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Loss Hurt More Than Gains

Dividend Power Week In Review – Losses Hurt More Than Gains

Losses Hurt More Than Gains

Losses Hurt More Than Gain and Curt Degerman. One well known fact about investing is that losses hurt more than gains for the same dollar amount. What do I mean buy this? Well, let’s assume that you had invested $1,000 in a stock of Company A. Now let’s assume that the stock lost 25%. This loss would be perceived as more painful than if the same stock had gained 25%. This is simply a manifestation of loss aversion for investing.

Loss aversion is a well-known phenomenon in investing. In fact, in the book Common Stocks and Uncommon Profitsfirst published in 1958, Philip Fisher stated that “More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason.” This is arguably just a statement about loss aversion where losses hurt more than gains.

How powerful is the loss aversion phenomenon? Some research suggests that the pain experienced due to a loss is perceived as twice as bad as a gain for the same dollar amount. The schematic below shows the difference between an investor that is loss averse and one that is not. Some research has suggested that this is due to making decisions with an uncertain or unknown outcome. Clearly, investing in stocks has an uncertain outcome. One is never really quite sure if the stock price will go up or down over a certain period of time.

Source: Hartford Funds

The loss aversion phenomenon is seemingly not limited to investing in stocks. It also extends to selling one’s home as we are all aware. Homeowners like many of us do not want to sell their homes for less than the price that they paid. Clearly in this situation losses hurt more than gains.

Investors in general try to avoid losses because they hurt more than gains. However, this can cause investors to make poor decisions when investing. For instance, the loss aversion phenomenon will lead to small investors holding onto a stock even if the fundamentals of a company deteriorate, leading to a decline in stock price. The stock price is cheaper than before so it may seem like a good value. But the reason that it is cheaper is because the business fundamentals are deteriorating, and the fair value or intrinsic value should be lower. Further, loss aversion combined with overconfidence leads some investors to buy and high and sell low. It goes without saying that this is a certain recipe for low returns over time.

Ultimately, it is emotion during decision making that leads to lower investment returns over time. Investors in U.S. stocks have in general lagged the S&P 500 index at least in part to emotion, such as loss aversion, when making investment decisions.

Coronavirus Dividend Cuts and Suspensions List in 2020

I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 296. We are just shy of 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic. Eleven companies were added to the list this past week. This past week I added Oxford Square Capital (OXSQ), Annaly Capital Management (NLY), Dynex Capital (DX), Chimera Investments (CMI), Chico’s FAS (CHS), Crown Crafts (CRWS), Plymouth Industrial REIT (PLYM), Independence Realty Trust (IRT), Permianville Royalty Trust (PVL), Ready Capital (RC), and Apollo Commercial Real Estate (ARI).

I will have an article out on Meredith Corporation’s (MDP) dividend suspension on Monday. This is probably another company that some of you may not have heard about. However, most of you certainly know the magazines and newspapers that the company sells. Meredith’s brands include People, Better Holmes & Gardens, Allrecipes, Family Fun, Everyday with Rachel, Parents, Real Simple, Southern Living, Martha Stewart Living, and others. The company also owns television stations. Meredith is a former Dividend Champion. Before the suspension the company had raised the dividend for 27 consecutive years. But the impact of COVID-19 on advertising has likely been significant. This combined with high leverage led to the dividend suspension. Check my blog on Monday for my article on Meredith.

Stock Market Volatility – CBOE VIX

The CBOE VIX stayed elevated this week at above 35. Recall that the long-term average is 19 to 20. It is likely that the surge in new COVID-19 cases across much of the southern U.S. and in some areas of the west coast has led to renewed volatility as measured by the VIX. Further, the number of cases in South America is increasing dramatically. Brazil now has the second highest number of infections behind the U.S. 

Source: Google

There is just too much uncertainty with COVID-19. In fact, Apple (AAPL) announced that it was reclosing some stores in states seeing new daily highs in infections. Overall, I continue to expect that the recovery will be choppy after an initial surge due to reopening of businesses. In my view, the CBOE VIX will not trend down and remain near the long-term averages until there is a vaccine that works. In the meantime take a look at this article on the effect of masks and social distancing on reducing infection transmission of COVID-19.

The Stock Market is Overvalued

I have also been tracking the Fear & Greed Index. The current reading is now at 52, which is Neutral. The index was reading 54 last week. The S&P 500 trading at a price-to-earnings ratio of 22.2X and the Schiller P/E Ratio at about 29.1X. These have trended up since last week. Neither values are indicative of an undervalued market. Rather, I would argue that they signal an overvalued market. Yes, there are pockets of value in the market. But for the most part the market has come too far in too short of a time considering the unemployment rate and contraction of the U.S. economy due to COVID-19.

Source: CNN Business

Investors are on the Sidelines – Losses Hurt More Than Gains

There are still a lot of investors on the sidelines as cash levels in money market funds are still near record amounts. This is happening despite the rally in stocks. Reportedly, cash in money market funds are at a record $4.8 trillion, which is greater than the previous peak of $3.8 trillion in January 2009 during the Great Recession. In addition, bank deposits are at record savings at over $15 trillion according to the St. Louis Fed after increasing $2 trillion or 15% from March through May. Check out the chart below.

Source: St. Louis Fed

In my opinion, this means that many investors are still fearful while there are some that are putting money into tech stocks. The NASDAQ-100 is at a record high due to the strength of mega-cap tech stocks. The stock prices of some of these companies are seemingly immune to the effects of COVID-19. I personally think many are overvalued at the moment.  For instance, Amazon (AMZN), Facebook (FB), Google (GOOG), Microsoft (MSFT), and Apple are all trading at an earnings multiple of ~30X or higher. I use 30X as cut off for overvaluation.

Secret Dividend Millionaires – Curt Degerman

In this installment of Secret Dividend Millionaires, I want to talk about Curt Degerman. So, Curt’s story is a little different that other Secret Dividend Millionaires. He rode around on his bike and collected bottles and cans for recycling in the town that he lived in Skelleftea, Sweden. He did not live into his 80’s, 90’s, or 100’s. He died of a heart attack at the age of 60 in 2008. By the time he died, he had amassed a fortune of about $1.4 million (12 million Swedish kroner at the time). He was never married and did not have a family of his own. Reportedly, Curt Degerman left his fortune to his cousin since he visited him every so often before his death, which was contested by Curt’s 92-year old uncle.

How did Curt Degerman become wealthy? He did not win the lottery or inherit money. Well, he would go the local library and spend his time reading financial newspapers. In time, he seemingly acquired knowledge about the stock market and investing. He invested the monies that he received from recycling bottles and cans in stocks and mutual funds. He also bought 124 bars of gold and owned the house that he lived in. For nearly 40 years he built his wealth in this way. His wealth totaled $1.4 million by the time that he died.

What lessons can we learn from Curt Degerman? Curt exhibited a very simple lifestyle. Some may argue that his lifestyle was extremely thrifty and eccentric. Note that I am not advocating his somewhat eccentric lifestyle. He acquired knowledge about investing and the stock market and made some smart investments. He did this despite not completing high school. In the end, Curt Degerman acquired his wealth through his own efforts. There is a larger lesson here as well. Most of us probably are not going to become the next Jeff Bezos or Warren Buffett. But if Curt Degerman can build a $1.4 million nest egg, so can the rest of us.

You can read about all the other Secret Dividend Millionaires.

Here are my recommendations:

If you are unsure on how to invest in dividend stocks or are just getting started with dividend investing. Take a look at my Review of the Simply Investing Report. I also provide a Review of the Simply Investing Course. Note that I an affiliate of Simply Investing.

If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend NewsletterNote that I am an affiliate of Sure Dividend.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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