Victory
Earnings drive stock prices over time. This simple truth is evident in the past century’s market performance. Over the past 100 years, both the S&P Composite index and S&P Composite index earnings gained about 6-7% per year. The profits, along with the market’s appraisal of the value of those earnings, rose and fell year-to-year. Sometimes, those swings in earnings and valuations were large, creating excitement and anxiety. What drove the earnings growth? Fortunately, we see an excellent and rational cause for the growth in earnings. As the chart below shows, we can trace growth in stock prices to economic growth…
Investors have done well to heed Marty Zweig’s advice “Don’t fight the Fed” since he published his 1970 book, Winning on Wall Street. The idea has generally stood the test of time. The most recent two major recessions and market declines, those in 2000-2002 and again in 2007-2008, were preceded by Federal Reserve (Fed) policy tightening. So too were the recessions and bear markets of 1973-1974, 1980-1982, and 1991-1992. The 1987 market crash was, likewise, preceded by rising rates. In each case, efforts by the Fed to rein in inflation via tighter monetary policy proved effective in fighting inflation, but…
We critique existing “style” investing frameworks as popularized in various “value” and “growth” indices. We cite three critical problems with how the indices are constructed, and discuss risks that come with overly strict adherence thereupon. Lastly, we offer an alternative framework as a potentially better way to think about investments.
The economy is either in recession or booming. This is what the headlines are telling us each week. So, against this muddled stream of seemingly conflicting and contradictory information, we look for signs regarding which way we are headed. Consider the following evidence for the “recession” case and the “boom” case.
Where do you want to be invested when faced with the prospect of a bear market? Some say that high dividend yields provide protection when stocks fall. This implies that since the yield rises as the stock price declines, new buyers will be attracted as the price drops. Such buyers could help establish a “floor” below the stock. While this sounds good in theory, we find scant evidence that it actually works in practice. This strategy fails when needed most because “high yielders” tend to be fundamentally weak. While some high-yielding stocks may be good bargains, most high yields reflect…
With the U.S. stock market near highs, we look at the role “beta” plays in portfolios and why we favor combining “beta” with fundamentals. We find that 1) the pandemic era brought a rise in average “betas”, and 2) that “betas” behave differently based on fundamental quality.
There is more risk in the world than most people realize, and it is often inadequately measured. Here we look at how we measure risk and how quality can help address both volatility and unwanted surprises.
Investing is not just about creating high returns but consistent returns. Therefore, we must contemplate how to address risk well in advance of demanding markets. This commentary addresses how some basic math can help explain the value of investing in high quality.
Easy money policies and rising debt lead us to focus on quality first. In past commentaries, we made a case for owning high-quality firms over low and offer an alternative to “growth and value.” This week, we want to explore how we think about what we pay to own high quality. How We Asses Quality When we say “quality,” we really mean flexibility, resilience, and consistency. To find these characteristics, we test firms for low debt, productive assets, and operating consistency. Each quarter we examine the largest 1,000 U.S. companies along these lines, rank the results, and assign quality grades…
The gardener must sow seed in fertile ground for a garden to grow. Once planted, young seedlings must be cared for and cultivated. If all goes well, the seed grows into an abundant garden, while also producing the seed and nutrients for next year’s plantings. In this way, the gardener achieves a sustained cycle of growth, and everyone benefits. The same is true for a business. Like a seed, a firm must sow investments in assets that yield a profit if it hopes to grow. Additionally, investments will be subject to risk and unknowns, some will produce profit, and some…
Our economy grows decade to decade, with corporations capturing an increasing share of global income in the form of profits in recent years. Along the way, low interest rates prompted growth, encouraged risk-taking, and pumped up the value of future profits. It is not surprising, then, that stocks have enjoyed a historic rise, achieving great returns far above other asset classes. Not even a global pandemic was able to short-circuit this wealth creation process. In this week’s commentary, we revisit an old idea — namely that real factors dominate growth and stock returns in the long-run, while illusory factors can…
It is essential not to overlook critical assumptions. One of the most basic stock investing beliefs is that firms will continue to exist — firms do not live forever. Beginning as a start-up and ending in decline, firms undergo many changes over their lives. An idea becomes a business that generates growing profits and revenue. As a result of sound investing, the company continues to grow, finds new markets, and fends off competitors. At some point, the demand for the firm’s product or service slows, competition erodes advantages, and the business shrinks. In an age of rapid technological change and…
President Biden signed into law a $1.9 trillion Coronavirus aid package last week. New spending of $1.1 trillion is expected this year, with the remaining $0.8 trillion spread out over the coming years. The spending is on top of last year’s $3 trillion fiscal support program, sets up 15% annual deficits for 2020 and 2021, and increases debt to 110% of GDP. Why should we care about such spending, especially when the economy is hobbled by COVID-19? Indeed, the package will indeed help many. There are $670 billion in checks and enhanced unemployment benefit checks on the way to…
There is lots of discussion about the return of speculation. Cryptocurrencies, message board short-squeezes, soaring penny stocks, “blank check” companies, and record issuance of risky debt dominate today’s headlines. It is hard to imagine that, just under a year ago, financial markets were in freefall. Greed replaced fear in the span of a few short months, despite an ongoing pandemic. This week we return our focus to “quality” as a key factor in portfolio construction. Risk-On! Notice the chart below. It is a ratio of the most volatile stocks in the S&P 500 divided by the least volatile. When investors…
The stock market is on a historic run, with U.S. stocks eclipsing $42 trillion in value for the first time ever last week. The broad market, measured by the S&P 500, continues a decade of strong returns with the rolling 10-year real return for the market above 10% (Chart A, below). Chart AS&P 500 Trailing 10yr Real Annualized Return Market of Stocks Many of this year’s “stay at home” themes are playing out and the technology sector is on a tear. Yet, this year reminds us it is not so much a “stock market” as a “market of stocks.” Even…
Quarterly Report
Principles
Dividend Investing
