Today, by a sudden hunch I wanted to know what if some one who smokes had invested a equal amount of money into the shares of the leading tobacco company (ITC). How would the Investment fare and what would be the current value.
And before I say anything, let me say that I neither smoke nor have invested into ITC shares, so no point sending me the joke below 🙂
Lady: Do you smoke?
Guy: Yes I do.
Lady: How many packs a day?
Guy: 3 packs.
Lady: How much per pack?
Guy: $10.00 per pack.
Lady: And how long have you been smoking?
Guy: 15 years
Lady: So 1 pack is $10.00 and you have been smoking 3 packs a day which puts your spending per month at $900. In 1 year, it would have been $10,800. Correct?
Lady: If 1 year you spend $10,800, not accounting for inflation, the past 15 years puts your spending total at $162,000. Correct?
Lady: Do you know if you hadn’t smoke, that money could have been put in a step-up interest savings account and after accounting for compound interest for the past 15 years, you could have by now bought a Ferrari?
Guy: Oh. Do you smoke?
Guy: Then where’s your fucking Ferrari?
Of course, there are several caveats in such a study. For instance, there are smokers who smoke a stick or two a day and then there are those who smoke 2 or even 3 packs a day. To be conservative, I took a smoker who smoked around 5 cigarette a day and did not smoke on week ends. That comes to a neat 10 packs per month.
I tried searching for data on what ITC charged per cigarette over the years but could not find any such statistic. Good friend Kora Reddy came to my aid with the starting number (1995). Since I know the current price, I just incremented the price over the years (CAGR of around 12.5%). This is clearly not the true price, but definitely something that could be used for the test.
ITC has over the years given Bonus as also split the face value of the stock. Since that would complicate things too much, I used adjusted data (adjusted for Splits / Bonus but not for Dividends). In 1995, ITC was traded physically and getting odd lot shares may have been tough. And prices would definitely not be the one I used (post split), but, once again, idea is to get a rough number than a very accurate one.
The concept was simple. When you buy say 10 packs for the month, you also buy shares for the same amount. So, in affect, every time one smokes a pack of cigarette, the amount that gets debited is more or less equal to 2 packs.
Starting from 1995 till end of 2014, I assumed a person would have smoked around 2400 packs (10 per month * 12 months * 20 years). The total amount spent on that comes to around 82,500.
If the same amount was invested in ITC shares, he would have bought approximately 1316 shares. If one uses the last investment price (Dec 1, 2014), the value of his portfolio comes to around 4.79 Lakhs. Since the investment is staggered over such a long period, using XIRR, I get a return of 19.97%. That is actually better than Gold or Nifty. Food for thought, eh?
So, the next time you buy a pack or carton of cigarette’s do think about calling your stock broker as well. Who knows, you may actually end up a millionaire due to your bad habit.