Please find an excerpt from our September 2024 Newsletter below.
Market Timing, Dividends, Warren Buffet’s Apple, Gold, and More Thoughts on Investing
If you have ever asked or wondered if now is a “good” time to invest in stocks, you are far from alone. It is one of the most common questions that people who are new to investing ask. It is also a common question when people come into a large amount of cash after selling a home or business, receiving a big bonus, or a gift or inheritance. Often this question is also followed with, oh, and I know I should be trying to time the market, but I just want to know if it is a good time to invest.
Answering this question at a very general level can be done in a variety of ways’ my favorite is “It depends”. What I mean by that answer is that it generally depends on your time horizon and your individual circumstances. If you know that you need or want to spend that cash in the next year or so, then no, it is not a good time to invest in stocks. If you know you want to fund something in the long term, like a retirement that is many years or decades away, then generally, the answer is yes. Then a common response to that is…I hear that stocks are very expensive or at an all-time high…or there is a war, or an election or bank failure or a pandemic or a possible new tax law or …the list goes on forever. There is always uncertainty. There is always a lot of noise in economic data and the news.
If you have never heard or read any of the articles about the “world’s worst market timer” it is worth reading an article like this one by Ben Carlson. He outlines the investing history of the world’s worst market timer a fictional character named “Bob”, who placed large amounts of cash in the stock market at various intervals right before big market crashes in 1973, 1987, 2000 and 2007. However, despite Bob’s terrible timing, he does one smart thing, he decides to never sell his investments.
The story is worth reading, with a couple of caveats. 1) If by the stock market, we mean the S&P 500 or the Wiltshire 5000, we, in my opinion capture a sufficiently large and diversified stock market. If we mean the SMI, the FTSE, the DAX, the Nikkei, or any other country stock market other than the US, I will say your portfolio is not well-diversified enough across sectors. 2) Past performance is not necessarily indicative of future performance. Nobody knows for certain what will happen in the future. There should after all never be an expected positive investment return, without the willingness to have a risk of loss.
Another common statement I hear is that: I only want to invest for “income”, and I never want to touch principle. While I somewhat understand the sentiment behind this, it unknowingly flies in the face of rational decision making in investment choices for most long-term situations from a risk, tax, and investment standpoint.
According to this research by Standard and Poors
“Dividends play an important role in generating equity total return. Since 1926, dividends have contributed approximately 32% of total return for the S&P 500, while capital appreciations have contributed 68%. Therefore, sustainable dividend income and capital appreciation potential are important factors for total return expectations”
When you own a share in a company, you own the right to future distributions of profits (generally dividends) as well as the right sell that share, hopefully for a higher price than you bought it. If you concentrate an investment portfolio only focusing on dividends, you are focusing on a much smaller component of investment return than capital appreciation. Capital appreciation is also taxed more favourably in many places (including Switzerland and often in the US.) A balanced approach of growth and income tends to give better returns over time, but with some increase in volatility.
Not selling stocks (and paying some taxes on the gains) is a certain way over long periods of time to increase risk. Let’s imagine your perfect portfolio for your risk profile and other factors is 70% stocks and 30% Bonds and you invest $100,000; 70% is invested in stocks and 30% in Bonds. Now, you agree to this, and you know that investing $80,000 in stocks and 20% in Bonds would be considered too risky for you.
Then, over a period of let’s say 5 good years in the stock market, your stocks double in value and your bonds stay exactly the same, and no trading is done. Now your investments are worth $170,000. $140,000 in Stocks and $30,000 in Bonds. In this case, your stocks are now over 82% of your investment portfolio and your bonds, less than 18%. Re-balancing, taking a profit, also reduces stock market risk in your investment portfolio. Re-balancing is an important component that forces your portfolio to balance risk and return, while selling high and buying low.
For those of you who like to follow big moves from famed investors, you may have noticed that Warren Buffet’s Berkshire Hathaway sold about half of their holdings in Apple stock and was willing to pay the taxes on these enormous profits. While Mr. Buffet has a lot of admirable traits, he is the first one to tell you that he is not a great investor or great stock picker. He has had a few “home runs” and a lot of mediocre investments. A lot of his success did indeed come with buying some stocks low and having a cost of capital about 200 basis points lower than the US Federal Government. (Thanks to his insurance businesses.) He also realized that as his company grew so large, it was much more challenging to deliver outsized returns. Mr. Buffet also largely shied away from technology stocks; Apple was apparently at the insistence of one of his trusted deputies, (Ted Weschler or Todd Combs). A lot of his success is the compounding effect, which means it should come as no surprise that most of his profits arrived after his 65th birthday, (he is 94 now).
The Economist earlier this month published an article “Has Warren Buffet Lost his touch?”. It is indeed a reasonable question. From 2009 to 2023 (a period chosen by the author which seems like a little cherry picking pre-financial crisis) the S&P 500 had a return of 15% per year and Berkshire 13%, that is a sizeable difference. [The long-term average annual return of the S&P 500 is about 10%, but even this is a bit misleading. In the 1990s, the S&P 500 was about 6% in technology stocks, today it is between 30-40%. The reason for the range is S&P has peeled certain tech companies out of the tech sector such Google, Amazon, and Meta.]
Berkshire pays no dividends, has stopped buying back shares, and is holding about $280 billion in cash as interest rates are about to go down. It will be interesting to see how long they sit on this pile of cash before deciding what to do next.
For those of you who studied economics, you will know that in most efficient markets as demand goes up, so too does price. You may also know that in history there are also long periods of inefficiency where “investors” attribute a value to something based more on sentiment than anything else (think the Tulip mania, the dot-com bubble, and, perhaps cryptocurrencies and certain minerals).
Gold is a strange asset class whose record on “hedging” against inflation, deflation currency devaluation, and disease (just kidding) is rather mixed. This year, gold is up a whopping 25%. Since 2022, Central banks have been buying an enormous amount of gold, and 2024 is looking set to see the biggest purchases on record. Do all the world’s central bankers read the same investment newsletter? It seems very clear to me that the dynamics of supply and demand are intact, and perhaps this is also part of the explanation for why the Swiss Franc has been appreciating too.
Hmm, Warren Buffet stock piling cash, Swiss Franc and Gold at record strength due to global Central Bank buying, and yet the Fed is about to start cutting rates, the US economy, at least, seems very strong…why all the fear? Well, if we go back over the last few years, I think indeed there has been a lot to be fearful of in the world: China policies and their real estate market, the war in Ukraine, over half the world’s population in 2024 living in a country undergoing elections, and just getting back to “normal” after a global pandemic. I would not be surprised if there is some copycat strategizing going on amongst the world’s central bankers and other large investors; though I have severe doubts if they “know” something that we don’t. While there will inevitably be more periods of severe market downturns (a 20% drop or more happens about once every three years); I would not be surprised to see this trend start to reverse if things start to feel more certain in 2025.
And finally, in this never ending section on investing, an article on “rip-off” ETFs. At White Lighthouse we invest in mostly plain vanilla low cost, high liquidity, established ETFs, a very plain investment strategy. Remember “ETF” is just a wrapper, and what really matters is what’s inside. The ETFs we use are primarily passive index funds. Not all ETFs are passive index funds, and not all passive index funds are ETFs.
There are many esoteric ETFs that take considerably more risk and are much less transparent about their current holdings. If you are doing your own investing into ETFs or hear about some “great new idea” in ETF investing (or some great big risk), feel free to ask us to have a look. Odds are that what is under the hood is something that does not taste quite as good as the plain vanilla investing that we are accustomed to. It may be fun to try, but in small doses and read the label very carefully.
Our clients find our newsletters to be a valuable part of working with White Lighthouse.
A sample of our past newsletters is freely available below.
