Spring Musings

Spring Musings

October 09, 2019

Originally posted Monday, March 28, 2016

Hello my friends. Spring is in the air… Perhaps not in Syracuse where it is snowing today, but hopefully wherever you reside, and most definitely on the Calendar. I thought I would take this occasion to share a few thoughts with you.

1. Sir Isaac Newton

In 1720, Britain’s most celebrated scientist, Sir Isaac Newton, managed to lose £20,000, almost all his life savings, in the shares of the South Sea Company. Having earlier doubled his investment in the company’s shares, Newton re-entered the trade after watching the stock proceed still higher. Upon cashing out near broke, he said that “I can calculate the movement of the stars, but not the madness of men”. In recounting this incident, Warren Buffet wrote that “If he had not been traumatized by the loss, Sir Isaac might have well gone on to discover the Fourth Law of Motion: For Investors as a whole, returns decrease as motion increases.”

The empirical evidence is overwhelming that stock market returns are directly related to the length of the holding period. If you can ignore the “noise” around you and hold on to your stock market investments, you will greatly enhance your performance. An annual survey of mutual fund investors suggests that active trading cuts an average investor’s long-term returns roughly in half. Between 1871 and 2012, an average holding period of one day generated positive returns 52% of the time. Increase the holding period to one year, and the odds of realizing a gain improve to 68%. By boosting it to 20 years, your chances of realizing a profit reach 100%.1 The bottom line… buy your stocks, mutual funds or index funds with the intention of holding for the long term.

2. Stocks vs. Real Estate

We have many professional Real Estate Investors among our clients… some of whom have done incredibly well with their investments in rental property. I’ve often joked with them that their stocks never call them in the middle of the night when the plumbing is broken, but I understand the benefits of real estate investing, including:

  • Tax advantaged depreciation
  • The ability to leverage
  • Potentially high rental income

And perhaps we should include, less visible volatility. Your rental building does not quote a varying price all throughout the day on CNBC.

Conversely, stock market benefits include:2

  • Liquidity
  • Lower transaction costs and
  • Potentially lower dividend and capital gains rates

In our view, the attractiveness of either depends on their ability to generate income. Not everyone is capable or suited to managing rental properties, with their myriad of difficulties with tenants, maintenance, vacancies and upkeep. However, anyone can put together a stock portfolio designed to throw off dividends:

AT&T, Verizon, Pfizer and Chevron are just some examples of stocks currently yielding more than 4%. Many of these companies can be counted on to both appreciate and raise their dividends over time.3 This can provide investors with a growing stream of income to accommodate inflation. It is also much easier to hold onto a stock when you know that despite the volatility those dividends keep coming in. And remember…no stock ever needed its roof or furnace replaced.

QE or Not QE ?4

That was the question, and now that the Fed has embarked down the path of extraordinary policy accommodation, it will not be so easy to reverse. We have seen all the consternation over a simple ¼ point move in the Fed Funds Rate, and how positively the stock market responded to last week’s Fed meeting where Janet Yellen projected only 2 more hikes this year versus the previous guidance of 4.

Simply put, the Fed has backed itself into a corner that will not be so easy to get out of. By expanding their mandate from inflation and economic growth to now include market stability, international stability and the dollar, the Fed will find it extremely difficult to find a confluence of those factors that allows them to normalize rates, much less tighten.

With interest rates likely to remain low under this scenario, it is reasonable to expect that the stock market can trade for a higher multiple (P/E) than it has historically. It also means that high dividend stocks will remain attractive versus alternatives in the Bond market.

In summary, we continue to believe that the best strategy for Investors remains:

  • Trade less frequently
  • Hold stocks for the long term
  • Design your stock portfolio to throw off dividends for you to live on.

We wish you all the best for the spring season and welcome your thoughts and comments.

Neil Hoyt, President

1The Motley Fool “Advice from the Oracle: 50 Warren Buffet quotes that will make a better investor” 2014
2The investment return and principal value of an investment will fluctuate so that an investor’s shares/units, when redeemed, may be worth more or less than the original cost. Investment securities are not FDIC-insured, nor are they deposits of, or guaranteed by, a bank or any other entity.
3Past performance is not predictive of future results
4Quantitative Easing (Q/E) Definition: the introduction of new money into the money supply by a central bank.