This Pittsburgh Post Gazette editorial about the importance of studying history makes the usual “knowing history is good for society” points, but leaves out the competitive advantage in business knowing the history of said business. So say I. https://www.post-gazette.com/opinion/david-shribman/2018/12/30/David-M-Shribman-The-end-of-history/stories/201812300095      

Factor investing through index funds and ETFs has been all the rage for the past decade. Yet, it may not work. https://www.bloomberg.com/opinion/articles/2018-12-24/professor-lu-zhang-has-some-questions-about-your-index-funds How about the factor hiding in plain sight, business ownership?

Had the pleasure of interviewing Ian Gow and Stuart Kells, authors of The Big Four, a new history of the modern audit industry. Fascinating and frightening at the same time. Listen here: https://newbooksnetwork.com/ian-d-gow-and-stuart-kells-the-big-four-the-curious-past-and-perilous-future-of-the-global-accounting-monopoly-berrett-koehler-publishers-2018/    

Year-to-date, the US stock market, as measured by the broad S&P 500 Index is roughly flat, with a -1.4% change in price (thru 12/11), augmented by nearly 2% in dividends distributed and accrued. It surely has not felt that way.  In January, the S&P rocketed up 7.5% in less than one month, and then fell over 10% in 10 days in late January and early February. From late March through September, the market rose steadily to a 9% gain before the up-and-down action in the fourth quarter brought the year-to-date returns back to around zero. Start Finish Price return % …

Following up on my post from November 1, here is a matrix of the Macaulay durations for a range of equity portfolios.  The conclusion is obvious: the amount of the upfront payment is far more significant in determining equity duration than the growth rate. The incremental growth rate, and the incremental expected return or discount rate, ends up being almost trivial in the calculation.   Cash is king.   Macaulay Duration Matrix for Equity Portfolios The “Dividend” Market The Stock Market The “Dividend Growth” Market Yield 4.0% 4.0% 4.0% 2.0% 2.0% 2.0% 2.0% 2.0% 3.0% 3.0% 3.0% 3.0% 3.0% Div …

WealthManagement.com’s John Kador puts Getting Back to Business on his 2018 Top 10 Book list for financial advisors. Link here.

In the past month or so, I’ve been interviewed by several podcasters. The crispest is Michael Covel’s Trendfollowing podcast, episode 711. You can listen to it here.   There is also an interview on Jay Coulter’s The Resilient Advisor podcast.   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.

I am far from alone in pointing out the damage done by the near-termism of both investors and corporate managers.  It is addressed at length in Getting Back to Business. This issue is not going away.  See, most recently, the comments of UK asset manager Baillie Gifford in today’s Financial Times.

James Mackintosh’s Streetwise column in Today’s WSJ (behind a paywall for non-subscribers) tells the tale of a American industrial giant that had to cut its dividend twice this year, most recently down to a penny a share. As Mackintosh wrote, “The business has been eating its seed corn recently, partly to maintain the dividend.” Mackintosh seems to blame “irrational” investors for placing too much emphasis on dividend payments, and managers for being cajoled into making dividend payments when the company really needed to push less, not more, cash out the door.  He ends by repeating the flawed Miller & Modigliani dividend irrelevancy …

One of the key points made in Getting Back to Business is that the daily repricing of assets in the stock market, and the “near-termism” that can result, ends up leading both company managers and investors astray. As a potential solution, I argue in favor of having both focus on cashflows, which are generally much more stable, and lend themselves to longer-term analysis and investment. The challenge of near-termism showed up in two completely separate forums this week. In the first, the Buttonwood column in the October 27 issue of the Economist, very likely now behind a paywall, points out the …

The historian in me frequently notes that too many people operating in finance assume that the “rules” are static, and everlasting.  That’s the case of MPT, as argued in Getting Back to Business. It’s also the case in regard to the US dollar’s status as the world’s reserve currency. A recent Bloomberg Businessweek article by Peter Coy, “The Tyranny of the U.S. Dollar,” (October 8) reviews the status of the greenback as the dominant currency in global affairs and why it might or might not remain that way. (One factor in favor of the dollar is that there is no …

In Getting Back to Business, I call into question the notion of a “risk free” rate, to which one adds a certain incremental amount to determine the appropriate overall risk (and expected return) of an investment. According to today’s FT, consumers in Italy are asking (sort of) the same question, as they become unusually aware of and focused on the spread between Italian government bonds and those of the “risk-free” investment source, German bunds.

Whatever the flaws of Getting Back to Business, irrelevance to portfolio management is not one of them. The book provides a critical history of the current paradigm, and then proposes an alternative approach, written from the perspective of an active practitioner overseeing one of the largest dividend complexes in the country. So I had to laugh when a leading journal in the field of investment management declined to review the book, writing to my publicist, “Not that kind of journal.” Alas, this is consistent with how I expected the book to be received by the academic community, as discussed in …

A nice shout out from Barron’s, with some Warhol-esque imagery, at https://tinyurl.com/y7vmhpky 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.      

Earlier this month, McDonald’s (MCD) raised its quarterly dividend by a robust 15% to $1.16 per share.  McDonald’s is not currently owned in any of the portfolios that I manage on behalf of clients, but as a dividend-oriented equity investor, I am always pleased to see companies providing a tangible manifestation of their business success by increasing cash distributions to company owners. My next thought was about the share price. In my business-based view of the equity markets, an increase in the dividend—assuming it is sustainable and based on long-term profit growth of the underlying business, not just borrowing money—should …

As a stock analyst coming up through the investment ranks, I always wanted more information, never less. There was no risk of too much information. Quarterly reporting of cashflow statements and regular publication of detailed operational data seemed the bare minimum. The flood of numbers allowed me to build out elaborate company models that were the basis of my recommendations to the portfolio managers. My initial mandate included European securities, and I was dismayed that the they could and often did report less frequently and less fully.  The nerve!   Now as a portfolio manager, particularly one with a strong …

What do you get if you combine the subject of my first, academic career, with my current portfolio management job? The League of Militant Dividend Investors.

I just finished Mihir Desai’s delightful The Wisdom of Finance.   He takes on a big challenge: making finance intelligible to the general public by using stories from the humanities to make the points that financial economists do through mathematical formulations and dense articles in academic journals.  It’s an enjoyable take on risk and return, leverage, and other key concepts that investors should understand intuitively even if they can not or do not want to be compelled to understand it mathematically. Desai’s goal is to make modern finance understandable. My goal in GBTB leans more in the direction of debunking those very …

I am not expecting a warm reception for the book from the academic finance community. The reasons should be obvious: the book calls into question the mechanical “system” that academic finance has become over the past 50 years. My objection is not technical–with the exception of several M&M propositions–but subjective, even philosophical. The difference can be seen in an email I received from a senior professor whose work I greatly admire and to whom I had sent the book. He responded that “I buy stocks, not businesses.” With that simple statement, we part company.  The stock owner can go down the path …