Streetwise for Sunday, January 13, 2019

There is no question that 2018 was not a particularly good year for Wall Street. As a result, the prognosticators of doom are feasting on your fears. And their theme is always the same.

The market is down because it was too high and will continue to lose ground although no one says why; other than such trite statements as “what goes up must come down.” What utter nonsense. By the way what is too high and where is it ordained that declines are mandatory.

Instead, let’s approach the problem by starting with the tenet that no one can predict what the financial markets are going to do at any point in time…period. Those who say or imply otherwise are misinformed. 

If you say that the markets have the potential for varying degrees of volatility going forward, that I would certainly agree with. Those who are armed with sophisticated computational toolsthe ability and resources to trade significant quantities of securities and cash almost instantaneously, can have a profound effect. 

The result being that large pools of capital continually ebb and flow throughout the financial markets, driven only by an insatiable desire for a quick profit. Yet, as we move into the New Year there is no reason to believe that Armageddon is just around the corner. My forecast is for 2.6 percent GDP growth. 

Yes, there are political and to some extent resultant economic problems that will exacerbate the market’s day to day volatility. This you will have to accept. However, do not allow yourself to be distracted or swayed by the passions of the market or the media.

Stock trades are mutually independent random events. Moreover, stock valuation is a matter of individual assessment that is subject to change without notice and for no apparent reason.

When a trade of any commodity occurs, it is because each party believes that the utility of the good being traded for is greater than that of the good currently held. Therefore, any trade must be subjectively viewed by each party as being advantageous to that party.

The notion of current market prices is fictional. Prices are neither current, nor of the market. Stock trades are historical events occurring between two parties and are unforecastable. What you can forecast is the potential success of a company going forward.

However, if you can evaluate a corporation’s underlying worth, then success will not be far behind. Yes, market conditions should always be considered. Nonetheless, well-chosen investments can and will be able to weather short-term cycles, both in the stock market and the economy. 

What is crucial is to develop the skills required to analyze historical data of a financial nature 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 269 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 enough. 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 dividend payout of no more than 40 to 50 percent of earnings, 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 forecast market trends.  

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.