Investing in Stocks Is Humbling
Investing in stocks is humbling. Investing in stocks is one of those activities that can be a humbling experience. It can teach you a lesson about money and that you do not know everything about the market. One moment you are right and the next moment you can be very wrong.
Even Warren Buffett Makes Mistakes
Not losing your money is a big part of investing. Warren Buffett, arguably the world’s greatest investor, probably said it best:
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
But that said, Warren Buffett has also said that:
“If you don’t make mistakes, you can’t make decisions”
Even Warren Buffett makes mistakes, he just learns from them and then tries not to repeat them. Learning from mistakes allows you to make better investing decisions in the future. Your mistake may be one of too much optimism, one of misjudging the business, or even one of missed opportunity. In the case of Warren Buffet, I would argue that his investment in Wells Fargo (WFC) may have been one of too much optimism. Buffett is selling his stake in Wells Fargo. His prior investment in International Business Machines (IBM) may have been one of misjudging management at that time. Buffett exited his stake in IBM. Buffet has even said that he has missed opportunities like Amazon (AMZN) Alphabet, (GOOG), and JPMorgan Chase (JPM). I too fall into this category for these three stocks. So, in this context investing in stocks is humbling on both the downside and upside.
Black Swan Events – Investing in Stocks Is Humbling
Despite doing your research at investing websites, reading the latest analyst reports, following real world portfolios, and reading investment blogs, a part of investing just depends on an element of luck or things beyond your control. You may have bought a stock that seems good at the time. But through no action of your own the stock price drops rapidly or for a sustained period of time. This can be due to reasons largely out your control such as technological obsolescence, too much competition, Black Swan events, management mistakes, and even scandal.
An example of technological obsolescence is Eastman Kodak (KODK). The company held a dominant position in photographic film for much of the 20th century. Film had high margins and the company had years of profitability and growth. But that started to change in the 1990’s as digital photography took hold. Ultimately, cell phones with cameras killed the film business. Could you have forecast how rapidly digital photograph and cell phones would grow?
Another reason is that a company may face too much competition, e.g. Sears. Sears at one-time was the largest retailer through the 1980’s. But by the 1990’s Sears began facing too much competition from other large chains like Walmart (WMT), Kmart, Home Depot (HD), and others. By 2005, the company was bought by a private equity firm and merged with Kmart. Sears was no longer profitable by 2010 and started a period of selling off assets. The company finally declared bankruptcy in 2018. Could you have forecast how a once dominant retailer would be passed by other companies with better business models and execution?
Black Swan events can also show you why investing in stocks is humbling. I would put the recent challenges faced by Boeing (BA) at least partly in this category. The stock was trading near all-time highs at over $435 per share. Boeing essentially operates in an oligopoly with Airbus SE (EADSF) in the commercial market and is also a major defense contractor. The company was already facing challenges with the 737Max. But the COVID-19 pandemic and its adverse effect on commercial air travel pummeled the stock price, which is now at about $156 per share. Could you have forecast COVID-19 and its effects on airline travel?
Management mistakes and even scandal can also show you why investing in stocks is humbling. I put Enron in this category.
Making Decisions That Don’t Work – Investing in Stocks Is Humbling
Alternatively, you can even buy a stock and it does nothing, meaning it stays flat and goes nowhere. You sell it, and then it takes off due to an unforeseen catalyst. I put Microsoft (MSFT) in this category. After the dot-com boom Microsoft’s stock price dropped and then for almost 13 years it went nowhere trading in the $20’s for much of this time. But a shift to the cloud and a new CEO served as a catalyst and the stock price is up about 9X since then. Could you have foreseen the cloud and the success of Microsoft’s new CEO?
Alternatively, you can pass on a stock and it becomes a ten-bagger or more. In hindsight it seems like the stock was a no-brainer, but at the time it probably was not. In this sense it must be like managing a pro sport team. Imagine the regret of general managers who passed on Kurt Warner as a quarterback. He was undrafted in 1994 coming out of University of Northern Iowa. I put Apple (AAPL) in this category. Apple’s computers were an also ran compared to the PC and Windows. It was close to bankruptcy in 1997 when Apple bought NeXT and brought Steve Jobs back. But the resurgence of product innovation, good execution, good marketing, and ultimately the iPod and iPhone led to Apple becoming the largest company by market capitalization. Could you have forecast that Apple would out innovate its peers in the U.S. and Asia?
Despite the potential to make mistakes, losses, and humbling experiences, stock investing can be rewarding. One does not need to be right all the time. Nor do you need to have 100-bagger like Apple. You just need to be right more than you are wrong. For that I would argue you need to learn from your experiences that investing in stocks is humbling.
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Dividend Increases and Reinstatements
Darden Restaurants (DRI) reinstated its quarterly dividend at $0.30 per share. The dividend was $0.80 per share before it was suspended.
New Residential Investment (NRZ) increased its quarterly regular cash dividend by 50% to $01.5 from $0.10. The company dividend was $0.50 per share before the COVID-19 pandemic.
General Mills (GIS) raised its dividend by 4.1% to $0.51 per share. This is the company’s first dividend increase since 2017 when it stopped increases due to the Blue Buffalo acquisition.
Coronavirus Dividend Cuts and Suspensions List
I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 404. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic. The number of companies on the list continues to rise each week.
One company was added to the list in the past week. I added Empire State Realty Trust (ESRT) to the list.
I included 9 companies that I had previously missed. The 9 companies that I previously missed were Mesa Royalty Trust (MTR), Permian Basin Royalty Trust (PBT), TPG RE Finance Trust (TRTX), A.H. Belo (AHC), Altabancorp (ALTA), Great Western Bancorp (GWB), Mullen Group (MLLGF), Saratoga Investment (SAR), and Apollo Investment (AINV).
Market Valuation – Investing in Stocks is Humbling
The S&P 500 is trading at a price-to-earnings ratio of 28.4X and the Schiller P/E Ratio is at about 30.3X. These have come down a fraction since last week. This is the fourth week in a row that these metrics have declined as market weakness to continues. Note that the long-term mean of these two ratios are 15.8X and 16.7X, respectively. I continue to believe that the market is largely overvalued at this point
I have used the current market weakness to add to a position in General Dynamics (GD). The stock is trading at a low valuation. The Gulfstream business is being pressured by weakness in business jet demand and commercial aviation in general. You can read my article on General Dynamics.
Overall, I believe that we will continue to face market weakness due to the uncertainties related the upcoming election. Further, there has been recent spikes in the number of new infections and deaths in some states in the U.S. and worldwide. Lastly, weekly unemployment numbers are coming in higher now that the effects of federal stimulus are fading. On that front, there is a new stimulus bill for $2.4 billion working through the House. But the House and Senate still remain far apart on this.
S&P 500 PE Ratio
Shiller PE Ratio
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility was up about a point this past week to approximately 26.4. After trending down the past two weeks it has trended up this week. The VIX still remains elevated relative to the long-term average. The long-term average is approximately 19 to 20. I continue to believe that volatility being driven by new infections, vaccine developments, federal stimulus, and unemployment numbers over the long-term. Over the near-term I think that election news and uncertainty will drive volatility.
Fear & Greed Index
I also track the Fear & Greed Index. There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.
The current reading is now at 49, which is in Neutral. The index ticked down three points from last week.
More of the sub-indices are signaling Neutral or Fear reading. Only two sub-indices: Put and Call Options and Junk Bond Demand are signaling Greed. But Market Momentum still remains weak at Neutral. Market Volatility is still Neutral. The remaining three sub-indices are signaling Fear or Extreme Fear. Stock Price Strength remains weak as the number of stocks hitting 52-week highs is declining. There are almost as many advancing stocks as declining stocks this past week. Investors continue to go for bonds, which are outperforming stocks by 4.52% in the past 20 days.
The number of weekly new unemployment claims were flat with last week at 870,000. This is up from last week. We seem to be bouncing around between 800,000 and 1 million for now. But for some perspective, one-year ago weekly unemployment claims were only about 215,000. Currently we are 4X the normal level. The seasonally adjusted insured unemployment rate was 8.6%. The weekly revised rate is now 8.6% to 8.7%
The ten states with the highest unemployment rates were Hawaii (19.8), California (15.7), Nevada (14.9), Puerto Rico (14.1), New York (13.7), Louisiana (13.2), District of Columbia (11.3), Georgia (11.3), the Virgin Islands (11.3), and Massachusetts (10.5).
About 3,500 companies have sued the administration over tariffs on over $300 billion worth of goods from China. The suits have been filed in the U.S Court of International Trade. The companies include Tesla (TESL), Home Depot (HD), Ford Motor Company (F), Target (TGT), Walgreens (WBA), Sysco (SYY), Ralph Lauren (RL), and others.
An article in the Wall Street Journal, states that prices are rising for things that people need in the pandemic. But overall inflation remains subdued.
More young adults are living in their parents’ homes than any time since the Great Depression. About 52% of young adults between 18- to 29-years old are living at home now. The two most important reasons were college campus closed (23%), and job loss or financial reaons (18%).
If you haven’t noticed the initial public market or IPO market is hot right now. In fact, it is the hottest it has been since 2014 and brings back memories of 1999. So far, roughly $95 billion has been raised in U.S.-listed IPOs. In 2014, $96 billion was raised and a good chunk of that was from Alibaba (BABA). With three months to go for the year, we will likely pass 2014.
Existing home sales were up +2.4% to a seasonally adjusted annual rate of 6 million homes in August. This was the third consecutive monthly increase and up +10.5% from one year ago. Prices increased for the 102nd month in a row, with the median home price gaining +11.4% for the year to $310,600. Single family homes increased +11.7% to a median price of $315,000, and condominium and co-op prices were up +7.8% for the year to $273,000. Available inventory for sale was down -18.6% over the year to a 3.0-month supply.
Durable goods new order growth slowed to +0.4% in August after a +11.7% increase in July and a +7.7% increase in June. New machinery orders led the increase with a +1.5% to $31.2 billion. Transportation equipment orders gained +0.5% but fell -4.0% for motor vehicles and -6.4% for defense aircraft, while civilian aircraft orders continue to remain in negative territory with a -137.8% drop in orders for the year. Core capital goods, which exclude transportation and defense and serve as a measure of capital investment, were up +1.8% (down 1.4% from the prior year), slowing from +2.5% growth in July and +4.3% growth in June.
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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.