Streetwise for Friday, April 19, 2019

Yes, I know the financial markets are trying. They are now and they always will be to some extent. And yes, each time economic or corporate data, or more specifically a “tweet,” is released that somehow upsets the apple cart, the Street reacts in a manner not conducive to increasing your wealth. So here are some of my favorite words on the subject.

While many prognosticators will for the most part all parrot the same party line, Utopia is just around the corner and for a wee price laddy…. 

Forget Utopia. Instead search for companies with an intrinsic or mathematical value that exceeds their current share price by at least 10 percent, have maintained a track record of performance in their field of endeavor with a resultant trail of uninterrupted dividend increases.

Nonetheless, it seems that there is no end to the nauseating bombardment of questions of the ilk: 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, and I am reticent to use the word, “crash” to happen in my 50 plus years on the Street was in 2008. Painful yes, but far from fatal if you adhered to the mantras of intrinsic value and consecutive dividend increases. Please note the words consecutive and increases.

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 their 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. And I do not think IBM and maybe Exxon are far behind.

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 bond’s face value–no more, no less. Moreover, neither the interest nor the principal is protected from the ravages of inflation. And for all your efforts, you are not rewarded when or if the issuing company’s fortunes improve.

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 going is an exercise in futility. The investment world can be counted on to overreact most any event. 

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 close with some of my favorite words. They were written by Admiral William H. McRaven, Ninth Commander of the U.S. Special Operations Command and I repeat them whenever possible. 

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.