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Observations on the Market

No. 360: Much Has Changed in 30 Years

Written by Greg Denewiler, CFA

One month turns into the next, and before you realize it, you have 360 of them. Counting part-time and the first 10 years as a broker at Prudential-Bache, I now have 42 years in the financial services industry. A lot has changed in the 30 plus years, but the fundamentals are the same. The goal is to find companies that grow their earnings over time; it is still that simple. However, because the information coming at us is literally like trying to drink from a fire hose, it presents challenges if you just want a drink of water. Although I must admit that it is much easier now to get information regarding the financial health of a company – you just have to be aware of all the noise that comes with it.

Thinking back to 1979 when I started in the business, stock prices came from Quotron machines which would bring up stock quotes by just typing in the symbol. However, if you wanted the news of the day you had to go to the machine in the middle of the room that everyone shared. It was typing out news headlines all day long onto a roll of paper that sort of looked like a scroll. You would unwind the roll and glance at the headlines until you reached the time you last looked at it, then you rolled up the paper for the next person. The research was accomplished by either looking at the Standard & Poor’s or Moody’s stock sheets that were in books on the ‘reference table’, and they were always at least a month old. You would think that returns would have improved with easier access to information now, history suggests otherwise.

You hope experience teaches you something. At the beginning of my career, I listened to one of my prospects tell me: “Why would I buy a stock from you when my money market fund pays 18%?” The year was 1980 and hindsight shows that buying the stock was exactly what he should have done. There was this minor detail that I will call ‘sustainability’ that made the 18% money market fund unappealing at the time, and it made stocks very appealing (more on that later). I have been through six recessions, and they are never fun. Every time a recession shows up, I wish I would have sold something before, or wish I would have bought something at or near the bottom. Afterward, I was just glad I hung on. There is a quote I have taped to my monitor: “You make most of your money in a bear market, you just don’t know it yet”. It seems like the hardest part to being a successful investor is telling yourself – I am going to buy when others are fearful and sell when everyone is greedy (I believe a Warren Buffett quote), but when the time comes the scenario is always different. The reasons for each new decline change and each new time it appears that this time the economy really will collapse. In the end, the economy has an amazing ability to heal itself, the catalyst is just different.

Personally, it became clear that to achieve more long-term success, I had to find something to anchor my investing to. When you look at the historical chart of the market, the message is crystal clear: The market eventually always goes up. However, when you are in the sixth month of a 40% decline, it is clear as mud, and the world is in trouble. This is where the internet has probably hurt society because we have access to the news being updated every second and have no idea what is accurate or how bias is being applied. It is easy to be overwhelmed if you are not clear as to why you are doing what you are doing. Unfortunately, the media is compensated only if they distract you, so what a surprise, they spend all their time inventing distractions. A few years ago, I read about a great way to combat the constant negativity, it is the vitamin C concept.

Vitamin C is not stored in the body thus you must take it every day if you want its benefits. You cannot skip five days and then catch up on the weekend. If you want vitamin C, you must take it every day. The application to investing is that if you do not remind yourself every day as to what your investment approach is, the media will create a plan for you and it will not be in your best interest. Mike Tyson once said: “Everyone has a plan until they get punched in the face”. This leads us to today.

Just as 18% money market rates in 1980 were not sustainable, 0% interest rates are not sustainable today. The Fed wants us to believe they know how to deal with the situation, but if they really did, then why are we in this situation to begin with? Zero interest rates have gone on longer than almost anyone imagined, but one day normal will return (normal is a higher interest rate than zero). What is that rate you ask? The market will set the rate ultimately, not the Fed. The hard part is that the Fed has more money than you or I have, so this can go on longer than we may expect. You cannot time it. You just must make sure you are not on the wrong side of normal when normal reinstates itself. Simply put, you do not want to own long-maturity bonds when interest rates finally move significantly above zero. You especially don’t want to own high-yield bonds when the next recession comes. That means accepting zero until the interest rate environment changes. How long you ask? As long as it takes.

Occasionally, I hear that this letter does not tell you specifically what to do or buy. That has never been its purpose, it is just an Observation of what I find interesting in the moment. To be honest, occasionally I have no idea what the topic will be until I feel pressed to get the letter out, since missing a month would sabotage my 30-year track record. Writing does force you to organize your thoughts (some would say it has not helped me) and it does force you to have an opinion – right or wrong. I try extremely hard to stay away from politics, and the good news is that market history tells us that market returns are not impacted much based on which party is in office. Finally, back to my investment philosophy anchor.

It has been more than ten years since I began working on my current dividend strategy. Originally it was just a means to be a little more defensive after experiencing the 2009 disaster. Then I realized that dividends are not boring, the dividend stock prices go up as well. A little market history shows us that half the 100-year return of the stock market comes from dividends. I have found that it does help to focus more on your income as opposed to the stock price. You do have more control over your dividend income, and they are more stable. If a company can pay you more over time, they tend to be a little more conservative, almost always profitable and tend to not have as much debt. Sustainable is the keyword. There will always be exceptions, dividend companies can also falter, but a portfolio of them has worked well so far. The real key is to stay invested.

In June of 1991, the Dow was at 2,900, now it is around 34,200. That is a return of 8.6% per year, and that does not count dividends. The dividend of the S&P 500 has grown from $12 in 1991 to its current rate of $58. That is a growth rate of 5.4% per year. GDP for the last 120 years has grown at a remarkably steady 4-5% annually including inflation. You cannot invest in our GDP. However, corporate America is the economy, and dividends are the more stable piece of corporate America. So, that is my anchor. This in no way suggests it will provide the best returns, or that it will not fall out of favor for an extended period of time. What it does do is give you a little more predictability in a very noisy world.

I am excited to announce that there are a few changes coming on the horizon. As of June 1st, there are now two employees at Denewiler Capital Management. The goal is to now offer financial planning so that you can better visualize how a growing dividend income fits your personal situation. Our hope is to provide a more organized approach to client communication and education. We will be introducing a podcast and other strategies to better connect you with what we are doing. More on this shortly.

Most of you reading this letter are clients. I feel very fortunate that 1) some of you actually do read this, and 2) that you trust me with at least some of your money. I cannot promise issue #720, but I am shooting for another good 20 years, and next month it will once again just be one page.

 

Observations on the Market No. 360 – Published June 2021

About the Author
Greg Denewiler, CFA
Owner & Chief Investment Advisor at Denewiler Capital Management