Yes, I know the current financial markets are trying. They are now and they always will be. And yes, each time economic or corporate data, or more specifically a “tweet,” is released that somehow upsets the apple cart, the Street reacts in a manner not conducive to increasing your wealth. So here are some of my favorite words on the subject.
Forget Utopia and search for companies with an intrinsic or mathematical value that exceeds their current share price by at least 10%. Those companies will have maintained a track record of performance in their field of endeavor that has resulted in a trail of uninterrupted dividend increases.
Nonetheless, it seems that there is no end to the nauseating bombardment of questions of the ilk: Is the stock market too high, too volatile, is it going “crash,” and do I still recommend investing in stocks?
The current downturn in the equity markets due to the coronavirus should not be labeled a crash, per se. Volatile yes, but not a crash. The only crash I am aware of, although I was not born yet, was the one that began on Oct. 29, 1929, and kicked off the Great Depression.
The only crash — and I am reticent to use the word — in my 50-plus years on the Street was in 2008. Painful yes, but far from fatal. Especially if you adhered to the mantras of intrinsic value and consecutive dividend increases. Please note the words consecutive and increases.
Is the market ever too high? Was it ever too high? If companies grow their earnings and reinvest those earnings in their businesses (compounding), which includes raising their dividend each year, their share price will most assuredly move inexorably upward.
Therefore, unless you are penniless, lying on your death bed and have no heirs, you need to own equities. Does investing in the equity markets entail risk? Of course it does. Even the largest most successful corporate monoliths are vulnerable to adversity. GM, AT&T and GE are textbook examples. And I do not think IBM and maybe Exxon are far behind.
However, without access to inside information it is impossible to predict stock prices short-term. Inside information removes the uncertainty; it also means trading tailored pin stripes for a more casual outfit in orange.
So why are bonds not the answer? One key reason is inflation. Debt securities, once they have been issued, do not gain in value at maturity. When a bond comes due you will be paid the bond’s face value — no more, no less. Moreover, neither the interest nor the principal is protected from the ravages of inflation. And for all your efforts, you are not rewarded when or if the issuing company’s fortunes improve.
Polonius counsels Laertes, his son, in “Hamlet,” Act 1, scene 3, 75-77: “Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”
When you hold a company’s stock you are an owner of that corporation, not a debtor. If the company prospers and grows then your investment will see a corresponding increase in value.
More importantly, as a shareholder you are tying yourself to a company’s fortunes, not to daily market fluctuations. Worrying about where the market is going is an exercise in futility. The investment world can be counted on to overreact most any event.
Finally, if your portfolio is looking anemic, if you dread looking at the closing Wall Street numbers wondering if you should get out, let me close with some of my favorite words that I have repeated on numerous occasions.
Written by Admiral William H. McRaven, Ninth Commander of the U.S. Special Operations Command, in an article titled “Life Lessons from Navy SEAL Training,” he wrote that in the Navy SEAL training compound there hangs a bell for all to see.
Ring the bell and you no longer must endure the hardships of SEAL training. Just ring the bell and it all stops. However, if you want to change the world and improve your life, do not ever … ever … ring that bell.
Lauren Rudd is president of Rudd International, an asset management firm. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at941-706-3449. For back columns, go to heraldtribune.com/business/columns. Lauren Rudd offers commentary Thursdays on SNN News 6 during the 5:30 p.m. live newscast.