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 …
Category: Investing
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 …
Dividend tax rates….
A collar tug, indeed, but dividend investors have survived a wide variety of tax climates. Main issue is not the rate increase itself, but the differential between div and cap gains rates. Better when they are similar…. harder when they are not. Wall Street Journal opinion piece: The Dividend Tax Canary – WSJ
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
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 …
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 …
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 …
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 …
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, …
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.
NBN Interview with Robert Pollin: Climate Crisis and the Global Green New Deal
Economist Robert Pollin has teamed up with Noam Chomsky to produce a manifesto for the New Green Deal in Climate Crisis and the Global Green New Deal: The Political Economy of Saving the Planet (Verso). Their plan attempts to keep the planet from heating up too much while simultaneously redressing the economic wrongs that they blame substantially on unfettered capitalism. Not everyone will agree that eco-socialism is the answer to global warming, but all participants in the debate will want to understand the wide range of policy proposals that are being brought to the table. Listen to the NBN interview here.
The FT on the current challenges of investing for dividends.
Quoted in the FT’s Big Read today, on the current challenges of being a dividend investor/manager. Lots of individuals/retirees directly affected when dividends under pressure due to business interruption or shifting market preferences. https://www.ft.com/content/2719966c-b228-4300-bdc0-dcbe2f7050fd
NBN Interview with Joshua Greenberg: Bank Notes and Shinplasters
What is money? Really, what is money? It turns out that the answer is not so simple. During the course of the 20th century, most of us have gotten used to the notion of a single medium of exchange based on Federal Reserve notes which we call dollars. They look the same, feel the same, and have the same use everywhere in the country. We are so comfortable with that medium of exchange that we are now increasingly doing away with the paper and accepting a digital version of said money. The convenience of having a single and stable currency …
May you live in interesting times….
The stock of an upstart but very successful EV company is currently trading at 144 times the average of 2020, 2021, and 2022 forecast consensus earnings. That’s an earnings yield of 0.7%. In contrast, an older telecommunications company that has focused in recent years on its “network” is trading at 12 times the average of forward earnings. Its earnings yield on forward consensus earnings is 8.3%. Few if any investors are doing the math of cashflows and discount rates when considering the former company, but it is still permissible and interesting to think about such things. Maybe theories of value …
Heretical views!
Managing a portfolio based on cashflows? Heresy! Well, maybe not. Others are also making arguments similar to mine in Getting Back to Business. See Jim Garland’s 2019 CFA Institute Research Foundation Brief, introduced by Laurence Siegel. Thanks to Will Goetzmann for the link here .
Random Book Project #3: The Sinews of American Commerce (1941)
#3: Roy A. Foulke, The Sinews of American Commerce (New York: Dun & Bradstreet, Inc., 1941). No price. How did I get it: The book was recently given to me as a housegift by someone who knows that my proclivities run in this direction. Why: The book is classic deaccessioning material. It is a commissioned history to celebrate the 100th anniversary of Dun & Bradstreet, a business information and credit research founded in 1841. Published in August 1941, just before the outbreak of direct US involvement in World War II, the book is a testament to a muscular, unapologetic capitalism …
Barron’s conversation about dividend investing
A conversation with Barron’s Lawrence Strauss and Lauren Rublin on dividend investing in the current economic and financial climate. The replay should be “free” but you may have to register with Barron’s to hear it. https://tinyurl.com/ya5apobb Note: The views expressed here are those of the author alone, and do not necessarily reflect the views of his employer. Nothing written here should be construed as investment advice. Consult your investment advisor for specific recommendations.
Another battle in the neverending war between clarity and confusion….
A recent opinion piece in the Wall Street Journal starts off with a promising title, “Why Many People Misunderstand Dividends, and the Damage This Does.” June 7, 2020 . That is most certainly true. After nearly two decades helping to manage dividend portfolios, I can say that even institutional investors and pension fund consultants still seem to trip over the basic math of dividend investing. Unfortunately the newspaper article only adds to the confusion when the author, an academic, asserts that “Paying dividends doesn’t benefit investors, because a dividend of $1 simply reduces the stock price by $1—just as withdrawing from …
What price life?
A New Books Network interview with Howard Friedman on how human lives are valued, in dollars…. https://newbooksnetwork.com/howard-friedman-ultimate-price-the-value-we-place-on-life-u-california-press-2020/
New York Times column on dividend investing.
A recent column by Jeff Sommer in The New York Times (https://www.nytimes.com/2020/04/24/business/coronavirus-stocks-investing-dividends.html) highlights some of the challenges faced today by investors seeking income from their stock holdings. While the economic shutdown has certainly created an adverse environment for the public-company cashflows that have historically been paid out in dividends, income-seeking investors will want to consider a few additional perspectives beyond what is raised in the Times. First, Sommer implies that because stock ownership has shifted from individuals a century or half century ago, to mutual funds, pension portfolios, and other institutional accounts now, that dividends are somehow less felt on …
Interviewed on HistoricallyThinking podcast
I enjoyed being a guest on Al Zambone’s HistoricallyThinking podcast. Discussed making the transition from Russian history to investment management, dividend investing, and the main arguments in Getting Back to Business. https://historicallythinking.org/episode-146-the-historically-informed-investment-portfolio-or-the-historian-as-financial-analyst/
German money situation then and now…
Germany one hundred years ago: wheelbarrows full of money to buy bread. Germany now: vaults overflowing with cash due to negative interest rates. https://www.bloomberg.com/news/articles/2020-01-31/german-banks-are-hoarding-so-many-euros-they-need-more-vaults As a refresher, the well-told tale by Adam Fergusson, When Money Dies: https://www.amazon.com/gp/product/1586489941
At the intersection of History and Finance…..
Think that Wall Street has nothing to do with the real economy? You are probably not alone in that regard. But it turns out, you are wrong. As William N. Goetzmann demonstrates in his Money Changes Everything: How Finance Made Civilization Possible (Princeton University Press, 2016), the tools of finance were as important for the rise of civilization as were the soldiers, castles and battles. Were it not for property contracts, agreements over imports and exports of grain, how to manage risk in increasingly complex economic ventures, etc we are still living in small agricultural communities eaking out an existence, …
Not rational, not irrational, but “for itself” behavior.
Tired of the mechanical, narrowly rational human behavior of the Chicago school, but not exactly comforted by the emphasis on irrational activity in behavioral economics? So am I. Richard Robb, professor at Columbia and fund manager, offers a third way. In Willful: How We Choose What We Do (Yale University Press, 2019), Robb develops the notion of “for itself” behavior and decision making that can’t be reduced to the algorithms of calculating machines, or even those that are adjusted for human foibles. Willful is not a comprehensive theory of decision making, but an effort to reinsert some element of humanity into explanations of …
The impact of the Chicago model: NBN Interview with Binya Appelbaum
Think economics is the “dismal science” with abstract formulas that have no impact on life as it is actually lived? Think again. In The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society (Little Brown, 2019), Binyamin Appelbaum–former correspondent and now an editorial board member of the New York Times–brings to life how academic economists rose “from the basement” of banks and universities in the post-war period to have a direct impact on almost every aspect of our lives. The end of the draft, unemployment levels, inflation, deregulation, air transport, phone service, patent law, monopolies and anti-trust activity, …
NBN “interview”: Robert Shiller’s Narrative Economics
Culture matters. And a key element of culture is storytelling. These maxims can be accepted as given, except in modern economics, where the mechanistic framework of modern macroeconomic analysis allows just for formulas. Concerned about the relationship between unemployment levels and inflation? Here’s the formula: gW = gWT – f(U − U*) + λ·gPex It’s called the Phillips Curve. Your personal experience of unemployment or rising costs, the stories that you tell others or hear from them–about globalization, about jobs being exported, about “disintermediation” through technology, etc–these stories play no role in the economics taught in the classroom, but may have a significant impact on the decisions that …
Interview with another dividend guru…
I very much enjoyed having David Bahnsen, CIO of The Bahnsen Group, on the New Books in Finance podcast. David is a fellow dividend practitioner, and a very sharp guy. Hear the interview here: https://newbooksnetwork.com/david-bahnsen-the-case-for-dividend-growth-investing-in-a-post-crisis-world-post-hill-press-2019/
The Economics in Two Lessons NBN inteview
Trying to follow the key macroeconomic debates that are swirling around DC, CNBC, the WSJ and the NYT? If you are but don’t want to go back to graduate school or re-open your college macroeconomics textbook, John Quiggin has a solution. His Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly (Princeton University Press, 2019) achieves several goals. First, it frames the current debates, providing a concise, well-written history of macroeconomics and the key twists and turns in economic policy that have brought us to our current state of (general) disagreement on economic policy. Second, he structures …
Big is Beautiful interview: not what you might expect!
Small is beautiful, right? Isn’t that what we’ve all been taught? From Jeffersonian politics to the hallowed family farm, from craft breweries to tech start ups in the garage. Small business is the engine and the soul and the driver of the American system. That’s the dominant narrative. And according to Robert Atkinson and Michael Lind, it is really wrong. In their new book, Big is Beautiful: Debunking the Myth of Small Business (MIT Press, 2018), the authors review the empirical evidence and conclude that large businesses create more, generate more intellectual capital, pay better, pollute less, are more diverse, and score higher on pretty …
New Books in Finance interview: The machines versus the humans…..
The machines have taken over…. For many operating in investment management, it can certainly seem that way: factor investing, algorithmic investing, dynamic hedging instruments, risk management derivatives driven by changes in market prices, etc. dominate much of the investment narrative. And now and again these supposedly superior investment approaches get blamed for causing big blow ups. If portfolio insurance led to a wave of computer selling in 1987, then the chaos generated by the models in 2008-2009 was incomparably larger. So say the critics. But in Financial Models and Society: Villains or Scapegoats (Elgar, 2018), Ekaterina Svetlova begs to differ. She looks at how …