Photo Credit: Rural Warrior Photography || Ah, the decrepitude of rural life, where excess space is virtually free.
I want to write a few brief notes on things I have seen recently. So here goes:
1) Please don’t loosen bank liquidity standards. The repo markets will function fine with a larger Fed balance sheet supporting it. We don’t need to add to the risk of the next financial crisis by letting the banks run with too little liquidity to support the risks being taken, as was true back in 2008.
This was one of the few good things to come out of Dodd-Frank. Crises are ten times worse when the banking system seizes up. Far better that banks have a lower return on equity, than that we have another crisis like 2008.
2) America?s Middle Class Is Addicted to a New Kind of Credit according to Bloomberg. I bailed a friend out of one of these agreements. He had no savings (his fault — he was spendthrift), and had a auto repair of $750. SO he borrowed using one of these online agreements where the lender was an obscure Californian Indian tribe.
The interest rate was over 800%/year! I asked him if he read the agreement, and he said no. I asked if he realized that the loan would be profitable to the lender after three payments, but he would still be paying 33 more payments. He shrugged.
Now, contra the Bloomberg article, I doubt that loans like this are all that common, or we would be hearing more screaming than we are now. I can’t find the article, but there was one guy pushing these loans trying to hide behind the sovereign immunity of another Indian tribe, and he lost the case.
3) Calling Tony Isola. AIG is getting investigated for pushing salesmen to sell higher cost retirement products to educational (I’m guessing 403(b)) DC plans.
Having worked in an insurance pension division in the 1990s, I know that this can be done. Group annuities have a lot more pricing flexibility than other financial products. Our effort at ethics was that we insisted on disclosure of compensation, unless the client was happy with no disclosure.
It wasn’t perfect, but we were doing more than most of our competitors.
4) Americans Aren’t Using Their Homes as Piggy Banks Anymore says Bloomberg. Well, good. We learned something out of the crisis. Borrowing against the equity of your home is not free, and could leave you in a hard place if the economy has a recession.
That’s all for now. I may do another post like this answering the questions of readers.
Photo Credit: The Aspen Institute || His shadow still affects central banking today…
At Aleph Blog, I will argue for things that are against my short term interests. After all, the higher stock and bond prices go, the higher my income goes in the short-run. In the long-run, that’s not sustainable.
I am here this evening to criticize the philosophy of Alan Greenspan that had the FOMC doing the bidding of the stock, bond, and futures markets.
Don’t disappoint the markets.
Give the markets what they want, and everything will work out well.
Flag the markets to tell what your intentions are.
None of those are the province of the Fed. The Fed is supposed to care for:
Low inflation
Low labor unemployment
Moderate long-term interest rates
(and indirectly) A healthy banking system, because the levers of Fed policy depend on it.
All of these things are going well at present, AND the yield curve has normalized. So why loosen again? Well, Fed funds futures indicate a igh probability of a cut… so give the market what it wants, right?
Ah, bring back Volcker and Martin, who would follow their statutory mandate, and not just mention it to excuse policy errors.
I write this partly after reading this article at Marketwatch. The article is a mix of different opinions, but the ones that get me are the ones that say that the Fed has to listen to the markets.
Well, that’s what Greenspan, Bernanke, and Yellen did, and it led us into a low interest rate morass because they never let recessions do their work and eliminate entities with low marginal efficiencies of capital.
Recessions are not always bad, and lower interest rates are not always good. Just as fires are good for forests in the long run, so are recessions that clear away marginal economic ideas.
It may not come this week. It may not come in the next few years, but eventually the Fed will be willing to offend the markets again. When it does, the jolts will be considerable, but it may lead to a better economy in the long-term.
Photo Credit: Ron Frazier || No, it wasn’t a vacation — perhaps a pause…
When I returned from my break from blogging, I realized my traffic was down by 2/3s over what it was when I left publishing. I wasn’t too surprised at that. I remember the early days when I started blogging. My readership grew rapidly over the first six months, partly fueled by people reading me who remembered me from RealMoney. After that it leveled out. I expect the same will happen this time.
As an aside, now that we are more than 11 years past the onset of the crisis, if a new crisis should come, readership of financial blogs will explode again, as investors search for answers amid chaos. Just remember that many readers will fade away as the crisis ebbs. It will be even more true if you bang the crisis drum too long. Though I covered the crisis well, I never wanted to be a “crisis blogger.” A balance between crisis and opportunity is best. After all, periods of crisis occupy less than 25% of the time.
Now email is the reverse. I found it funny to watch email subscriptions grow week after week while I was on hiatus, and then shrink when I returned. Must have seemed to be a good idea at the time when they subscribed, but less so when they actually received the emails.
There were a bunch of quasi-legal sites republishing me. They never asked my permission, but I rarely ask them to desist. Most disappeared during the hiatus and did not return. The legal republishers who had my permission were slow to restart, but they are back in force.
Commenters are slow to return, but that is no surprise. People are emailing me again, but not at the level from before the hiatus. Most are glad to have me back.
What really made me happy were bloggers who were happy to see my return. Chief among them was Tadas at Abnormal Returns. I also appreciated Jeff Miller at A Dash of Insight.
Last, I felt refreshed by the break, but I also feel refreshed by restarting. The break gave me more ideas, and hopefully I am expressing them better.
One thing that was unaffected was the spam that bloggers receive. I got it before the hiatus, during and after the hiatus. These people are desperate, don’t do their homework, and just scattergun in an effort to gain some market for their writing, services, etc.
I will simply close with this: it is nice to be back. There’s a lot more to come.
Picture Credit: Brian Solis || What is true for a political leader is not the same as for an investor, unless you are an activist or a short seller who publishes
Understanding the consensus in investing is important. During the middle of when an investment idea is succeeding or failing, typically the consensus is correct. At the turning points, the consensus is typically wrong. That is why it is important to try to understand what the consensus is.
Often we listen to or read the news to learn the what current opinion is. In the quotation in the picture above, King was a major molder of the consensus on race relations in America. He knew the situation, and took action to try to change people’s minds, and thus move the consensus to a better place — closer to a colorblind society. We haven’t arrived on that yet; maybe in the generation of my children we will get there. We owe a debt of gratitude to King politically. (Religion was a different matter for King. If you want to read about that, there is an appendix at the bottom.)
Picture credit: tara hunt || Active managers must avoid being consensus thinkers, lest they be expensive indexers
But for investors, reading or listening to the news will not give you the consensus. It will give you opinions, and sometimes the agreeing chatter of opinions may give you the illusion that you know the consensus.
In an election, the consensus is whoever manages to win a majority of votes, whether of people, or their electoral representatives. This is can take place in a simple district, or in the more messy situation of who prime minister will be in a parliamentary system, or even the election of a US President.
But in the markets consensus does not stem from what is said, but rather where money is invested. This is once again the concept of Ben Graham’s voting machine. Thus to understand the consensus, we don’t read the news. Rather, we look at prices, and then try to do some sort of analysis, usually fundamental, to see whether the consensus is right or wrong.
Indexing is the ultimate statement of an investor saying he will just go with the consensus. That’s not a bad idea for many people. Active investing is a statement that you think the consensus is wrong, and that over a reasonable period of time, the consensus will be proven wrong, and you will make good money in the process. But part of that question is whether your investors will hang around long enough for you to be proven right. The other part is that you could be wrong — non-consensus does not mean right. (In my time, I have known more than my share of cranks who held extreme minority positions for a long period, and would rarely admit they were wrong. When they would admit failure, typically, they would blame someone else.)
Now let me give you two large present examples of how the “consensus” in the investment news is not the market consensus:
One frequent thing that I run into both on the web and radio is the argument from many advisors as to how pessimistic investors are today. The correct way to understand this is that because the market is high, many investors are skittish about future commitments. So what is the consensus here? The big investors of the world have and are investing money in the stock market such that prices are high — they discount a low expected future return.
The second example is people who kvetch about low interest rates and say they have nowhere to go but up. I’ve been hearing this off and on since 1987, when my boss said, “Interest rates will never go below 10%.” These arguments are a little dented today, because of the shell-shock stemming from negative interest rates in much of the developed world, but I still read commentators on the web and on the radio saying that interest rates must rise.
But what does the behavior of market participants tell you? It tells you that investors at present are yield-hungry, and that there has been money looking for a home than entities willing to borrow. No promises about the future, but the consensus has been that yields have been attractive to lenders, and that may continue for a while.
Now a hybrid regarding investment consensus and activists and short sellers who publish their opinions to the market in an effort to profit. In the long run, the cash flows will dictate the market movements, but in the short run their words, purchases/sales, and expected purchases/sales implied by their writing will drive prices in the short run.
Articles
Now, I’ve written a series of articles dealing with this topic over the years:
On Contrarianism — ” With markets, it doesn?t matter what people say.? What matters is what they rely upon.” I give several examples for how to possibly generate a correct contrarian (or, non-consensus) opinion.
My 9/11 Experience — A brief telling of what happened to me on 9/11/2001, but focusing on the very non-consensus investment decisions we made immediately after that.
The Ecology of Investment Strategies — ‘ Any investment strategy can be overused.? Part of the job of a portfolio manager is to ask the question ?To what degree am I in or out of the consensus? Where am I in the cycle for my strategy?? ‘ (I wish I had applied that to my deep value investing when the FOMC dropped rates to zero.)
Book Review: The Most Important Thing — Howard Marks as an investor is probably the best explainer of non-consensus investing, which he entitles “second level thinking.” I’m currently reading the book Non-Consensus Investing by Rupal Bhansali. This also seems to be a good book on the topic, and I will likely review it.
But then if you want to hear the same thing from someone who is out of favor right now it would be: Book Review: The Only Three Questions That Count by Ken Fisher. It’s his second question: ” What can you fathom that others find unfathomable?”
Summary
In general, talk is cheap. Money talks louder than human chattering when it comes to the markets. The consensus derives from the investment actions that market players make, not the words they utter.
Appendix (skip if you don’t want to read a brief critique of liberation theology)
Martin Luther King, Jr. was probably the most famous American example of a liberation theologian. Unlike many liberation theologians in Latin America, he was far more moderate in his goals — he sought the end of segregation, not a violent revolution.
Even the verse the liberation theologians so often cite, Jesus saying, “Think not that I have come to bring peace. I have not come to bring peace but a sword,” wasn’t talking about war. It meant that a division would be made between Christians and non-Christians, such that non-Christians would sometimes hate Christians, even if they were family members.
But King’s preaching nonetheless focused on ending a great evil in this life, rather than pointing people to repentance from sin, and faith in Jesus Christ, which would lead to eternal happiness in the life after death.
The Bible does not promise human happiness in this life to Christians, or anyone else for that matter. Christ said believers should not be surprised if they were persecuted, poor, and/or their own families might hate them. He said “I will never leave you nor forsake you.” He would bring comfort in the midst of sorrow.
As the BIble says, “What does it profit a man to gain the whole world, and lose his soul?” (This was my Bloomberg banner message for years.) The liberation theologian offers his hearer a poor deal. “Listen to me, overthrow the wicked government — God is behind you — He will support you in your goal.” Even if they succeed, and those who rebel rarely win, they might be happy for this life, but not eternally.
There are many verses in the Bible that discourage rebellion against the powers that be, but the overarching reason is that God sets rulers in place, even bad ones (see Romans 12). God says, “Vengeance is Mine, I will repay.” As such, it is not for us to take revenge against those who rule us. As it says in the Psalms many times, God will bring judgment on all bad rulers.
That’s my brief argument. I have a lot more to say, but the main thing is this: the Bible focuses on the eternal, not the temporal. It teaches that this short life of ours that ends in death is a test. Would you rather ignore God and enjoy life now, or deny present desires, and aim for heaven? God isn’t looking for perfection, but repentance and faith in Jesus Christ as Lord.
I know that I fail to always do what’s right, but I trust in Christ. Anyway, if you got this far, pray and consider it. Thanks.
Disclosure
If you enter Amazon through my site, and you buy anything, I get a small commission. This is my main source of blog revenue. I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don?t change.
Picture Credit: Olivier ROUX || Simplicity almost always beats complexity.
I’m not a fan of EIAs. I’m not a fan of variable annuities, unless they’re really simple with rock-bottom expenses and no surrender charges. I’m not a fan of ETNs. I hate structured notes. I’m also not a fan of ETFs that are filled with derivatives.
* Small compared to the pool that they fish in * Follow broad themes * Do not rely on irreplicable assets * Storable, they do not require a ?roll? or some replication strategy. * not affected by unexpected credit events. * Liquid in terms of what they represent, and liquid it what they hold.
The last one is a good summary.? There are many ETFs that are Closed-end funds in disguise.? An ETF with liquid assets, following a theme that many will want to follow will never disappear, and will have a price that tracks its NAV.
But tonight I have another complex investment to avoid, and a simple one to embrace. First the avoid…
There was a piece at Bloomberg Businessweek called ETFs With Downside Protection? It?s Complicated. These are called defined outcome ETFs. Basically they are a bundle of equity options that cut your losses, while limiting your gains on a given equity index. (Also, you don’t get dividend income, and have to pay manager fees.) In-between the cap on gains, and where losses kick in, your returns should move 1:1 with the index. The same will be true with losses after the first N% get eaten — below N% losses, you begin taking losses.
Illustration of Defined Outcome ETF returns as compared to an index fund using the same index as the Defined Outcome ETF
I wanted to keep the illustration simple. This hypothetical defined outcome ETF caps gains at 10%, and absorbs the first 15% of losses. This example assumes no fees, which would likely be lower on the index fund. This example assumes no dividends, which would get paid to you in the index fund, but not on the defined outcome ETF.
Defined outcome ETFs purchase and sell tailored options that are backed by the central counterparty the Options Clearing Corporation — a very strong, stable institution. Credit risk still exists, but if the OCC goes down, many things will be in trouble. The options exist for one year, after which gains are paid to and losses absorbed by ETF shareholders. The ETF then resets to start another year following the same strategy with slightly different levels because the relative amounts of the cap and the loss buffering rely on where equity volatility is for a given index at the start of the year.
Unlike an index fund, your gains cannot grow tax-deferred, though if you have gains, you can roll them over into the next year.
I’ve read the offering documents, including the sections on risk. My main argument with the product is that you give up too much upside for the downside protection. The really big up years are the places where you make your money. There aren’t so many “average” years. The protection on the downside is something, but in big down years it could be cold comfort.
The second part is the loss of dividends and paying higher fees. Using the S&P 500 as a proxy, a 2% dividend lost and a 0.5% added fee adds up to quite a cost.
There are implementation risks and credit risks but these risks are small. I ran a medium-sized EIA options book for a little more than a year. This is not rocket science. The investor who is comfortable with options could create this on his own. They list more risks in the offering documents, but they are small as well. What gets me are the costs, and the upside/downside tradeoff.
Yes, interest rates are low. Yields on some stocks are higher than the yields on the Barclays’ Aggregate [bond] Index. But if you only bought those bonds, you would have a rather unbalanced portfolio from a sector standpoint — heavy on utilities and financials. The Barclays’ Aggregate still outyields the S&P 500, if not by much, like 0.8%/yr.
The real reason that you hold bonds and cash equivalents is not the income; it is risk reduction. I’m assuming no one is thinking of buying the TLT ( 20+ Year Treas Bond Ishares ETF), which is more of a speculator’s vehicle, but something more like AGG ( US Aggregate Bond Ishares Core ETF), which yields 0.3% more, but the overall volatility is a lot less.
With AGG, fixed income claims of high investment grade entities will make it through a deflationary crisis. In an inflationary situation like the 70s, the bonds are short enough that over a five year period, you should make money, just not in real terms.
It’s good to think long term, and have a mix of fixed and variable claims. The bonds (fixed claims) lower your volatility so that you don’t get scared out of your stocks (variable claims) in a serious downdraft.
The models I have run have returns max out in an 80/20 balanced fund, and the trade-off of risk for return is pretty good down to a 60/40 balanced fund. In my personal investing, I have always been between 80/20 and 60/40.
Thus the need for bonds. In a bad scenario, stocks will fall more than bonds, and the balanced fund will buy stocks using proceeds of the bonds that have fallen less to buy stocks more cheaply. And if the stock market rises further, the balanced fund will sell stocks and use the proceeds to bank the gains by buying bonds that will offer future risk reduction, and some income.
As such, consider the humble balanced fund as a long-term investment vehicle that is simple and enduring, even when rates are low. And avoid complexity in your investment dealings. It is almost never rewarded.
Picture Credit: OTA Photos || This is easier said than done!
The SEC is seeking ideas on how to make small cap stocks more tradable. Let me quote the closing of an article from the Wall Street Journal:
In soliciting the proposals, the SEC laid out a number of possible approaches, without endorsing any of them.
One such approach would limit trading in low-volume stocks to the exchange where they are listed. Nasdaq Inc. has promoted a similar plan, arguing that it would create deeper markets for small-cap stocks by concentrating the trading of their shares on one venue. But critics, including some rival exchanges,?have attacked Nasdaq?s plan?as anticompetitive, saying it would benefit big exchanges like Nasdaq.
In another approach floated by the SEC, trading in low-volume stocks would take place in periodic auctions, separated by discrete time intervals, instead of continuously throughout the trading day.
I’m not sure that any of these proposals will work. Longtime readers know that I think that liquidity is hard to permanently increase, or decrease for that matter.
By nature, small cap stocks have smaller floats. There’s less information about them Many accounts and managers have mandates that don’t allow them to purchase small cap stocks. Bid-ask sizes and spreads tend to be smaller and larger respectively than those of large caps. That’s largely a function of floating market cap and the underlying riskiness of the company in question. Market structure plays less of a role.
The composition of investors does matter. It typically doesn’t change that much; it is cyclical. Horizons shorten as volatility rises, and vice-versa.
The more buy-and-hold investors there are, the more liquidity decreases. The more traders with short time horizons there are, the more liquidity increases. Commissions declining will possibly make time horizons a little shorter for day-traders, but I can’t imagine that the effect will be that big.
As a smaller investor, I do like the concept of a central order book that would have a monopoly on trading a stock, because it would remove an informational edge that high-frequency traders [HFT] have. I don’t think it would increase liquidity much though. It would change where the trades happen, and perhaps who makes the trades. I think that some less technologically inclined investment advisors would be willing to put up larger bids and asks in such a context, but they would mostly replace lost volume from HFT.
I also think that having more auctions during the day would be a good idea, say like one every half hour. I don’t think it would increase liquidity, though. Trading would become more sparse away from the auctions.
I own four illiquid stocks for my stock strategy clients, and one less liquid closed-end fund for my bond clients. I can trade them if I need to. I just have to be more patient with those securities, and break trades up into bite-size pieces.
For me, trading is a way of implementing changes to the portfolio. If any of the proposed changes happened, my trading would not change much at all. I suspect that would be true for all but the investors with the shortest time horizons, but I think that could go either way. We have lower commissions on one hand, and disadvantages for HFT on the other. Could be a wash.
Enough rambling. I don’t see a lot of likely change here, and liquidity should not be the highest priority at the SEC. Rather than facilitating more secondary trading, it would be nice to see more private firms going public. SEC efforts on that would get my attention.
Photo Credit: 401(K) 2012 || As that great moral philosopher George Harrison once sang: “It’s gonna take a lotta money, a whole lot of spending money…”
Hello David. Fellow actuary here. I usually love your posts. I disagree with this one. Or at least I disagree with the title. ?How much (or how little) should I spend?? may have matched the content better. I?d love to read your thoughts on ?When have I saved enough so that I may now outspend my income?? Perhaps you have written such a post but I don?t recall it.
My main idea is encouraging spending that supports the well-being of the household in the long-run. I am trying to encourage a balanced point of view, which is the hardest thing to do. For many people it is easier to convince them to do just one simple thing than try to balance two or more unaligned goals.
That is why the “stoplight rule” is so useful. It is minimal, but balances saving and spending. Imagine telling a friend to enjoy life, but not too much, such that he compromises the future. The stoplight rule is a real help.
People have a hard time expanding their time horizons. It is easiest to live for the present, and hardest to live for retirement. The good of the present is tangible, whereas the good of the future is intangible.
I do not favor excessive savings. It usually leads to a trail of tears in relationships. God wants life to be enjoyed, because it honors the way he provides for us. God is not a miser; we should not be misers either.
?There is a fine line between over-saving and under-living.?
That particular story dealt with a couple that had been especially frugal, and after not earning all that much, at retirement had $6 million. ?They had a traditional marriage, and the husband handled the money entirely. ?He worked until 72, retired due to incapacity, and on the day of his retirement, he handed his wife a check for $3 million.
She thought it was a joke, so for fun she tried to cash the check. ?To her surprise, the check cleared. ?Then came the bigger surprise ? her amazement gave way to anger! ?All the years of self-denial, and they were this well-off! ?There were so many things she denied herself along the way, and now both of them were too old to truly enjoy their riches. There?s more to the story? the point the author goes for is mostly abut how husbands and wives should learn to cooperate on the shared tasks of household economic management, so that both are on the same page, and they can be agreed on goals and methods.
I agree with that, and would add that the best approach on spending versus saving is what I would call a conservative version of the ?middle way.? ?Make sure that you are provident, but balance that with contentment and a happy enjoyment of what you have. ?Life is meant to be lived.
Yes, it is good to be prudent and frugal, but not to the point where you amass a lot of assets and never enjoy them.
I sometimes say in certain charitable contributions “What is the point of money if I can’t enjoy it being spent to a good purpose?”
Yes. There are some tiny-minded people who believe that “the one with the most toys at death wins.” These are people who want to delude themselves that selfishness is what is right, which is ridiculous.
If you are well off, God does not want you to be a miser. First, he wants you to honor Him. After that, he wants you to take care of your charitable obligations to society. After that, he wants you to enjoy what you have.
And that’s what I do, Lord helping me. I am sparing on optional items, but I take care of my home, the church, and other opportunities for charity that are in front of me. After that I relax, because I wait for other needs to be big enough to deal with.
Photo Credit: Images Money || Saving is a good thing, don’t let the Keynesians tell you otherwise. After all, Keynes saved and invested.
When I started Aleph Blog my oldest child (out of eight) was 17. At present, my youngest child is 17. My view on saving is that you should save as much as you can. Why?
Much consumer spending is not needed. It is done to compete with other people for bragging rights, rather than meet basic needs. Many people in the US and other places are spoiled, and think that they need to have the best in the goods that they consume.
Learn from your great-grandparents who you never met, or were too little to understand: Deferred gratification. Don’t maximize the joy of your youth. Rather, save when you are young, and look to have a happy life from middle age to the end of life. That would be more happiness than if you had not saved when you were young.
What I have seen from my own children is that the savers are he happy ones, and the spenders are miserable… chased by the debt collectors and the repo men. It is a poor kind of happiness for me that those who listened to me are doing well, and those who ignored me are doing bad.
My basic advice for you is this: save 10% or more of your income. If you think you can’t do it, you are right. But I will tell you that you can do it, regardless of what your think. It is a question of will, not ability.
True saving means cutting expenses that are pleasant but not necessary. It means searching over your credit card statement for things you agreed to once, but no longer need. It means living with the old clothes that are just fine, but a little out of date. It means eating common food at home, and learning how to cook delicious food yourself. In this era of the internet, with rated recipes, this is not hard.
The main thing to fight is the attitude that you need to spend now. Think and plan. What is the best way that you can organize your life for the next 30 years? When you think long-term everything becomes more rational.
Summary
Save and invest. Your life will be happier if you deny yourself when you are younger, and enjoy life more when you are older. I have been debt-free for over 15 years now. Not having to make a mortgage or rent payment is a sweet thing. Having a valuable asset like my home (free and clear) is a sweet thing.
On average, in my life I saved more than 10% of my income, and I gave away more than 10% of my income. I do not regret the deprivation. At present, I have more than I need, and I give to charities.
I am not telling you to be like me. I am telling you that there is an alternative to the typical consumer mindset. Like your great-grandparents, defer gratification and save. You will be happier in the long run.
Photo Credit: Stephan Caspar || In Roman numerals 3000 is MMM… and thus the yummy picture that will make some people go “mmm….” As for me Mmm… I’m glad to be back.
Every 100 posts (except that I did not do it at the 2900 milestone), I take a moment to reflect. I started blogging back in February of 2007. I was 46 years old then; I am 58 now.
I resisted starting a blog for some time. When my editor at RealMoney asked me (she was asking all the contributors) “Are you going to start a blog?” I answered, “RealMoney, particularly the Columnist Conversation is my blog.”
I loved writing for RealMoney, but in some ways I was not the best fit for RM. I wrote more about theory, and less about actionable ideas. My main reason for that was that beyond holding a CFA charter, and at the time, a dues-paying life actuary, I have a code of ethics in addition to those from CFAI and the SOA. Aside from that, feedback is lopsided, like on Yelp. You get disproportionate feedback when you make a mistake, but little praise when you get something right.
But the reason I decamped from RealMoney was that I wanted more editorial freedom. It is the same reason that I tried writing for The Balance, and gave it up because I needed more freedom to write what I was thinking. (Also, writing for The Balance involved rewriting old articles, many of which were average for the web, but way below my standards. Rewriting those took a lot of time, and did not satisfy the other requirement of writing new articles on topics the the editors wanted, most of which were decidedly niche.)
How Aleph Blog Changed Over Time
When I began, I was writing two small articles per night. I morphed into writing articles that were relatively long, and one per night. I had a goal: to express all of the main ideas that I had come to regarding finance, economics and investment. A major part of that was The Rules posts, which mostly stemmed from insights I had between 1999 and 2003. There were a few that came after that, but not many. When I finished the last of the original Rules posts, I breathed a sigh of relief, because one of the major goals of the blog was complete. I had written an article on all of the “Rules.”
Now, one other thing that changed was the financial crisis. During the crisis, I resolved to write about all of the issues that I thought my distinct view could help explain. But I did not want to be a “crisis blogger.” There are some bloggers that are locked into writing about disaster, which is problematic when we have been in a very long though shallow recovery. Some commenters criticized me for not being like Zero Hedge back in 2009 or so. I ignored it because I want to be an “All Weather” blogger. I will write when the sun shines. I will write when it rains.
I do want to make one comment from the crisis era, when I was one of the bloggers invited to the first US Treasury / Blogger summit. In my 7-part coverage of the event, I never mentioned what I said during the main portion of the event. I was not the most outspoken at that event. Those that were “crisis bloggers” dominated the conversation.
There were only two things I got to say during the meeting. The first was my telling them that they could learn something from the way Canada regulates their banks, and also that the US state-regulated insurance companies were regulated better than the depository institutions in the US, especially for solvency.
The second thing that I said was that the US should lengthen maturities for Treasury issuance, and issue fifties, centuries, and consols. Also, they should issue floating rate debt. I told them that the US government would face a crisis when there is too much debt to roll over, so stagger the maturities, and pay up to borrow longer.
Back to the Present
I wrote a lot of book reviews in the past. I am unlikely to write a lot more of them, though there will be some. Part of that is Amazon favoring reviewers that bought their books at Amazon. I got most of mine from the publishers.
I have maybe 40 article ideas to work on now. Many of them will require significant work. Many of my best articles required that level of work, but it will mean that my output will slow down. If you have something you would like me to write about, send me an email. My address is on the Contact Me page. I don’t guarantee that I will write about it, but reader letters have led to more articles at my blog than most others.
Thanks to my Readers
There is one post that is especially dear to me, the one entitled Learning Leadership. It describes a time when I effected a huge change in the business that I worked for, and got little to no reward for doing so.
I thank all of my readers for reading me, wherever you are. One-third of my readers are outside of the US. I try to write for a global audience, but living in the US, I know that it will be somewhat US-centric. All the same, I invite those outside the US to write me and ask me questions.
And with that, I close this piece. Not that I will answer every question, but I will read everything that is written to me. My readers help make my blog better. Keep writing to me and helping me; I appreciate it.
Photo Credit: Simon Cunningham || Not paying a dividend does not create an enforceable claim, as happens when an interest payment is not made.
Don’t get me wrong, I love dividends. I even have a money management strategy based off of them. But I know that dividends are more fickle than most of their fans admit. The infatuation that some money managers have with dividends is misplaced. To say that “Dividends don’t lie,” is an overstatement. Yes, the check will clear, and you get money, but that does not mean that the next dividend will get paid.
I have always said that reliable dividends flow from businesses with predictable free cash flow. As such, I don’t look for dividends, but free cash flow. As a check on that, I watch debt levels in the companies that I own. If the debt levels are persistently increasing as a fraction of assets, it is likely a sign that the company is borrowing to pay the dividend.
Borrowing to pay the dividend — an old phrase, dating back to the 1970s and prior. Companies know that a consistent and growing dividend attracts investors. They are reluctant to not grow the dividend, much less cut it, lest massive selling take place. But businesses have their limits, and paying a dividend beyond those limits leads to an eventual dividend cut.
No management team will admit to being uncomfortable with its dividend payout. The Fed may as well admit that they don’t know what they are doing. It’s not gonna happen. But prior to a surprise dividend cut, the company will borrow more, probably hoping that business will rebound, and that the increased dividend will be sustainable.
In the 1970s, there were many dividend cuts. At the end of the 70s there was no cachet to dividends. With interest rates so high, income was to be found in bonds, even if inflation was going to the sky.
I remember the 1970s even if I was a teenager then. I was gifted two bits of stock in the 1960s, and the companies paid their dividends until they failed. I remember taking my dividend checks to the bank to add to my savings account. I still knew that the two stocks I had been gifted, Magnavox and Litton Industries, were disappointments that had given me less than the value of when the stocks were purchased.
In a significant recession, many companies will cut their dividends in order to avoid bankruptcy. Dividends are subject to the boom/bust cycle as much as any other aspect of corporate behavior.
This is why I say be careful regarding dividends. We are in a bull market now, with prices near the recent peak. Financing is plentiful and cheap. As Buffett has said:
Only when the tide goes out do you discover who’s been swimming naked.
brainyquote.com/quotes/warren_buffett_383933
Summary
My main point to you is this: don’t assume that dividends are automatic. Test the companies whose stock you want to buy to see that they have adequate capacity to pay the dividends, and that they are not borrowing to pay them.
I like my dividend portfolios. They are roughly half as volatile as the market, and have had decent returns. But I don’t blindly trust the dividends that companies pay as if they are an obligation. Be wary and analyze the safety of the dividends that you are paid.
