In investing, don’t doubt the power of dividends

Decades ago, one of my colleagues made a presentation at a financial conference on the importance of dividends. As he left the podium, he was confronted by a college professor who declared, “I just don’t believe in dividends.”

But dividends are real, they don’t require faith — they simply “are.” Rather than approach the topic in an analytical fashion, the professor seemed to react to investing as though it were a religion. Which is precisely the opposite of what we seek to do.

Investing successfully requires a kind of agnostic thought process. We must be indifferent to emotion and volatility. Undogmatic, dispassionate, concerned only with the facts.

The question is not whether we believe in dividends, the question is what they tell us. Blind bias adds little to total return. We must contend with the world and stock market we are given. It is there we will find value. It is there we collect dividends, whether we believe in them or not.

Don Kilbride, the manager of the Vanguard Dividend Growth fund, remarked toBarrons in November of 2013, “Ninety percent of what we do is opinion — value, quality, estimates. But two (factors) are not debatable: Price and dividend. I focus as much as I can on fact.”

I have written in the past of the importance of dividends as a stock selection input, but they also contribute significantly to total return. Last year, the price return of the S&P 500 was a negative 0.7 percent, but when the dividend return was added in, the total return for the S&P was 1.4 percent. Over time, the contribution of dividends to total return compounds significantly.

For the rest of the article, click here:  The Arizona Republic

Stick with investment plan amid brutal market correction

For  25 years, I commuted into San Francisco to work. During the Internet bubble at the end of the end of the 1990s, the traffic grew to epic proportions.

A normally  30-minute drive morphed into an hour, sometimes an hour and a half. Too many cars, too few lanes. The traffic made me crazy, and I drove like it. I was the driver who merged first into one lane and then another to anticipate the flow. Inevitably, once I switched lanes, the traffic slowed and the cars in my previous lane whooshed past. If I shifted back over, the traffic in front of me once again suddenly slowed and I watched another stream of cars whiz by on either side. By trying to anticipate future traffic flows, I inevitably came up short and increasingly frustrated.

On the heels of the worst short-term opening for stocks (ever!), it is important to have a plan, know your risk tolerance and to implement your discipline with conviction. One day I observed that changing lanes didn’t pay. The best strategy was to pick a particular lane and stick to it. I learned not to zig. Or zag. I resisted the lure of chasing the apparent traffic flow, because from my vantage — in the thick of the traffic jam — I lacked perspective so I stuck with my driving discipline and didn’t veer from the plan.

According to Deutsche Bank, the stock market, on average, has a correction every 357 days, or about once a year…

Read more here:  The Arizona Republic

Don’t Let Stock Market Volatility Do You In

Volatility brings out the worst in even the best investors. It has a way of clouding our memory and activating our flight hormone, inspiring us to do exactly the wrong thing at exactly the wrong time. But on the heels of the worst-ever year opening for stocks — down 6 percent for the S&P 500, 6.2 percent for the Dow Jones Industrial Average and 7.3 percent for last year’s super-star, the NASDAQ — investors are understandably nervous.

Behavioral economics studies the effect of the recency of a risky event on subsequent financial behavior. For example, I can tell you where I was and what I was doing during the crash of 1987, the market rout of the third quarter of 1990, the minute the market re-opened after the terrorist attacks in the fall of 2001, and during the market meltdown of 2008. The memory of those difficult markets stands out starkly — particularly the most recent decline. Despite over 30 years of professional and personal investing, I am not immune to that sinking feeling of panic when the market sells off with the kind of vigor we have experienced recently. The only thing that keeps me focused on the long-term is a cursory understanding of behavioral economics and knowledge of the long-term, historical performance of stocks.

Interestingly, I cannot pinpoint where I was or what I was doing during the many market rallies I’ve enjoyed. Like most people, I remember the negative events much more vividly than the pleasant ones. When the market rises, we accept it like we do a safe flight or an automobile performing as expected. When the market declines, we are reminded of the harsh reality — that markets, like airline travel, for example, contain inherent risk that we often take for granted.

But let’s take a look at the facts.  Click here for the rest of the article:  The Arizona Republic

Extreme Volatility: What’s An Investor To Do?

This market reminds me of an old friend who had the unfortunate tendency to obsess over details. Hyper-focused on the Fed’s every word, investors are driving this market batty, parsing and splitting each piece of economic data, each Fed governor’s statement into smaller and ostensibly more consumable bits only to spew them out the following day. Up one session. Down the next. Manic, euphoric and very hard to live with.

So what is an investor to do?

Some are pulling money out of stock funds — to the tune of $16.2 billion last week alone and, according to Merrill Lynch, $46 billion over the last month. Sentiment, measured by various organizations, indicates investors are more bearish than bullish for the first time since the fall of 2011.

The experts are divided, too.  According to Barron’s, about half of the 78 economists surveyed by Bloomberg predicted the Fed will lift rates, although traders in Fed-funds futures are much less certain, with about 28 percent expecting an increase. If the experts can’t agree, the rest of us have no chance.

Let’s consider a few facts.   Click here for more:  The Arizona Republic

Stock Liquidity: A Two-Edged Sword

The great 20th-century playwright Tennessee Williams once remarked, “If I got rid of my demons, I’d lose my angels.” For those not keen on literary bromides, the translation in 21st-century vernacular might be: The good news is also the bad news. Either sums up the double-edged sword of stock liquidity. The good news is that investors can obtain an instantaneous stock quote and sell their shares with the click of a mouse. That is also the bad news.

Ben Graham was the first to write about the antithetical characteristics of liquidity in his classic “The Intelligent Investor.” He compared the benefits of owning non-liquid investments to those of liquid securities during the worst of the 1931-33 depression. Graham observed that there was a kind of “psychological advantage in owning business interests which had no quoted market.” He argued that those with illiquid investments could convince themselves that their investments had kept their full value — since there were no daily market quotations to prove otherwise. On the other hand, owners of stocks and bonds subject to daily quotations obtained a sense that they were “growing distinctly poorer” each day. For those of us who still feel the sting of the 2008 decline, Graham’s words resonate.

Warren Buffett, a student of Graham’s and his eventual collaborator on the fourth edition of “The Intelligent Investor,” is the modern-day personification of the intelligent investor. In his 2013 annual letter to shareholders, Buffett provides an example of two very successful illiquid investments he made in real estate. “Those people who can sit quietly for decades when they own a farm or apartment house … often become frenetic” when exposed to daily stock quotes and commentary. He concludes, “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”  Click here for more:

The Arizona Republic

Independent thinkers earn enviable investment returns

Urban legend suggests lemmings are so committed to their herd they will stick together even if they march right off a cliff to their inevitable death.

It is easy to understand why many find the adorable lemming’s behavior analogous to investor behavior at market tops.

Those of us who have run a race understand just how important it is to pace ourselves, removed from the pack, running our race — not the race of the person to the right or the left. In investing, we refer to this as a goals-based approach: a strategy that focuses more on personal, long-term goals than beating an arbitrary benchmark or owning the latest and greatest growth stocks. It is an approach that, by definition, removes investors from the lemming crowd.

Jeremy Siegel, author of “Stocks for the Long Run,” has conducted comprehensive research on stock performance over the past 100-plus years; as a result, he is a diehard proponent of value investing. The primary reason is the power of dividend reinvestment.

Siegel’s classic and most-cited example of why value stocks outperform growth stock analyzes an investment of $1,000 in (then) growth stock IBM compared with value stock Exxon (XOM) from 1950-2012.  For the rest of the article, click here:  The Arizona Republic

Friendly insights on commodity prices, undervalued stocks

My friend Kenny Polcari, a floor broker on the NYSE, he writes a daily market commentary. It is lively and direct and always insightful. At the end of each piece, he provides a recipe du jour. The guy is not only investment savvy — he can cook (his Fava Bean Risotto is a masterpiece). Last week Kenny provided a unique and erudite explanation of the decline in commodity prices: “Hey look! Commodities and the dollar have an inverse relationship…when one goes up, the other goes down.”

Because commodities are priced in dollars, investors in other currencies have to purchase the dollars to purchase the commodity, which becomes more expensive when the dollar rises. Got it? Higher prices reduce demand. And when demand declines, so does the price of the underlying commodity. Economics 101: supply and demand.

RELATED: Checking back on our 2014 stocks to watch

Why does this matter?  Read on:  The Arizona Republic