Of the Stock Market

"In the end, everything is a gag." Charlie Chaplin

Trends and Noise

The short-term ebbs and flows of uncoordinated buying and selling make the market look more or less random. New information can establish a trend but discerning the strength of that trend and how long it will last takes a keen eye -- and the wisdom and insight gleaned from years of experience. Once the trend wears off, the market quickly resumes its random walk.

Recommended Reading

For the more serious Excel, and mathematics-oriented, reader, an exceptional book:

Javier Estrada, Finance in a Nutshell: A no-nonsense companion to the tools and techniques of finance (FT Press, 2006)

Long-Term Dividend Growth

In spite of the economy's ups and downs, long-term dividend growers have continued to raise their dividends at a high and stable pace well ahead of the rate of inflation. Johnson & Johnson is on a streak of forty-nine years of consecutive dividend raises.

But be aware that even if companies raise their dividends every year, it is not enough. The dividend increases must be robust. This is not a problem with Johnson & Johnson. The company has excelled.

Over the forty-nine years, its dividend growth rate has averaged fifteen percent. That doubles the dividends that you receive every five years. In the context of average long-term inflation of around 3-3.5 percent, even the company's lowest dividend growth rate of four percent (in 1972) is still not bad.

However, in a sign of maturation or a reflection of its recent business blunders, or both, the company's dividend growth rate has slowed the last few years. Whether this is a permanent change or a pause remains to be seen.

Johnson & Johnson's dividend history since 1972, from the company's website.

A mockery of market prices and relative valuation

During the NASDAQ Bubble of 2000, when investors used relative valuation models to justify the prices of stocks such as Yahoo and Cisco, straightforward absolute valuation models showed that these companies -- and many others -- had to double their adjusted earnings every year for several years to justify their then current market prices. But this did not seem like something that had even the remotest chance of happening. In effect, absolute valuation made a mockery of market prices and relative valuation.

Minutiae of the news

We often get caught up in the minutiae of the news. What happens tomorrow because of such-and-such? What happens if Candidate X is elected? What happens if the yen strengthens? Doing so could easily make you a 24-hour business news junkie, fidgeting for this or that, trading much too often -- and much too recklessly. Just because it's cheap to trade does not mean that you have to trade.

Averages are better

All financial metrics should be averaged. Just because a stock has a profit margin of twenty-five percent this year does not mean it will have a profit margin of twenty-five percent the next year. An average clarifies the true trend. Averages should be calculated over a period relevant to your investing time frame. For dividend growth investors, this means a five-year average. Watch out for trends. Be wary of negative trends.

Alcoa and Coca-Cola

An investor who received $1,000 in dividends from Alcoa in 2000 received $240 in 2011. Houston, we have a problem. By contrast, an investor who collected $1,000 in dividends from Coca-Cola in 2000 collected $2,765 in 2011. That's dividend growth.

Panic in the stock market

Investors flee from the stock market to the bond market when there's panic in the stock market. They return when panic subsides. But this can take time. The Crash of 2008 created a panic of unheralded proportions for this generation of investors. Yet, even today, four years later, money continues to pour into the bond market even as stocks have risen and the stock market has recovered since the Crash of 2008.

Diverse group of customers

Companies that sell to a diverse group of customers face fewer problems than companies that sell to a more restricted range of customers. For instance, 99 Cents Only, a company that went private recently, caters to lower-income consumers. When oil prices soared in 2008, it ran into problems because the budgets of its customers were constrained. As another example, a company with sales that depend on a government budget item faces huge problems when that budget item is reduced or cut.