An investing Road To Damascus. Several factors have led me to believe that the market has made a long term change over the past several years. Without going into details, one was an article by Russ Winter, one an email from Ilya, another an email from BS Grinder, my own experiences with Mid Cap and foreign securities, Jeremy Grantham's observations, the boringazation of large cap mutual funds and other factors that exist now that never existed fifteen years ago. I haven't reached Damascus yet and may not have even seen anything but the glimmer of the flash of light, but my donkey is acting very antsy. <G> Here are some things I've come to believe, based upon numbers and observations and a couple of immediate investments I am making to take advantage of them.
1. It is getting harder and harder to differentiate performance by picking stocks in the S&P 500. It has never been easy. But, as Russ Winter points out, today, 70%+ of the 500 stocks correlate with the index itself, which is higher than it has been. By a lot. Part of that has to do with the huge % of daily volume made up of S&P 500 ETFs. Of course, huge index funds run by Vanguard and others are always adjusting their portfolio to the index. And even non-index funds often stray little from the index discipline when putting together their portfolios. To underweight an industry by 20% is considered a gutsy move. To eliminate a major industry in a portfolio is unheard of.
Something I learned as a broker is that they risk their jobs when they deviate from accepted indices, and the S&P is the most accepted, the Dow being considered flawed. If you get a financial plan from a CFP, it is rare that less than 50% of your recommended positions are not the S&P 500 (though usually not called by that name) and the number is usually greater than 50%. Who can blame a broker if he clings to the index? Well, they found out in 2008 that a lot of folks will blame you, but they still think of the 500 as a harbor of safety. For the brokers.
2. Dividend growth will be more important in the future. It has been important in the past, but, with so many large stocks marching in lockstep, payout money will become as or more important than appreciation money. Make certain, I am saying dividend growth and not large dividends. High yield stocks are often moribund companies. But those who try to increase dividends often are the true growth stocks.
Is that a panacea? Nope. It is just as difficult to pick future dividend growers as it is to pick stocks that will out appreciate. But, the dividend growth is internal and less dependent upon index returns. And, dividend growers tend to outperform in appreciation, too. I know, I know, you'd rather have owned Google without a dividend than ADP with a steadily growing dividend. But I contend that finding a gorilla like Google is not going to happen very often while finding a dividend oriented co. with continued growth prospects is much easier.
Does the co. have to raise dividends every year? No, and be suspicious if they do. Nobody is free of the business cycle. And, when business turns down, it is fiscally irresponsible to raise the dividend payout.
Here is a table that shows what a dividend raiser can do for you over a long term. Check out the ADJUSTED dividend payout in 1990 vs. that of 2010: investquest.com
3. Many consistent dividend growers are small and mid cap stocks with niches in the marketplace. And sometimes you have to anticipate a dividend grower. For example, I think COH, which just started paying dividends, has the cash and capacity to continue to increase them in the future. I owned COH before they started paying out part of profits and one of my hopes was that they would start paying soon. I got lucky and they started even sooner than I expected.
4. Appreciation will be found in odd places. Perhaps miro caps, perhaps foreign mid caps, perhaps an industry that has been blasted, perhaps a country that has been blasted. My recent buy of TRF has worked for over 20% appreciation so far. TKF has not done as well, but it has gone up. Stocks like Mitey and Cheuy are representative of Asian real estate and they have not rung up any profits for me this round. Yet. But they are contrarian plays that have a good shot. I like green and Guinesses' carbon fiber plays feed into that concept. I haven't bought a yacht on my HXL profits yet, but it hit a new 52 week high today and I'm not crying in my beer. Makes it too salty. <G>
5. I will be able to use fewer options for appreciation as many of the areas where I am looking will not have options. However, options are so cheap that I will still buy some in even the S&P 500 list, though my own guy tells me I may as well play the index options. That just isn't fun for me, so I may pay a bit for entertainment. <G>
I hope some of this makes sense. |
