New Book One-Pager

Paradigm shift: the stock market, dividend investing, and the next thirty years. Dividend-focused investing has been strongly out of favor for the past five years, and receding in popularity for nearly four decades. Once the dominant investment style, it is now a boutique approach to the US stock market. That is about to change. Paradigm Shift explains how the stock market drifted away from a mostly cash-based returns system to one almost completely driven by near-term share price movements. The exceptional forces behind that shift are now substantially exhausted, and the market is well positioned for a return to more …

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A meditation on trust in finance. Yes, you read that correctly.

I have been wondering about the role of trust in modern finance. To judge by the academic literature and the dominant rules and formulas, it has no role whatsoever. I find that paradoxical, to say the least, because trust is inseparable from participating in modern society. Everyday we make judgments, including economic and financial ones, based primarily if not exclusively on trust, as opposed to a calculation of odds, risks and rewards, costs and benefits. Academics refer to these daily challenges as exercises in “decision making under conditions of uncertainty.” Modern finance tries (and has failed) to quantify that decision-making …

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If it sounds too good to be true….

If it sounds too good to be true, ….  Big takedown of the Private Equity industry by former PE manager  Jeff Hooke (now of JHU-Carey).  His new The Myth of Private Equity  (Columbia Business School Publishing, 2021) highlights the sky-high costs, poor returns, & very low visibility. And yet, the industry persists… Hooke’s expose is a latter day “Where are the Customers’ Yachts?” The New Books Network interview.

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How big is your platform? or “What color is your parachute?” 50 years later.

I recently got this very positive email mail through a professional social media platform: “:) .. your web site is treasure of great insights – I’m in my year two of my MBA journey and more and more I found myself checking historical and geopolitical “whereabouts” when reading the cases the profs. thrown on us .. I think it’s a/THE key  to fully understand what is happening “behind the scenes” of all/most they want us to do (evaluate equities or M&A deals, making recommendations, etc. etc. ) unfortunately it’s mostly omitted…” I was touched. The thing is, nobody goes to …

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NBN Interview with Jon Lukomnik on his Moving Beyond Modern Portfolio Theory

Jon Lukomnik thinks outside the box, specifically the Modern Portfolio Theory box. Rather than trying to pick up a few basis points here or there by operating within a flawed system, Lukomnik argues in favor of looking for factors which affect overall systemic risk and reward.  That is, he looks at what factors will influence the health and levels of the overall capital markets. This is an important work for all market participants. Listen to the NBN interview here.

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Equity duration: now is the “time.”

As a cashflow-oriented investor, I’ve been focused on equity duration for a while. Now others are beginning to catch on as well. Zero-Hedge may not be your cup of political tea, but it does have serious investing content, in this case a piece from data shop called VariantPerception. Their brief piece on equity duration can be seen here.  My case for using equity duration begins at the 22 minute mark of the Keep Calm and Carry On episode that dropped yesterday.

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The power of narrative economics….

A recent New Yorker article by Charles Duhigg ties together nicely several threads of emerging finance that are worthy of notice. The first is the power of narrative economics (and finance) championed by Robert Shiller. My review of his 2019 book by that name appeared on the New Books Network. Shiller’s argument stands in stark contrast to the orthodox model of classical economics. The second is that investment bubbles of the type we are now seeing with SPACs can and have in the past left behind substantial technological and financial innovation after the bubble has burst and much money lost. …

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Equity duration, revisited for an even lower market yield.

Updating a post from late 2018 on equity duration. The yield of the market is now down to around 1.5% and inflation expectations are much higher than they were at that time. Hence it is worth revisiting the math of valuing cashflows in a rising rate environment, or at least one in which rates are not relentlessly declining. Updated table below.  The conclusion has not changed. If you have a choice of distributable cashflow options, get paid up front. Those distant cashflows take a real beating in any reasonable discounting exercise.  In that regard the S&P 500 Index is an …

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If it looks like a bubble, walks like a bubble, & talks like a bubble, is it a bubble?

History matters, no less so for your retirement account. Are we in a normal investing environment or is something “not quite right”? The asset bubble doctors are in and will see you now.   Join me for a conversation with Will Quinn, co-author along with John Turner, of the new and highly acclaimed, Boom & Bust: A Global History of Financial Bubbles (2020). The NBN podcast can be accessed here.

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Uninvestable, due to government overreach…

I was alarmed yesterday to see a sitting US senator assume that the Fed Chairman would naturally prohibit banks from paying dividends (or buybacks) under the new administration. The Fed Chair wisely deflected the question and the assertion behind it.  For folks unaware of how the stock market works, and specifically bank accounting, let me say that that was a “doozy” moment. Yes, it is true that the vast majority of quantitative easing and Federal Reserve activity over the past 13 years (since the GFC) has gone into the financial markets rather than the real economy. That is not because …

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Do books and articles about financial bubbles mean we are in a bubble?

I’m reading an excellent new academic account of bubbles in the financial markets by two Irish academics, William Quinn and John Turner, Boom and Bust. Their taxonomy of bubbles involves formally identifying them after the fact, though they believe their explanatory model would help forecast as them as well. Still it raises the question, which we all felt in 1999 and some of us feel in 2021, how one identifies a bubble whilst you are in the midst of it. While I was pondering that notion, the latest from the WSJ‘s Streetwise columnist, James Mackintosh, hit my device, “If it …

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Price discovery, Soviet Russia, and artistry

The elevator pitch to a book editor and movie producer that never happened: “the early 1960s Soviet experiment of loosening price controls would make for a great work of historical fiction and a high-end movie drama.”  No one in their right mind, right? And yet, it did. Francis Spufford’s Red Plenty came out in 2010. It is simply the best Western work of historical fiction about the post-war Soviet period. Spufford is not a trained Soviet specialist, but every professional historian of the Soviet Union secretly (and not so secretly) wants to have written that book. I know of what …

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Defining risk in a high dividend-paying portfolio. It’s not what most people think.

As the manager of a high dividend-paying portfolio, I necessarily take dividend risk. The yields in the portfolio are, as you might expect, much higher than the market’s miserly 1.6%.  Individual securities in the portfolio have had, can have, and will have yields that can be in the high single digit range, and even sometimes low double-digit range.  Very high yields in a low yielding market is admittedly a sign of dividend risk, but not an assurance of it. And that’s what the goal of the enterprise is: to take an appropriate amount of dividend risk in order to maximize …

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Putting S&P 500 Index “dividend growth” in context….

For those of you keeping score, the S&P 500 Index managed to eke out in 2020 a small increase in the index dividend, 0.07%, over 2019. $58.24 went to $58.28. That’s pretty impressive given the economic circumstances and the reality that dividend-focused products had a tough time in 2020 actually collecting their dividends. The economic downturn affected the Old-Economy dividend payers more than the New-Economy work-from-home companies. So bully for the S&P 500 Index. But it is important to put that achievement in context. Growing the dividend off such a low base isn’t really much of an achevement. The S&P …

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The dividend chorus is getting louder. Will it make a difference?

Blackrock is jumping on the dividend bandwagon. According to a recent Bloomberg article, Blackrock is calling for strong dividend payers to benefit in 2021 from the paucity of income generated in the bond market. Their argument is more in regard to fixed income securities than it is versus other equities, but they are still highlighting the attractiveness of higher-dividend paying equities in a yield-starved market. Blackrock joins a lengthening list of market participants and commentators making the same call. Will it make a difference?  Interest rates have been low and declining for years without a major rotation into dividend stocks …

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“Dividends will have their day again,” says the WSJ. So will business investors.

Happy to have this Dividends will have their day again call out from the Wall Street Journal, but it is worth filling out the story a bit. Distributable profits are the most natural, logical way of generating return for minority shareholders in an on-going, for-profit enterprise. If that enterprise happens to be publicly traded they are called dividends. It is a form of business ownership.  Successful businesses that do not distribute their excess cashflow to company owners can be owned as stocks, and stocks only. Their only cash return comes from going into the market place and selling a stake–hopefully at a …

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NBN Interview with Paul Donovan: Profit & Prejudice

Prejudice is bad for business. That’s the long and short of it. Paul Donovan amply documents this in his recent work of Shiller narrative economics, Profit and Prejudice: The Luddites of the Fourth Industrial Revolution (Routledge, 2020). With that out in the open, shouldn’t prejudice in business cease? Well, that’s a tall order. Not every business person is a profit maximizing Fisherian with an MBA from the University of Chicago. Pointing out to prejudiced business people that they are leaving money on the table is, on its own, unlikely to put an end to their discriminatory practices.  Culture matters, as …

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December’s real-time test of market efficiency.

We have this month both a test of and an immediate HBS case study in market efficiency. A highly innovative electronic vehicle company is about to enter the major market index. Is that a problem for the many investors in the index funds and ETFs based on the S&P 500 Index, or are things as they should be in an efficient market? Market efficiency is presumed to be greatest in large-cap, liquid, well-researched companies. The EV company clears all three thresholds easily, with a market cap of over a half trillion (!) dollars, plenty of trading volume, and 36 separate …

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What if we counted differently……

Saijel Kishan’s recent Bloomberg article, provocatively titled, How Wrong was Milton Friedman is intriguing on many levels. It summarizes the work of George Serafeim, an HBS professor who wants to change how we measure company success and failure. Specifically, he wants to reward and punish companies on the income statement based on ESG impacts. That is, he proposes to put a dollar value on diversity or lack thereof, on polluting or not, etc. And then have those companies report profit and loss after consideration of their social impact. It’s an ambitious plan, and some would say just a natural extension …

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GM’s Alfred Sloane on dividends (1935).

Alfred Sloane was the legendary, long-time leader of General Motors. In 1935, he shared his views on GM’s dividend policy in the New York Times. The point is that the company that dominated an industry for over a half century felt completely comfortable paying robust dividends while investing in its business. Any answer from the Fab 15? (Google, Amazon, FB, etc)  Pdf of the column in the attachment, courtesy of the NYT. Sloan 1935

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The “non-cash” charge and the business investor.

An investment philosophy that considers stock market investing as simply another form of business investment will necessarily focus on the basics of business investing, such as cashflows. That is often at ends with how the stock market works. Case in point is the infamous “non-cash” charge……  Wall Street brokerages and too many investors are delighted to ignore non-cash charges because, well, they are non-cash.  It’s worth reminding investors what every business owner knows: that those non-cash impairments more often than not started out as cash outflows, usually for acquisitions. A non-cash impairment of goodwill or asset write down is the …

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NBN Interview with JC de Swaan: Seeking Virtue in Finance

JC de Swaan does not shy from a challenge. In his new book, Seeking Virtue in Finance: Contributing to Society in a Conflicted Industry (Cambridge University Press, 2020), de Swaan, argues that it is possible to work in finance and not fall prey to the worst ethical ills of a profit maximizing industry. A lecturer at Princeton and partner in at Wall Street hedge fund, de Swaan spent years chronicling examples of virtuous behavior in finance. He distills his research into four “pillars” of ethical behavior for financial professionals. They include 1. Customers first, 2. Social wealth creation 3. Humanistic leadership  and 4. Engaged …

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Are vanishing dividends a good idea? Hardly.

Exercising business ownership through the stock market is hard enough. The pressure to be a stock speculator is overwhelming. And it just got a little harder. A Bloomberg Opinion column from October 20, entitled, “Those Vanishing Stock Dividends Should Stay That Way,” took up the case of a junk rated (BB), highly cyclical mining company that cancelled its miniscule dividend in March of this year. The piece trumpeted that the stock’s share price rallied sharply off the bottom of the market that month. The author wrote that “shareholders appeared to send the message that they would prefer [the company] put …

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A thoughtful dissent from the ruling investing orthodoxy…..

Aswath Damodaran’s recent Musing on Markets blogpost (from Sept 21) offers a thoughtful dissent from the ruling orthodoxy on ESG investing. He highlights how the current “hype” (his word) leaves critical analytical questions “unanswered or answered sloppily.” For example, he asks,  “Do companies perform better because they are socially conscious (good) companies, or do companies that are doing well find it easier to do good?” If the latter, “researchers will find that ESG and performance move together, but it is not ESG that is causing good performance, but good performance which is allowing companies to be socially good.” He points …

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NBN Finance Interview with Tom Levenson: Money for Nothing

Modern finance isn’t really all that modern. Three centuries ago, Great Britain’s need for money to fight its wars, the appearance of joint stock companies, and the emerging quantification of all aspects of life converged to create new notions and forms of money and investments. And then there was a spectacular bubble in 1720. The South Sea stock rose and fell quickly, but the financing structures remained and last to this day in evolved form. In his new book Money for Nothing: The Scientists, Fraudsters, and Corrupt Politicians Who Reinvented Money, Panicked a Nation, and Made the World Rich (Random House, …

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Same problem–global warming–but very different answers.

Is there a consensus on the best response to global warming? Not even close. Left and right both bring their own tools, math, and, most notably, agendas–climate related and non-climate related–to their policy prescriptions. From the economic right, Bjorn Lomborg offers economic growth to increase adaptation to a warming planet, as well as market-based innovation to mitigate carbon generation. From the left, Robert Pollin (and his co-author Noam Chomsky) put forth an Eco-Socialist New Green Deal. Listen to the NBN interview with the former here, and with the latter here.

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