Taking a Beating in the Stock Market, Again This Year

You have plenty of esteemed company if once again you are taking a stock market scalping. The popular Legg Mason Capital Management Value C Fund is down a staggering 11.8% YTD. And, of course, the broad market indices are down. The S&P 500’s negative total return YTD is negative 6.3%. It has been a bummer of a year for a number of reasons, which include the limping-along economy, jobs and housing market despair, and the ugly situation both in Washington and at the Fed.

In my monthly strategy reports, I have been warning clients for many quarters. I use inference reading and anecdotal evidence to help gauge the tone in the financial markets. I combine this research process with the intuition gained in nearly 50 years of professional investing to craft armadillo-like investment portfolios. Successful investing is often more of an art than a science. The armadillo is an all-weather beast able to take on all comers. I dedicated my 1987 book to this hearty beast and, today, practice the same basic strategies outlined over two decades ago.

The benefactors of my work are regular strategy report subscribers as well as clients of our Naples- and Newport-based family investment management company. Our equities research firm provides the input for Young Research’s Retirement Compounders (RCs) model portfolio. This portfolio is the North Star for our portfolios at our management company and for monthly advice in my strategy reports. Year to date, the RCs are actually up 0.9%. The advance is certainly not a whopper, but it is an advance nonetheless and compares right well versus the travesties outlined above.

Thirty years ago I waded through annual reports, chronicling, well after the fact, a company’s prior year performance. I haven’t relied on these historical relics for decades. You will not find one in my office. I want to know what is going to happen five or ten years in the future. I want to know about companies and industries with a sustainable advantage and with a high barrier to entry. I don’t talk to anyone on Wall Street or read books on finance and investments. I do have one book on investing on my desk, and it has been on my desk since 1963. The book is Security Analysis. You have probably heard of one of the book’s authors, Benjamin Graham. Most of what I want to know about investing can be found in this single, 778-page reference. On page 480, the authors write, “For the vast majority of common stocks the dividend record and prospects have always been the most important factor controlling investment quality and value. … In the majority of cases, the price of common stocks has been influenced more markedly by the dividend rate than by the reported earnings.” Every stock in our RCs portfolio pays a dividend. The average portfolio yield is most often more than twice the yield of the S&P 500.

Forty-eight years and my basic dividend strategy has not changed. No modifications, no adjustments, just the continuity of dividends today and dividend increases tomorrow. How has my long-term program of inference reading, anecdotal evidence, and a laser-like concentration on dividends worked out? Well, as shown, our RCs have outrun the much lower yielding S&P 500 this year. And the same was true last year and the prior year and the year before that and the year before that. Well… you get the picture, and a bright one it is indeed. Keep it simple. Keep it consistent. And anchor your investment program with dividends, as I do. Good Luck.

Warm regards,

Dick