Streetwise for Friday, May 5, 2017
Yes, I know the financial markets have been trying of late. In many ways, Wall Street is like a child that just will not take no for an answer. Each time economic or corporate data, or even a “tweet,” is released that somehow does not meet its desires, the Street throws a temper tantrum and you know what happens then.
Playing on the Streets volatility, virtually every prognosticator parrots the same party line, Utopia is just over the hill but only they know which hill. Forget Utopia. Confine your search to companies with an intrinsic value well above their current share price, combined with a track record of performance in their field of endeavor.
Meanwhile, I continue to be bombarded with the same series of questions: is the stock market too high, too volatile, is it going “crash”, and do I still recommend investing in stocks. Crash…why should the stock market crash and what do you mean by crash? Is a 5 percent correction a crash, what about 8 percent, or 12.356 percent?
The only so-called “crash” to happen in my 50 plus years on the Street was in 2008, which was painful yes, but far from fatal. This was especially true if you adhered to the mantras of intrinsic value and of only investing in companies with a minimum track record of increasing dividends for at least 10 consecutive years. Please note the words increasing and consecutive.
Is the market ever too high? Was it too high when the Dow Jones Industrial Average crossed 6,000 or 17,000? If companies grow, if they see an increase in earnings and reinvest those earnings in their businesses (compounding), which includes raising the dividend each year, their share price will almost assuredly move inexorably upward.
Therefore, unless you are penniless, lying on your death-bed and have no heirs, you need to own equities. Does investing in the equity markets entail risk? Of course, it does. Even the largest most successful corporate monoliths are vulnerable to adversity. GM, AT&T and GE are textbook examples.
However, without access to inside information it is impossible to predict stock prices short-term. Inside information removes the uncertainty; it also means trading tailored pin stripes for a more casual outfit in orange.
So why are bonds not the answer? One key reason is inflation. Debt securities, once they have been issued, do not gain in value at maturity. When a bond comes due you will be paid the bonds face value–no more, no less. Moreover, neither the interest nor the principal are inflation protected. Furthermore, you do not participate if the issuing company’s fortunes improve.
And it gets worse. We are on the cusp of a rising interest rate environment and as interest rates rise, the market price of your bonds will decline.
Polonius counsels Laertes, his son, in Hamlet Act 1, scene 3, 75-77: “Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”
When you hold a company”s stock you are an owner of that corporation, not a debtor. If the company prospers and grows then your investment will see a corresponding increase in value. More importantly, as a shareholder you are tying yourself to a company”s fortunes, not to daily market fluctuations.
Worrying about where the “market” is on any particular day is an exercise in futility. The investment world overreacts to almost any piece of news, good or bad. Bad news simply means stocks are on sale that day.
Finally, if your portfolio is looking anemic, if you dread looking at the closing Wall Street numbers wondering if you should get out, let me leave some of my favorite words written by Admiral William H. McRaven, Ninth Commander of the U.S. Special Operations Command that I love repeating at every possible opportunity.
In an article titled “Life Lessons from Navy SEAL Training,” he wrote that in the Navy SEAL training compound there hangs a bell for all to see. Ring the bell and you no longer must endure the hardships of SEAL training. Just ring the bell and it all stops. However, if you want to change the world and improve your life, do not ever…ever…ring that bell.
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.