Streetwise for Friday, March 22, 2019

As an investor, you are continually bombarded with conflicting statements about the future of stocks and the stock market. It is nearly impossible not to be overwhelmed by such a seeming never-ending stream of rhetoric. 

Moreover, each time there is a crisis of sorts, i.e., the recent crash of an Ethiopian Airlines Boeing 737 Max, coming less than six months after the crash of a similar Boeing aircraft in Indonesia, the prognosticators of doom resemble vultures ripping apart a carcass, in this case Boeing’s carcass. 

While disasters of any kind are distressing at best, and I am not minimizing in any way the ramifications of devastation wrought on the families of those lost, the connection to Boeing’s share price and long-term future is tenuous at best. 

Keep in mind that the cause of the latest crash has yet to be determined. There could be extenuating circumstances, although evidence seems to be pointing towards a combination software and training problem. 

Nonetheless, trying to dissect every gruesome development and its effect on the future of a company such as Boeing long-term makes little sense.

Johnson & Johnson found itself in a similar crisis regarding baby powder, with plaintiffs complaining the product resulted in their being diagnosed with cancer. And yet the resultant number of cases facing Johnson & Johnson, 11,700, is well below that of other product liability cases, such as pelvic meshes, 37,400.

Common sense says that companies with superior products and significant market share, combined with a finely-honed distribution network, run by a seasoned management team, will see their share price increase over time, regardless of short-term market trends, good or bad. 

The real question here is about you. If you continually worry over short-term market or share price volatility, then please reconsider Wall Street. You cannot put a price on peace of mind. At the same time not taking advantage of the increased wealth that equity investments potentially offer is like not showing up to collect a well-deserved Oscar.

No, Wall Street is not a level playing field. To paraphrase a concept from the book “Animal Farm,” by George Orwell, published in 1945, “All investors are created equal, but the rich ones are more equal.”

You are not going to interact, much less compete with the “biggies” of Wall Street. Rather you are going to run between and around the feet of the stampeding elephants. In doing so you will create a diversified portfolio of dividend paying blue chip companies that have a high probability of providing a reasonable total return. 

At the same time, you must have the patience of Job to allow share price performance to equate to corporate performance. Having a love affair with stocks is fine but you need to let be more than just a passing bout of infatuation.

The truth is that if you employ a bit of patience along with a modicum of common sense, your investments will do just fine. Yet, it never fails to amaze me how intelligent and responsible people seem to disconnect their brain because of some off-the-wall piece of investment news or advice.

A diversified portfolio of 15 or more stocks will have little or no individual stock risk. However, you still have market or systematic risk, as measured by beta, that cannot be removed through diversification.  

So, what kind of return should you expect from your portfolio? Warren Buffett once addressed this question quite succinctly. 

He said, “Stocks are a decent way to make 6 to 7 percent annually. However, anyone who expects to make 15 percent from the market, or by having a broker pick stocks, is living in a dream world.” 

I would argue that it is possible to increase that number to 8 to 10 percent plus a 2.65 percent dividend yield, assuming you invest in companies with a minimum of 10 consecutive years of rising dividends.

Finally, never become so obsessed with Wall Street that you let it run your life. In a recent interview on CNBC, Buffett said, “If all you succeed in doing in life is getting rich by buying little pieces of paper, it’s a failed life.”

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.