Investing Is Like Sports
Investing is like sports. Why do I say that? There are several reasons for this. Let’s take a look at some of the key reasons why investing is like sports.
Investing is like sports since you need a strategy. Every sports team has a strategy. Every sports player has a strategy. That’s a given. You cannot win games consistently just by showing up on the field and not having a strategy. Every investor should have a strategy that works for him or her. The strategy could be dividend growth investing, index investing, high yield investing, momentum investing, etc. There are many choices, but your choice needs to work for your personal situation. I personally prefer dividend growth investing although I use index investing for retirement accounts. The strategy you prefer may change as you age. You may be more comfortable with a more aggressive strategy at a younger age and change to a more conservative strategy at an older age.
Investing is Like Sports Since You Need Discipline and Patience
Investing is like sports since you need discipline and patience. You have to develop an investor mindset and you need to develop an athlete’s mindset. These two go hand-in-hand in sports. It takes commitment, training, diet, and sacrifice to be successful in sports. Sports also requires patience. Success does not happen overnight. Michael Jordan did not become the greatest of all time in basketball in one year. It took many years. The same can be said about investing. If you have a strategy it takes long-term commitment, education, and sacrifice. You may need to give up on some spending to save a little more for investing. Investing also requires patience. You have to let the power of compounding work for you. That takes time despite some downturns or relatively poor years.
Investing is Like Sports Since It Involves Risk
Investing is like sports since it involves risk. Sometimes in sports you need to take risk to win. But it may not work, and you lose. The risk in investing is somewhat different but there is always the risk versus reward trade off. High risk investments can generate a high return but often have the greatest downside and higher volatility. Further, you can always end up losing your money when investing.
Investing is Like Sports Since You Have a Record
Investing is like sports since you have a record. Every sports team and even those playing in individual sports have a record. If you are below 0.500 in sports, you are not doing well. Similarly, if you are below 0.500 in your investing picks you are probably not doing well. For instance, if you have 10 stocks in your dividend growth portfolio and seven are down and three are up then your overall portfolio is probably not doing well at the moment.
This leads me to one of my major themes in this blog, you have to keep track of your record over time. Many investors do not. Hence, they have no idea how they are doing. The stock market over time generates about an 8% average return. The average investor in general has returns much less than the stock market at only about 2.5% according to J.P. Morgan’s Guide to the Markets. If you are doing worse than the stock market it is sensible to know your record so that you can adjust your investing strategy. If your record is not that great take a look at my recommendations or resources page.
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Investing is Like Sports – Dividend Kings List in 2020
I updated the List of Dividend Kings in 2020. There were some additions to the list but no deletions. This points to the resiliency of the companies that are Dividend Kings. Once a company becomes a Dividend King they tend to stay there. That is not a hard and fast rule. Sometimes a Dividend king gets acquired, e.g. Vectren. Other times a Dividend King will fall off the list due to consistent operational challenges, e.g. Winn-Dixie. The two additions to date are Sysco Corp (SYY) and National Fuel Gas (NFG). Sysco is a giant distributor for food service and food away from home locations. The company operates in the U.S., Canada, UK, and France. National Fuel Gas is diversified utility focusing on natural gas exploration, production, transportation, storage, and distribution.
I do not expect too many changes to the Dividend Kings as the year progresses despite the coronavirus pandemic. Overall, the Dividend Kings include some of my favorite dividend growth stocks. You can read my article on the Dividend Kings versus S&P 500.
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 325. We are now 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. However, a select few companies have starting to reinstate suspended dividends. But this number is very small at the moment. On the other hand, a few companies are now announcing second dividend cuts. This includes KAR Auction Service (KAR), MV Oil Trust (MVO), and Mesabi Trust (MSB). For those of you who have read my Week In Reviews for some time, you know that KAR is my only dividend cut to date. It is not part of my core portfolio. Instead, KAR was special situation stock for me due to the spin off. I sold the stock when the first dividend cut was announced.
This past week there were four companies added to the list. They were BP PLC (BP), Viper Energy (VNOM), Vornado Realty Trust (VNO), and Capital Product Partners (CPLP). The two biggies here are obviously BP and Vornado. BP is an oil major. Vornado is a commercial retail REIT that focuses on New York City, Chicago, and San Francisco. It owns some of the premier commercial real estate in the country.
BP is an oil major, and one of the largest oil companies in the world. The dividend cut was probably inevitable. BP reported a $17.7 billion loss in the quarter, its worst ever. Most of the loss was due to write-downs and impairments. It was BP’s first dividend cut in a decade. The main problem for BP and the oil majors is very low oil prices during Q2 2020. Royal Dutch Shell (RDS.A and RDS.B) cut its dividend in the first quarter so the dividend cut by BP was probably not a surprise to many investors. Despite the dividend cut the stock price gained. This was probably because BP beat expectations and had decent revenue from trading. Further, the cut was not as severe as Shell’s cut. For the ADR, which trades on the NYSE, the regular quarterly dividend is now $0.315 per share. I will have an article out on Tuesday, on the BP’s dividend cut. Check my blog for it.
Stock Market Volatility – CBOE VIX
The CBOE VIX finished this week lower than last week at 22.2. It still remains elevated relative to the long-term average, but we are almost there. The long-term average is approximately 19 to 20. Volatility declined on the strength of some decent news in unemployment and continued out performance of mega-cap tech stocks. Apple (AAPL) is now the most valuable company by market capitalization. The stock is approaching a $2 trillion valuation.
Unemployment has continued to trend down. The latest monthly report indicated that unemployment was at 10.2% in July down from 11.1% the prior month. This is a good trend. But remember that even at 10.2% this number is still higher than the Great Recession from 2008 – 2009. Most of the people returning to work are those that were temporarily furloughed. Recall, we are still coming off record declines of 1.4 million in March and 20.8 million in April. As businesses reopen, they will bring back workers.
On the other hand, unemployment claims are still high at roughly 1.2 million per week. Further, ADP reported that there were only 167,000 new jobs in July, much lower than expected. Take a look at the ADP Employment Report chart below. The downward spike is due to COVID-19 and ‘social distancing’ is much greater than the upward spike during the recovery. There will likely be some backward revisions, but clearly the number of hires is slowing.
Fear & Greed Index – Investing Is Like Sports
I also track the Fear & Greed Index. There are seven indicators in the index. They are Stock Price Breadth, Put and Call Options, Stock Price Strength, Junk Bond Demand, Safe Haven Demand, Market Momentum, and Market Volatility.
The current reading is now at 72, which is in Greed. This is seven ticks above last week. The index has been in Greed now for four straight weeks. Note that this index rarely stays above 60 for an extended period of time. Typically, once this index goes over 60 there is a move down. However, this is not a hard and fast rule. Sometimes the index does go higher to even over 80. Historically, once the index goes over 80 it comes down pretty fast.
Why is this index still going up? Well, I would argue it is due to the continued rise of the S&P 500 that is being powered by the mega-cap tech stocks, e.g. Apple. These companies in aggregate are seemingly little affected by the impact of COVID-19 to date. Further, some stocks are now setting 52-week highs, there are more advancing stocks than declining stocks, and volatility is now approaching its historical average.
The S&P 500 is trading at a price-to-earnings ratio of 28.8X and the Schiller P/E Ratio is at about 31.0X. These have ticked up again since last week. 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 juncture. In my opinion caution is warranted for investors.
S&P 500 PE Ratio
Shiller PE Ratio
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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.