Your 2023 Market Outlook

Looking for a good guide to the markets in 2023? May I suggest Isaiah Berlin’s The Hedgehog & the Fox. Written in 1953 as a meditation on Lev Tolstoy’s approach to history, especially in War & Peace (1869), it’s as good a guide to investing as you’ll find anywhere. That’s because its about you; it is about self-knowledge. Interest rates, currencies, P/E multiples, etc will always come second to awareness of who you are, what you want, what really matters to you as an investor. Berlin draws on a fragment from an ancient Greek poet Archilochus that “the fox knows many …

Continue Reading

On crypto….

As the frisson of fury over SBF/FTX subsides, a few comments from a traditional dividend investor, cash-on-the-barrel, bricks & mortar business owner: 1. Distributed ledgers are not new. 2. A World Wide Web of servers is well-suited to implement distributed ledger technology that is faster and more expansive than could ever have been imagined prior to the internet. 3. Encryption of transactions in a distributed ledger system makes sense. 4. The full flourishing of this system will likely require an internal system of measurement, store of value, & medium of exchange. 5. Existing ones such as blocks of salt, strings …

Continue Reading

A nice write up….

A nice write up from James Faris of Business Insider. Behind a paywall, but makes the point that being a dividend investor/business owner in a stock market has its benefits. https://www.businessinsider.com/how-to-invest-2023-dividend-stocks-strategy-top-fund-manager-2022-12  

Continue Reading

US corporate margin reset

I’ve been highlighting the need for US corps to “reset” margins to make up for the excessively asset-light business models that have come to the fore the past three decades. Has the Great Reset begun? Perhaps. Empirical Research Partners, LLC has a report out today highlighting that Capital Expenditures are up 20% ytd for the S&P 500 vs. earnings that will barely be positive. Is this the beginning of that new spending? We shall see. If so, companies that can afford to invest during the downturn should do so. Those that can’t will continue cost-cutting/hewing to the prior model. On the capital …

Continue Reading

Down markets and higher returns.

The market has declined by 25% in nine months. No one is particularly happy about that, but the rapid reset of prices does provide an opportunity to remind investors about basic investing math. In this case, the issue is expected future returns after a sharp move in the market, either up or down. And that math is somewhat paradoxical.  Consider, for instance, investment in the income stream—the dividends—of a diversified portfolio of stable publicly traded companies. The cash yield at time of purchase in 2021 is 4%. Fast forward to September 30, 2022, and the price of the portfolio has …

Continue Reading

For want of a nail, a shoe was lost…

The United States has now had more than three decades of neo-liberal globalism which has favored outsourcing, off-shoring, margin improvement and earnings growth above all else. Encouraged by the capital markets, corporate America has privileged short-term efficiency over long-term efficacy.  Capital spending on hard assets is down as a percentage of sales; intangibles are up. A benign post-Cold War geopolitics and an addressable labor cost differential allowed us to import deflation. We’re not quite at the “virtual” enterprise level, but we’ve moved beyond the polite and acceptable “service” economy that replaced our prior “manufacturing” engine.  At the same time, declining …

Continue Reading

“Once more unto the breach, dear friends, once more.”

The universally respected and admired Michael Mauboussin has chimed in on the now political issue of share repurchase programs. His opinion piece in the FT this week in defense of them tries to clear up what he considers “confusion and sloppy thinking” critical of buybacks. Cliff Asness, his equally formidable ally in support of buybacks, has made similar points in print recently. Wrestling with either of these finance heavyweights is done at one’s peril. But I can’t help but add some additional color around their assertions from the perspective of a dividend investor. I’ve spent the past two decades competing …

Continue Reading

Dividend investing is! sustainable investing

Dividend investing was “sustainable” decades ahead of the current frisson of ESG-based sustainability. Think about it. The attraction of an income stream—whether of a publicly traded or closely held asset—is its value over time. Whereas a “price only” asset can be bought or sold tomorrow with the intention of profiting from a change in price a week or month from now, an income stream-based asset delivers its worth over many years. Investors might agree or disagree as to the current value of that income stream—and put a changing, daily price on it—but the NPV of the income stream is measured …

Continue Reading

Stock market drawdowns during retirement…..

A follower wrote in to suggest a stronger assertion of the value of dividend-focused investing for retirees concerned about drawing down their portfolio. He argues that for those investors, the sequence of their returns matters hugely, especially in a market not moving up steadily. (He was responding to my post about the difference between a harvested capital gain vs. a dividend payment.)  He writes: “The argument goes that there’s no difference between an income stream derived from selling stocks or one derived from amassing dividends. But that isn’t true. Selling stocks in a bad year means selling more stocks. Dividends …

Continue Reading

A dollar may be fungible; how it is generated is not.

The recent market sell off has provided investors an opportunity to reconsider a fundamental belief in modern finance and investment. And that is that investors are indifferent between the two forms of return, a harvested capital gain or a cash dividend payment. That notion underpins pretty much all of modern stock market investing, from the calculation of return, to the capital allocation of corporations, to the behavior of investors. In short, it’s a biggie. And in a rising market, it looks like a pretty good assumption, since most of the time the market is up, open and liquid. The belief …

Continue Reading

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 …

Continue Reading

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.

Continue Reading

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 …

Continue Reading

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.

Continue Reading

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.

Continue Reading

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. …

Continue Reading

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 …

Continue Reading

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.

Continue Reading