How Tobacco Became One Of The Greatest Investments In History

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:17)

And I'm Tracy Alloway.

Joe Weisenthal (0:19)

Tracy, one thing that sort of characterizes the stock market these days is just this incredible dominance of a handful of gigantic tech companies. I mean, you pointed out today, I think you tweeted a chart this morning just showing how if you exclude just a handful of five companies or whatever, the S&P 500 is basically going nowhere.

Tracy Alloway (0:43)

Yeah, that's exactly right. So I think it's if you exclude Facebook, Amazon, Apple, Microsoft and Google, and just look at the remaining 495 companies in the S&P 500, the index is actually down 1% so far this year. And if you only look at those five tech stocks, those are up 40 or almost 40% this year, which is phenomenal. And because they're such a huge part of the index, of course, they pull the whole thing up to about 6% year to date.

Joe Weisenthal (1:16)

What do you think about those articles? I mean, you're a journalist. What do you think about those articles that are like, oh, if you had invested?

Tracy Alloway (1:22)

You say that like you're not. Oh, you're a journalist.

Joe Weisenthal (1:25)

No, we both are.

What do you think about those articles that are like, oh, if you had invested like $100 at Apple's IPO, you would be like this rich by now. Would you ever commission a story like that?

Tracy Alloway (1:36)

I don't think I'd commission them, but I can see why people keep writing them. I mean, hindsight articles are often a draw. And I think there are quite a few things that you could find where you could say, oh, well, had you invested a dollar in this, you'd now be a millionaire or even a billionaire. And some of them are really surprising. So I think we spoke about Domino's Pizza once. I mean, there are stocks like that.

Joe Weisenthal (2:04)

That's a good one.

Tracy Alloway (2:05)

That you wouldn't necessarily expect to outperform in that way.

Joe Weisenthal (2:08)

Right, here's a crazy stat.

If you had invested $1 in tobacco stocks in the year 1900, which, you know, no one alive today, I don't think we could have done that. Do you know how much it would be worth today?

Tracy Alloway (2:24)

I do not.

Joe Weisenthal (2:26)

$1 supposedly, according to this thing I'm reading right here, $6.3 million if you had invested in tobacco stocks in 1900

Tracy Alloway (2:36)

Oh, darn, I missed that opportunity. But I mean, tobacco stocks kind of fits under the dominoes pizza model of unexpected outperformance. Because when you think about tobacco stocks, you think about all these pressures and headwinds that have been on the business model for decades now, right?

Joe Weisenthal (2:59)

Yeah, I mean, basically, since we've been alive or since, yeah, since we've been alive, we've mostly known tobacco as the sort of vilified industry, all sorts of public health efforts to get people to stop smoking, taxes on cigarettes to discourage consumption, lawsuits and so forth. And yet, sure, you have some noise here and there. And I think maybe in the last couple of years, they haven't done as well.

But by and large, tobacco companies, cigarette companies have just been extraordinary winners for years and years and years, even with all of these sort of efforts to slow them down.

Tracy Alloway (3:35)

Yeah. So I think this is a really interesting industry to focus on at the moment, even though we're talking about things that happened to tobacco over the past 100 years or so, you can see there's definitely parallels between tech and cigarette makers, I guess, because government policy played such a role in the tobacco industry, and we're starting to see, I think, the beginnings of government policy really come into play for the big tech companies as well.

Joe Weisenthal (4:05)

And I think people even called, I've seen people say things like, oh, Facebook is the new tobacco or whatever. They usually mean that negatively, but if you took it literally from an investment standpoint, that's like, oh, then I should definitely buy that.

Tracy Alloway (4:19)

Yeah, there's definitely tension there between it being a complete moneymaker and also people saying it's a negative for society.

Joe Weisenthal (4:28)

Right. So anyway, today we're going to talk about tobacco stocks in general and why they've done so well. And not just tobacco stocks, but tobacco companies and what it is sort of unique about this industry that for decade after decade after decade, year after year, and despite all these headwinds, they've just been extraordinary moneymakers, very hard to disrupt them, and bring them down in any way. We're going to be talking with two guests today. Gene Hoots, he's an investment advisor, and he's the author of a book, Going Down Tobacco Road, RJ. Reynolds Tobacco Empire, The Gold Leaf in North Carolina, and Lawrence Hamtil. He's also an investment advisor, and follow him on Twitter. He's talked a lot over the years about tobacco stocks and about what makes them unique. And Gene and Lawrence, they did a Q&A on Lawrence's blog a few weeks ago about the industry. I thought it was super interesting, and I thought we should expand on it here. So very excited to learn more about tobacco companies with these two.