Sharknado
From time to time my wife persuades me to watch the tv show "Shark Tank" with her (I don't like shows about money in my down time) . If you're unfamiliar, it's a reality based show where entrepreneurs make presentations on their products to a panel of professional, what you would call, "angel investors," to try and get them to invest in them. As boring as that may sound, it's actually quite interesting. The products and ideas of the presenters are eclectic and highly innovative. The panel of investors is also highly entertaining.
One of the regular panel members, Kevin O'Leary (aka "Mr. Wonderful") could be described as the heartbeat of the show (along with Mark Cuban, the billionaire owner of the NBA's Dallas Mavericks). He's, without question, an ego maniac and a pompous jerk. Although everyone else on the panel with him is there for business, you can tell many of them really enjoy helping out these, sometimes, struggling guests on the show. All except Kevin. Kevin is there for one purpose. To make money and he could give a darn about you or anything else if he doesn't make money. Somehow through all of this, his humor and aloof nature to being the bad guy, gives him an endearing quality which plays perfectly into the show.
Many people know Mr. O'Leary owned a software company which he sold for several hundred million dollars. What many people don't know is that he's also an accomplished investor and owns his own asset management company. I see him regularly pop up on CNBC to talk about the markets. Although he's not "performing" quite like he does on Shark Tank, you can tell he's still the same old Kevin despite talking in a straightforward manner about the world of finance.
When it comes to investing, Kevin has one main rule. He will not buy a stock that does not pay a dividend. A dividend, just for a refresher, is a return of capital from a company to its shareholders. If you own stock in a company, you are an owner of that company. A dividend is a way of giving back company profits to their rightful owners in cash. Some companies choose not to give dividends for various reasons, but typically it's to use their profits to fund more business ventures. Which the company hopes will increase the value of the company, and subsequently its stock price, over time.
There are plenty of companies that will not issue dividends in the interest of growth. Its not uncommon by a long stretch. So why does Mr. O'Leary refuse to invest in these companies?
He says it's easy. It's because he knows that when he buys a stock its value absolutely, positively will fluctuate up and down in value based on anything and everything going on in the world markets. But if it produces a dividend and the market is down, it's paying him to "wait" and "be patient." He considers investing in a company that does not issue a dividend as "pure speculation" because there is no guarantee that the profits used internally will ever produce an increase in the stock's price and he could be waiting around for an increase that never happens. In other words, he understands the market will be down at times, but if he's being paid cash in the interim, he's happy to patiently wait for it to recover. It also allows him the option of taking the cash, or reinvesting the dividends at lower prices, which would increase value faster upon a market recovery.
As I'm sure you understood from my prior writings, there was nobody more disappointed that the Fed Didn't raise rates than myself (see "No Soup for you!" June 2015). Although I don't second guess a panel of economists, vastly superior in intellect and experience than myself, I also understand market psychology. The market doesn't like uncertainty, and after close to a decade of the lowest rates possible, it's ready to start hearing that the economy can support itself.
The way the market looked at it, in my opinion: Considering the Fed has made it clear they are raising rates this year, what's the difference between a September and December rate rise? Are you not raising because there's something wrong we can't see? Is China worse than we thought? Oh my gosh, I can't deal with another 3 months of waiting in uncertainty, let's PANIC!
So short term, we're still stuck in this negative market sentiment I wrote about last time. It's actually gotten worse. It's: sell into rallies, sell first and ask questions later, buyer's strike, etc. Give any negative market cliche you can think of and you've probably described where we are right now. Again, we need some catalyst to break us out this funk. I thought it might be an interest rate hike, but now if that's the case we have to wait a little longer. I could go on and on about some positive signs I'm seeing that we're close to a bottom, but ultimately I would love to see one more real panic selling sign before I'm really confident on a definitive, stable turnaround.
As mentioned in prior writings, many of you went into this correction with decent to high levels of cash which can be (and have been) used to "buy low," but what I didn't mention was that I tend to feel similarly to Mr. O' Leary. I like investments that produce income. Income can be reinvested at lower prices to help long term growth. Income can be taken in cash to offset market volatility. Growth is always an important part of any diversified portfolio, and I certainly don't have a rule against it. But right now many of you are getting paid to wait in the form of dividends and interest. Some of you are reinvesting it. Some of you are taking it in cash. Some of you are doing both. Either way, many of you are being managed to maximize value during this time of uncertainty and volatility.
Every investor worth his salt knows that the market, and their investment's value, will never go straight up in value on paper. Ever. In the opinion of myself and Mr. Wonderful, if they are being paid to wait, it helps a disciplined investor be patient. It can set them up for better long term returns upon recovery. And most importantly, helps them feel less like they're floating helplessly in a tank full of sharks.
Written morning of 9/25. Approved for distribution evening of 9/29.
Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.