What do investing, presidential elections, and dating shows have in common? Nice guys finish last-and that's never been truer than it is now. Traditional choices for the value investor, like the financial sector and housing, got obliterated in the credit crunch. The once booming and "socially responsible" ethanol market got hit with a glut that plunged prices into the corn-clogged crapper. And experts are betting that more volatility is on its way as the U.S. dollar continues to slide, with some even muttering the R-word... as in recession. When the economy tanks, industries that cater to the downtrodden boom.
The only solution to this hellish investing climate is to start listening to the little devil on your shoulder. He'll tell you to sink your hard-earned scratch into four things that have always been reliable growth industries: war, death, disaster, and sex. They consistently beat the S&P 500 and keep returns up even when the market is down. Investing in misery and vice isn't risk-free, but deals are yours if your scruples are as weak as the dollar. And yes, it's legal...ish.
Strategy: War
Why it's dirty: You can sleep at night by telling yourself you're investing in technology-guns, missiles, warships-but really you're banking on carnage. Most defense funds invest in the "big five" government weapons contractors: Lockheed Martin, General Dynamics, Northrop Grumman, Boeing, and Raytheon. PowerShares Capital Management also includes the "homeland security" sector, and mainstream outfits like the Victory Diversified Stock Fund invest heavily in big government contractors like dirty money poster boy Halliburton.
Why it's worth it: "The Index is up more than 27 percent [as of October, 2007]," says Scott Sacknoff, manager of the SPADE Defense Index. "And in four of the past six years we've beaten the S&P by more than 10 percent." That's an indication of how the entire sector is performing.
Strategy: Death
Why it's dirty: In what's called aviatical settlement-first popularized in the '80s, when AIDS was exciting and new-you purchase someone's life insurance policy for less than face value. The longer the life expectancy, the deeper the discount; when he dies, you collect. So not only are you waiting for a terminally ill patient to kick the bucket; you're also pulling a scam.
Why it's worth it: Rates of return vary wildly, but 40 percent is possible. Your investment is independent of the market-people always die-and risk can be smoothed out by using a specialized broker. You just need to cover your ass. Unreliable actuarial data and pesky experimental cures can foil your plans, insurance companies can refuse to pay out, and a suicide can void everything. Plus, you could get scammed if a broker acquired the policy you buy via shady means. "Brokers and providers are licensed in most states," says Julie McPeak, chair of the Life Insurance and Annuity committee of the National Association of Insurance Commissioners. "Ask for disclosure of fees, whether there's a contractual arrangement, and whether fair bids were made on the policies."
Strategy: Disaster
Why it's dirty: Almost 600,000 vehicles were flooded and damaged in hurricanes Katrina and Rita. Many are still floating around on the market after insurance companies "totaled" them because their electronics systems got soaked. But they can be legally salvaged and resold by an unscrupulous dealer: namely you. Simply "wash" the title by moving the car from a state where the salvage title is required to one where a new, "clean" one can be acquired.
Why it's worth it: Buy a flood-damaged late model BMW 3-Series for $4,000 at insurance Auto Auctions or on eBay Motors. Spend $5,000 fixing it. Sell it for $18,000 with a new title that doesn't reflect that you found the car upside down in a tree.
Strategy: Sex
Why it's dirty: Porn is a $12 billion industry, but historically almost all of that wealth has been privately held. Then about two years ago AdultVest created a pornographic investment marketplace. You can register for their funds if you have access to Peter Northsize loads...of cash (at least $5,000). Or you can find a specific company and be a slutty angel investor and even bankroll a production featuring your favorite starlet.
Why it's worth it: Porn production companies can enjoy 60 percent profit margins and collectively boast annual worldwide revenues of $57 billion, yet banks and traditional investors turn their noses up at providing capital. That's why the less squeamish can clean up. "It's not unheard of for investors to generate a two to six times return on their money," says Francis Koenig, former Wall Street hedge fund guru and founder of AdultVest. Plus, "there are certain sectors we call consumer nondiscretionary," Sacknoff says. "Like Kellogg's, people will still want their Corn Flakes in the morning no matter what." Turns out Corn Flakes were originally marketed as a cure for masturbation and they're both sure financial bets, because neither will ever go out of style.
Vice
The racket: Thankfully, even in bad times, "People will still smoke and drink and gamble," says Charles Norton, manager of the Vice Fund, a vigorous mutual fund that invests
in alcohol, tobacco, and gaming (in addition to defense and aerospace stocks).
The forecast: Recessions spell boom times in the vice game. The claim that these stocks are not only recession-proof but actually robust in downmarkets received a huge boost after the last economic downturn. Here are the green- machine stats: Tobacco stocks soared 56 percent and alcohol stocks gained 46 percent in the five years that ended in mid-2003, even as the broader market declined 14 percent. Bring on the financial pain, America!
How to sleep at night: Hey, rehab counselors and oncologists need work, too.
Pawnshops
The racket: The skeeziest middleman in commerce, the pawnbroker, gives minimal cash to desperate souls for their goods, then turns around and sells them for a profit.
The forecast: "Pawnshops are in the business of providing short-term financing for people this economy is going to affect the most- those who can't get conventional credit," says Henry Coffey, an analyst with the investment firm Ferris, Baker Watts, Inc. who forecasts the stock of Cash America, a pawnshop company with more than 450 stores (symbol: CHS).
How to sleep at night: Hock shops help people. Think Dan Aykroyd in Trading Places. His watch-which told time in Monte Carlo, Paris, Rome, and Gstaad-earned him 50 bucks in a Bo Diddley's pawnshop. Score! Wait, that was the movies...You're going to hell, Winthorpe.
Corporate Bagmen
The racket: Vulture firms (known as "opportunity investors" at the country club) buy up unhealthy companies, then make them profitable. Think steel plants a few years back and mortgage lenders now.
The forecast: Hedge funds and distress- loving investment firms like WL Ross & Co.
are swooping down on Wall Street's casualites from the mortgage mess, which means they're confident these companies can bounce back.
How to sleep at night: Sure, these suits come in and slash jobs, but they save companies from folding altogether. So some people do keep their positions-they're just paid
less, have more responsibility, more hours, and fewer benefits. But this ragtag staff has a dream and a crazy plan that might work if they put away their differences and work together!
Debt Collectors
The racket: The tightening of bankruptcy laws last year (which makes it harder to ditch debt) gave the collection agency industry reason to never stop calling you until you pay up.
The forecast: With the continuing mortgage crisis, bum car loans, and the steady stream of delinquent credit card users, the collection business has never been better. Many publicly held agencies like Asset Acceptance Capital Corp. (symbol: AACC) are seeing demand soar and are frantically hiring additional crews of phone jockeys to harass the masses.
How to sleep at night: The depressingly grim economy of Buffalo-the U.S. capital of debt collection agencies (108 and counting)- has seen a much-needed hiring boom thanks to the rising number of deadbeats out there. You're welcome, Bills fans.
Private Prisons
The racket: Brat Pack movies and Prince songs helped our horny parents get down and dirty in the '80s, resulting in a current spike of 18- to 24-year-old males-the most crime- prone peer group. And because government budgets are squeezed, private outfits are ready to step in with cells, trained guards, and beat-downs at a bargain.
The forecast: Mandatory sentencing and tougher immigration laws guarantee we'll keep locking people up at record numbers, says Kevin Campbell, an analyst at Avondale Partners of Nashville. Campbell has a "buy" rating for the top publicly traded prisons, The GEO Group (GEO), Corrections Corp. of America (CXW), and Cornell Cos. (CRN).
How to sleep at night: With your eyes shut-unlike the boys in C-block.
Rent-to-Own
The racket: Rent-A-Center and ColorTyme, owned by same behemoth company (symbol: RCII) "rent" housewares to folks who can't afford to drop cash on a couch or a flat- screen. Thing is, once the loan term is up, the suckers, er, renters, have paid nearly three times what the item costs and still may not own it. If someone were to give a loan with a 300 percent fee or interest rate, they'd be arrested under usury laws, i.e., for loan sharking.
The forecast: Thanks to a three-pronged poor-folk prod-(1) the growing recession, (2) the age of the four-figure HD flat-screen television, and (3) the coming death of analog (antenna) broadcasts next year-Rent-A-Center netted $756.6 million in the first quarter this year.
