Dancing with the Devil

About 8 years ago, my friend Rob and I pondered whether to make an investment in Philip Morris, the cigarette manufacturer. 

The company, now known as Altria, had been rocked by yet another anti-smoking related lawsuit.  But we knew that—despite lawsuit after lawsuit—this company just kept churning out the profits.  Its share price, however, really got kicked in the teeth, so Rob and I were tempted.  Should we or shouldn’t we buy shares?

In the end, we opted out—not because we didn’t think we could make a killing on the stock, but because of the ethical component of owning a cigarette manufacturer.

The stock went on to gain 300% from that point, and then dropped recently back to the 2002 level.

 The blue line represents more than a 5000% gain for Philip Morris (since 1970) versus about a 1,500% gain for the S&P 500 since 1970.  Clearly, it would have paid to invest in sin.

If you don’t care about the ethical issues, buy the stock.  It’s cheap, and over time, I believe that it will more than satisfy investors.  I think you’ll make a killing.  Pardon the pun.

Less harmful, but certainly bordering on a different ethical dilemma involves the purchase of mutual fund companies.  No—I’m not talking about investing in their funds.  Clearly, that’s a fool’s errand.

I’m talking about buying their stocks.  You see, when mutual fund companies (ahem) rip people off with high fees,  that “money for nothing” goes into the companies’ pockets.

It’s even better than buying shares in a company that sells addictive products because, when you buy cigarettes, at least you know that you’re forking over your $5 a pack, or whatever it is.

With mutual funds, most of the people who buy them have no idea what their fees are.  And they don’t compare their performances with a relative benchmark—so they continue paying fees to the owners of those fund companies.

We all know that the greater the profits a publically traded company can reap from its “customers”, the higher (long term) the stock price will rise.

If you think companies like Apple (AAPL) are profitable for shareholders, let me show you an example of what a stock can do when its customers aren’t aware of the money they’re throwing at it (in this case, in terms of mutual fund expenses)

Let’s have a look at Apple, and compare its long term stock appreciation with Franklin Resources, the company that operates the Franklin/Templeton mutual funds.

My goodness, since 1985, Apple (representing the blue line) would have made you about 17,500%.  That’s a lot.  But if you had owned a profitable mutual fund company, like Franklin Resources, you’d make your Apple buddies drool with envy.  They wouldn’t understand how you could make so much dough by investing in something so dull (not to mention predictable) but it wouldn’t matter.  Your 40,000% since 1985 with Franklin Resources (the green line) would have made Apple seem….well….comparatively poor.

But that has to be a one off, right?  Nope.  Enter a business that can reap HUGE profits from unaware customers, and you have yourself a cash cow.

Let’s have a look at T. Rowe Price and Raymond James Financial.  Since 1988, they’ve made 8000% and 7000% respectively.  T Rowe Price is the green line below, with Raymond James Financial representing the blue line.

Look below, and you can see that T.Rowe Price comes up way ahead of Apple over the same time period.  In fact, if you had invested in shares of both of these stocks (Apple and T Rowe Price) since 1985, you would have made more than twice as much with the mutual fund company as you would with the sexy inventor of the ibook, iphone, ipod and the new ipad.  Pity.

Charles Schwab?  Same thing.  It too, has come out far ahead of Apple over the long term.  The green line below represents Apple’s stock appreciation since 1990, while the blue line represents the great supermarket of mutual funds, Charles Schwab.

The word on everyone’s lips is Apple, Apple Apple….but should it be?  How about a company from a sleeper industry that can continue taking, taking and taking from investors, without them even realizing it.

Apple is probably set for a plunge anyway; it’s price isn’t sustainable.  …read more

Long term, it isn’t generally sexy companies that reap the most profits anyway.  It’s the dull ones you’d never expect. 

So, back to my buddy Rob: 

Rob, is investing in a mutual fund company like investing in Philip Morris?  And are we selling out on morals if we do it?  What do you think?