Let's face it: Humans like to gamble. It often starts with children betting that they can run faster than their buddies, but I often wonder whether it starts earlier than that. Sometimes I picture babies thinking about their parents: "I bet I can get more of that food on my face and clothes than you can get into me." They seem to win that bet, too.
As one grows older, though, it usually changes to more codified wagering such as poker, blackjack, slots, and the lottery. Occasionally, it is taken to extremes, as with the fellow who recently wagered everything he had on a single spin of the roulette wheel. Many companies support our inborn urge to bet and have made a lot of money doing so. Investors who recognize this tendency among their fellow humans and invest in companies that cater to it could do very well.
For instance, many casino companies have returns well above those of the S&P 500 since 1995. If one looks at three of the top five casino companies by market cap -- those that have been public long enough -- the 10-year annual returns have been 10.7% for Harrah's Entertainment (NYSE:HET), 20.4% for MGMMirage (NYSE:MGM), and 23% for Station Casinos (NYSE:STN) from share price appreciation alone. Over the same period, the S&P 500 has returned 7.7% per year.
One could have invested in the support companies of the gaming industry and done very well, also. For instance, two companies that provide logistical support to the growing lottery industry, Scientific Games (NASDAQ:SGMS) and GTECH Holdings (NYSE:GTK), have risen by 25.9% and 16.2%, respectively, per year for the last 10 years. International Game Technology (NYSE:IGT), which provides slot machines among other things, has risen on average by 25.1% per year over that period.
Obviously, one could argue that these gains happened mainly because of the growing popularity of poker over the past three years. Not so fast. While the past three years have certainly helped, all of these companies also outpaced the S&P 500 index from 1995 through 2002, during the heyday of the dot-com bubble and the crash that followed. For instance, MGM Mirage dealt itself a respectable 10% annual growth rate compared with the index's 4.5% level, and Scientific Games enjoyed 8.3% growth. Even the weakest of the lot over this period, Harrah's Entertainment, still managed to eke out a stronger hand than the S&P 500 at 4.9%.
I sometimes think of companies like these as being akin to those who supported the gold miners back in 1849. Very few miners got rich from their stakes, but many who provided the supporting infrastructure did. Some of them are still around today, such as Wells Fargo, Levi Strauss, and Armour meatpackers, which evolved into Dial.
Laying down a wager and watching the cards turn or seeing the glint of gold appear in a swirling pan is exciting, and that excitement is part of what makes gambling and gold mining so popular. Pursuing it, though, is not the way to get rich, as most of those gold miners found out. Instead, look for those companies providing useful services and products and bet with them. You may not get rich quickly, but you will get rich eventually if you invest steadily and wisely.
Given the probability that poker's popularity will plummet someday, you may not think that the gaming industry is the best sector to be involved in. However, with human nature being the way it is and the desire to gamble being as strong as it is, I believe that investing in this sector will yield decent returns over the long term. After all, that betting baby has to have somewhere to lay his chips down.
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GTECH Holdings is a Motley Fool Inside Value recommendation. For more on gaming, check out the Gamblin' Fools discussion board.
Fool contributor Jim Mueller does not own any shares in the companies mentioned. The Motley Fool is investors writing for investors.
