchers suggested that people will satisfy urges to check their Twitter feed more readily than they will indulge cravings for food and sex.
Social media has been a difficult option for investors, with the biggest names in the industry being private companies. Facebook's upcoming IPO will allow investors to connect to the heart of the social media industry, even if some are sceptical of the company's profitability. Once the company goes public, investors will be in a better position to invest in the Global X Social Media Index (NASDAQ: SOCL) as well as companies that depend on the Facebook ecosystem for their revenue. At the moment that basically means Zynga (NASDAQ: ZNGA), which has rallied lately on the hopes that the Farmville maker can translate the company's addictive products into revenue. That hasn't happened yet--not officially at least, and some analysts estimate that the company is hemorrhaging cash. Other game makers have shown greater signs of profitability, such as Electronic Arts (NASDAQ: EA) and arcade staple Konami (NYSE: KNM). Zynga, and similarly unprofitable Glu Mobil (NASDAQ: GLUU) still need to play catch-up.
The varied results of the game producers points to one fact: investing in twenty-first century addictions will involve changed expectations. Unlike the tobacco stalwarts, social media and tech companies are slow to offer dividends. One of the best dividend tech companies, Seagate (NASDAQ: STX) is focused on platter-based hard drives, although solid state drives have increased in popularity, which may hinder the company's recent growth, which has been explosive, although slower sales might signal changes in the media storage sector.
Other tech companies that make the Internet function have not become dividend giants. Cisco (NASDAQ: CSCO) gives a paltry yield barely over a percent, which caused Nader to threaten an investor revolt. Other tech companies don't offer a dividend at all while sitting on massive cash reserves, which has put the spotlight on Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) and their enormous cash reserves.
However, a focus on dividends is short-sighted. Despite crashing with the dot-com bust in 2001, Cisco is still up 52,228% from its days as a penny stock in the early 1990's. Since going public, Google's stock has climbed over 460%. Apple has gone from near bankruptcy to battling for the title of biggest American company by market cap within a generation.
The lack of dividends from these companies points to the different climate that surrounds the companies that pander to the new type of addict. The only weapon that tobacco kings had to fight one another was marketing. Despite the packaging, promises, and images, at the end of the day each company was offering the same thing: nicotine. The internet, video games, and technology are a more uneven industry, with Apple's offerings radically different from Google's. Tech companies need to be nimbler and more adaptable to compete, a reality that IBM (NYSE: IBM) wisely acknowledged over a decade ago when it shifted from PC manufacturing to business services and consulting. Investors cannot just jump into one or two companies and ignore changes in the industry.
To push the drug of choice for the twenty-first century--information--investors will need to follow their investments more closely. The days of a steady flow of passive income from feeding artificial needs are gone, but the days of getting rich off of human weakness are far from over.
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