Streetwise for Sunday, January 14, 2018
There is no question that 2017 was a good year for Wall Street. Unfortunately, the prognosticators of doom seem to be coming out of the woodwork. Reminds me of an infestation of cockroaches. Their theme is always the same; because the market has gone up rather sharply, it must come down rather sharply. Yet, no one says why, other than, “that is the way things work.”
So, let’s start with a basic tenet of Wall Street. No one can predict what the markets are going to do at any point in time, period. However, what you can forecast is the potential success of a company going forward two or more years.
If you say that the markets have the potential for a degree of volatility going forward, that I would certainly agree with. Large institutions, armed with sophisticated computational tools and the ability to trade considerable amounts of securities in a matter of seconds, can and do have a profound effect on market volatility. Giant pools of capital continually flow in and out of the financial markets, driven only by the insatiable desire for a quick profit.
And while there is some uncertainty on a number fronts as we move into the new year, there is no reason to believe that a major retrenchment is just around the corner. Certainly, the current political and economic problems, which can drive daily market activity, will continue to exist.
Yes, the economy is on track to continue to grow throughout 2018. So, while you are in the process of researching companies to add to a portfolio, do not yourself to be distracted or swayed by the passions of either the market, its proponents, or the media.
Keep in mind that Stock prices are statistically mutually independent random events because stock valuation is a matter of individual assessment. Furthermore, this assessment is subject to change without notice and for no apparent reason.
When a stock trade occurs, it occurs because the parties to the trade disagree as to the utility of the good being traded. For the trade to come to culmination, it must have been subjectively viewed as advantageous to both parties.
The notion of current market prices is fictional. Prices are neither current, nor of the market. Trades are historical facts, and they occur only between individuals.
Therefore, if you can properly evaluate a corporation’s underlying worth, then success will not be far behind. Yes, of course market conditions should always be considered. And well-chosen investments should be able to weather short term cycles in both the stock market and the economy.
What is crucial is to develop the skills required to analyze historical data and then project forward a company’s potential success. This takes effort; sometimes considerable effort.
To reiterate a favorite theme repeated here many times, you should limit yourself to companies with years of uninterrupted increases in dividends. The reason is simple. Dividends ensure that you will receive a certain minimum return. There are about 273 companies that have been able to continually raise their dividends for a minimum of 10 consecutive years.
Annual dividend increases signify financial strength and solid conservative accounting. It is positive proof that the company respects its stockholders. However, simply compiling a list of companies that increase dividends annually is not sufficient. There are other guidelines that need to be considered if you are to have a high probability of success.
Continued corporate growth demands that a portion of a company’s profits be reinvested each year in the business. A rule of thumb would be a payout percentage of no more than 40 to 50 percent, utilities excluded.
A company’s debt burden must also be considered. For non-utilities, 25 percent of total capitalization is a reasonable number. Highly leveraged companies can run into difficulties if profits decrease during an economic downturn.
It is with this type of analysis that you can evaluate an investment with a cold eye and without trying to predict the market.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.