Great piece. I apply this same approach to other industries as well. If industry economics are strong, sometimes it’s not worth the effort to try to pick winners.
Industry structure is terribly important. I'm biased toward specific names in the nicotine space, but I think that there are appealing qualities across most. I'm happy to be wrong on my biases and see the smaller legs pick up the slack.
I also take a similar approach as yours for certain other industries where I want to round out exposure.
I own all 4 majors with a bias towards the UK listed ones simply because there is no dividend withholding tax. Ironically it was zirp that pushed me into tobacco :)
Same for me! When interest rates on “risk free” bonds were 1-2% (ie it was almost a guarantee they’d return a negative real return), nicotine stocks had dividend yields of 5-8% (and in some cases free cash flow yields well above 10%) and seemed to be a much better allocation, as it turned out.
I wholeheartedly agree with the basket approach. The only exception would be for investors who have a truly exceptional understanding of trends in the nicotine space. As a thought exercise — who would have correctly guessed in the 1950s and 60s that Marlboro would become the best selling cigarette brand in the US and the rest of the world? And that despite all the legal issues, PM would be such an enduring cash machine?
I *think* I have quite a good understanding of the industry. My unweighted basket indeed expresses bias toward some companies over others. But I am happy to concede that I have yet to learn plenty more. Your point is spot on. And I think if we look forward by a similar timeframe, there is no way to know how the space will look. However, from now until then, as long as the industry structure remains somewhat similar to today, aggregate results may look very impressive.
Great piece. I apply this same approach to other industries as well. If industry economics are strong, sometimes it’s not worth the effort to try to pick winners.
Industry structure is terribly important. I'm biased toward specific names in the nicotine space, but I think that there are appealing qualities across most. I'm happy to be wrong on my biases and see the smaller legs pick up the slack.
I also take a similar approach as yours for certain other industries where I want to round out exposure.
I own all 4 majors with a bias towards the UK listed ones simply because there is no dividend withholding tax. Ironically it was zirp that pushed me into tobacco :)
Same for me! When interest rates on “risk free” bonds were 1-2% (ie it was almost a guarantee they’d return a negative real return), nicotine stocks had dividend yields of 5-8% (and in some cases free cash flow yields well above 10%) and seemed to be a much better allocation, as it turned out.
I wholeheartedly agree with the basket approach. The only exception would be for investors who have a truly exceptional understanding of trends in the nicotine space. As a thought exercise — who would have correctly guessed in the 1950s and 60s that Marlboro would become the best selling cigarette brand in the US and the rest of the world? And that despite all the legal issues, PM would be such an enduring cash machine?
I *think* I have quite a good understanding of the industry. My unweighted basket indeed expresses bias toward some companies over others. But I am happy to concede that I have yet to learn plenty more. Your point is spot on. And I think if we look forward by a similar timeframe, there is no way to know how the space will look. However, from now until then, as long as the industry structure remains somewhat similar to today, aggregate results may look very impressive.
Devin,
Why don't you give us your top to bottom picks without the specific allocations?
thx
I may very well disclose rankings and relative allocations in the future. You can get a good sense of my views through the archive.
"Thinking in bets" is a priceless advice.