Not Cheering A Record-Setting Stock Market

New_highs_in_stock_marketIt’s silly season in stock market news again. By that I mean the regular “stock market reaches new highs, hooray!” headlines and commentary.

I’ll start by unpacking some reasons why this is silly news, and how you can be a much more sophisticated reader of financial news. I admit upfront that you’ll risk being a bore at cocktail parties if you repeat my commentary when people want to discuss how “the market” is doing. Sorry. (Not sorry.) But still, I want you to know these things and feel quietly smug.

I conclude with an argument for why a rising stock market overall probably isn’t even good financial news for me, or many of you, if you’re not yet retired.

But first, there’s our bad habit of noting point changes and absolute levels in stock market index values, as if the market index matters much.

In my first year in bond sales in the late 1990s, I used to call each morning upon a junior trader – a Venezuelan named Luisa who worked at the smallest customer of my desk – to give market commentary. I remember the morning I breathlessly mentioned a dramatic move in the Dow, like a 100-point drop. Luisa dryly noted that she didn’t pay much attention to point movements, but rather percent changes in the market.

Ugh, my ears burned with shame. They still do.

Mathematically, she was right. A 100 point drop means a lot if the index value is 2,000 – a 5 percent move! – but very little if the index is 10,000 – a 1 percent move. Meh.

We should all be like Luisa and only pay attention to percent changes, not point moves.

Similarly, noting that numerically pleasing round numbers like Dow 10,000 or Dow 18,000 have been breached for the first time is the financial equivalent of noting that Mercury is in retrograde while Neptune’s tilt should lead us to tread cautiously with emotional matters this week. People do pay attention to these things, but they really shouldn’t. It’s utterly meaningless.

Next, there’s the problem of talking about moves in “the market” when we’re describing just a small sliver of companies.

“The market” as typically described in financial media is the Dow Jones Industrial Average – a 120 year-old marketing tool of the company that used to own the Wall Street Journal – comprised of just thirty large companies in a variety of industries. These are important companies, but a very skewed snapshot of stock market performance.

Even the more-representative S&P 500 Index – another widely used proxy for ‘the market’ – still only describes what the five hundred of the biggest companies in the United States have done, excluding another five thousand or so reasonably big companies in this country, not to mention the thousands more located in other countries.

Next, we have the topic of dividends, which account for a significant portion of stock market gains for long-term investors. The dividend yield for S&P500 stocks – aka how much cash you get paid to just hold the stuff year in and year out – is about 1.9 percent in 2016, and has ranged from 1 to 4 percent in recent decades. Which means that much of the long-term return from investing in stocks happens regardless of whether the prices for stocks even go up or down.

With a 1.9 percent dividend yield, the stock market indexes could flatline for many years and you’d still make more current income than you would invested in US Treasury bonds. By this point I just mean to emphasize that the index going up is not the key to making money in stocks in the long run. Which sort of brings me to my final point.

grinch wonderful awful ideaI don’t mean to be a complete Grinch. (Yes I do.) It seems like it should be better for existing stock investors if the market indices reach new highs rather than new lows, right?

But when I think about it, that’s not quite right either.

I personally should not celebrate high stock prices. It kind of makes the most sense depending on your age and where you are in your investing life.

Celebrating high stock market prices only makes sense if I’m a seller of stocks, not a buyer. I bought my first stock at age 24. I figure I’ll want to still accumulate more through maybe age 64. Right now, at age 44, I’m right at the hump of my investing life, my mid-point. If I have a chance to accumulate stocks over the next 20 years, shouldn’t I prefer prices to stay low rather than high?

Taking this thought process to the extreme, shouldn’t I prefer a completely flat-lined stock market for the first 39 years of my 40 year investing life, then some kind of rocket-ship price jump, in which the market zooms up by 6188 percent in the final year, when I’m getting ready to sell in retirement? (FYI 6188 percent is the cumulative returns of the S&P500, including dividends reinvested, over the previous 40 years, from July 1976 to July 2016. Or 10.9 percent annual return, if you prefer.) I recommend verifying this for yourself with an online S&P calculator for any time period.

Meanwhile, the upward climb in prices we celebrate in financial news really isn’t helpful for me, as I accumulate at higher and higher prices.

This rising stock market index news is both misleading and not something to particularly celebrate, for most of us.

A version of this post appeared in the San Antonio Express News.

 

Dow Hits New Highs Part I

Dow Hits New Highs Part II

Dow Hits New Highs Part III

 

 

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Sin Investing

A version of this post ran in the San Antonio Express News.marlboro man

I recently used a reader question about a stock with ticker symbol MO – also known as Altria, and formerly known as cigarette maker Phillip Morris – to talk about investment returns.

I suspect readers of my column on calculating investment returns responded “ok, yes, fine, thanks for the theoretical treatise, but tell me how do I make money?”

Interestingly, MO stock can tell us a thing or two about that question as well. A contrarian like me cannot resist the opportunity to discuss MO in terms of:

  1. Socially responsible investing vs. sin investing, and
  2. Investing in innovative companies, and
  3. A five-year bet, on paper, I’d like to record

On ‘socially responsible’ Investing

I previously wrote about how I do not advocate purchasing ‘socially conscious’ mutual funds.

To summarize those ideas: I don’t like the costs of a typical socially conscious mutual fund; it’s difficult to match up large public companies with one’s specific moral compass; and the returns of such funds may not keep up with the broader market.

In fact, the opposite of ‘socially conscious’ investing – aka ‘sin’ investing – may be a far better idea, at least for making money on your money.

On ‘sin investing’ and efficient markets

When my daughter and I discussed the first stock she should buy with her tooth fairy money,  you can be certain that Altria was not on the list of possibilities. (FYI we went with Kellogg, “because Rice Krispies make a lot of noise.”)

While our choice to avoid buying a company like Altria was not market moving,[1] that choice multiplied by many billions of dollars by other similarly-situated investors can leave socially unappealing companies like Altria undervalued. In other words, the fact that cigarette smoking is totally disgusting is the key to Altria’s attractiveness as a stock.

sin_investing

Wall Street Journal columnist Jason Zweig recently highlighted a fund built specifically to take advantage of the aversion many investors feel for stocks in certain industries such as tobacco, alcohol, weapons, and gambling.

The fund – formerly known by the catchy name ‘Vice Fund’ but now going by the more staid ‘USA Mutuals Barrier Fund’ – has had a good record beating a broad market index by nearly 2% per year for the past decade.

I generally do not believe that mutual funds can consistently outperform comparable market benchmarks.

Yet even an ‘efficient markets’ guy like me can imagine that systematic aversion by some investors to some ‘sin industry’ companies creates opportunity for other investors.

By the way, I’m not advocating actually investing in this fund, because the management fees, at 1.46%, run well above what I would consider for my own account or recommend for others. But I think their success may – possibly – highlight an inefficiency in an otherwise extraordinarily efficient market.

Most Successful Company In The World

Finance writer Morgan Housel featured MO stock, Altria, a few weeks ago in a post on the Motley Fool site calling it “the most successful company in the world.”

Before identifying Altria as his featured company, he described the long-run returns of stock ownership:

One dollar invested in this company in 1968 was worth $6,638 yesterday…that’s an annual return of 20.6% per year for nearly half a century…What company is this?

On Innovation and stock investing

And then Housel built the suspense before revealing the company as Altria, tongue firmly in cheek:

…It had to have been revolutionary. It had to have been innovative. It must be in an industry that changed the world – probably the biggest trend of the 20th Century. It must have done something no other company could do.

And then Housel goes on to reveal – in a way that thrills an incorrigible contrarian like myself  –  that this world-beating stock is in an unattractive industry, one that suffered massive declines and lawsuits over the past 30 years.

Most interestingly to Housel, and to me for that matter, tobacco as an industry barely innovates at all. And that, Housel goes on to say, is another key to its success.

Innovation is super-expensive. Innovation is risky! Innovative companies frequently die. Innovative companies in rapidly evolving industries get beaten by newer upstarts.

By the way, Tesla Motors, to name one public company that I’m reasonably certain will be dead in 5 years, despite its $25B market cap, is an innovative company.

But that doesn’t make it a good stock to own.

Tobacco delivery is not innovative, but rather something far more valuable for a stock: It’s profitable.

A few final thoughts

  1. I don’t own MO, except probably tucked away as one of a few thousand companies in some broad index fund I own in a retirement account.
  2. I have absolutely zero opinion on whether one should or should not own MO stock for investment purposes.
  3. Would a few people mark their calendars for five years on Tesla and let me know how I did with my call? Because I AM SO RIGHT.

 

[1] My daughter’s stock picking is NOT YET market moving. But look out, Bill Ackman, she’s gunning for you.

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