The Dividend Cafe - A Golden Opportunity to Go Against the Grain

Episode Date: June 25, 2021

The weird week in the markets doesn't change what I want to be doing with each Dividend Cafe.  As of press time, the market is up ~1,000 points on the week, with pre-market futures on this Friday pointing to a +100 point open.  The day-to-day and week-by-week movements in the market are not the subject of the Dividend Cafe, but they are what we do each Monday through Thursday at The DC Today. This week it is tempting to dive more into the cluster of these infrastructure talks. On Thursday, there was a White House briefing that it was a done deal; on Friday, it appears to be falling apart; I can write about all this now, but I think by the time it hits your inbox, the deal may be back on, and by the time you are done reading it back off. Yet, in these "current events," there is, indeed, a "timeless principle" that warrants immediate application.  A week ago, markets were experiencing nearly irrelevant levels of volatility - and the media declared it the new apocalypse as they went about drooling on themselves in a sea of inaccuracies about what the Fed did, said, and meant.  A week later, markets have been rallying, and the new question is what to do about "investing at the top" (it is "new" in that the last time I heard this concern, was almost three weeks ago). So I want to dive this week into some fun history, some actionable application out of that history, and leave you with some crucial reminders about markets.  These things will be useful whether the market is down a thousand or up a thousand next week. Come on into the Dividend Cafe ... DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Welcome to this week's Dividend Cafe. I am back in my New York apartment where I just arrived less than two minutes ago. I'm going to be here long enough to record this for you, and then kind of change and grab some things and get out of here. I just flew back. I've been at a conference I spoke at yesterday in Grand Rapids, Michigan, just in and out, real quick trip, and now I'm leaving again to go meet up my family for the weekend, and so a lot of in and out,

and again to go meet up my family for the weekend. And so a lot of in and out, but actually a lot of time to be reading and writing. And I think the message of this week's Dividend Cafe is a good one. It's kind of not one. Even though I intended it to be one message, there's a kind of multitude of applications that I think you're going to get out

of what I'm about to say and what I wrote about at DividendCafe.com. It was a weird week in the market, and I'm not going to talk about it much, because that's not what this is for. But it does sort of tee up kind of one of the points I want to make throughout this message today. The market was down over 1000 points last week. And as I'm sitting here recording in the middle of the market day on Friday, it's up over a thousand points this week. And so you can decide for yourself if you think that's coherent. Last weekend it was dropping and we were told this new apocalypse was coming and that, oh boy, it looks like the Fed is really about to... I mean, first of all, they not only got wrong with what the Fed's about to do,

which was kind of my bigger point, but then getting wrong, what it means to markets, what it means to a lot of different things, it does bother me, but it shouldn't surprise me. But I guess the bigger point I want to make is, okay, if the press thought that talking about 0.5% interest rate in two years was going to be the source of a big market correction, and the press was really wrong about that, that's fine. However, I would still be perfectly willing to say there will be a market correction. And the reason I say it is because there's always a market correction. And the issue is not, well, is it going to be the Fed or is it going to be this or what's going to cause it and when?

The point is recognizing the inevitability of market corrections. So what I did this week in Dividend Cafe is put in two charts, one of the bull market of 1951 to 1966, the really kind of famous post-World War II bull market lasted a long time. We're up close to 16% per year in the market in that period of time. And yet there were 14 different times that the market dropped anywhere from 10 to almost 30%. The worst drop in that period was 28%, which is still pretty violent. And then you have the 80s and 90s bull market. You had a big double-dip recession when President Reagan first took office and Paul Volcker began raising rates. And back then, raising rates meant something very different than it does now.

of what happened throughout that market period, the market was actually up close to 18% a year, 17 plus change throughout the 80s and 90s until the big crash of dot com in 2000. And yet there were nine different times that the market dropped substantially, including a 34% doozy in there. And I'm sure a lot of you know, that was the Black Monday, 1987 crash, 22% of that came in one day. And there was a 27% drop, and there were just multiple, you know, volatilities and corrections and bear markets along the way. And yet the chart of the 80s and 90s just looks like this incredible wealth building, secular bull market because it was. And so I, first of all, I guess I'll interject a kind of sidebar note. Extended periods of these bull markets that have this kind of violent downturn are tailor-made for dividend reinvestment. The fact of the matter is a really great return of

a bull market is just simply made better when there's dividend reinvestment going on along the way because of these 14 market corrections, these nine market corrections. Having the happenstance of purchasing at lower prices through that period just simply takes the exact same market experience and adds more return to it because of this thing called math. So that's first and foremost for the accumulator, just a little interjection I want to make. I'm going to talk more about dividend growth in a second. But the bigger picture here that I'm trying to get to is that those corrections that come through really tremendous multi-decade periods of time, they have this violence on the

way, these setbacks, these corrections, these bear markets, what have you. Those things are unavoidable. And there is a cottage industry of liars and criminals that will tell you differently. But those things not only are inevitable, but they are a blessing. They are the price of admission. They are the generator of risk premia in equity markets. They are the thing that has to be tolerated and the expected rate of return because of that tolerance is higher. And I think that that is something that we just simply have to understand. So rather than approach the mental process of the next correction around a dread or regret or desire for avoidance, we A, for dividend growers, understand that we're going to benefit from it. And B, look back throughout decades upon decades of understanding that this is not avoidable. And I understand those people saying they can time their way in and out and so forth.

And all I can tell you is they're wrong and they're lying. And if they can time their way in and out, I don't think they're going to tell you. But let me move forward past that. Because right now in a more contemporary relevance, the market is trading, the S&P, is trading 25 times. It's actually trading higher than that. and P is trading 25 times. It's actually trading higher than that. But if you, on a forward basis, really do what you can to kind of normalize the P-E ratio, you're at least 25 times earnings. It's much higher than that backward looking, but we go far forward and that's the right way to do

it. And you have a bond yield at one and a half percent on the 10 year. These are expensive entry points in both asset classes. And so I'm asked all the time, what do I think about that? And I think that those things, just on the basis of pure mathematics, suggest that someone coming into the market brand new right now, the start date is today, ought to have a lower expected rate of return going forward if they were simply buying indexes than they otherwise would have. Now, what did I not say? I did not say I expect a negative rate of return. The fact of the matter is that you can still get a positive rate of return even with expensive entry level in an index should there be avoidance of massive disruptions and huge

recessions and other things. I don't know that you won't have a negative return, but I'm expecting that the broader index investor will. I am though expecting it to not, from a mathematical standpoint, someone entering at 16 times earnings on a full 10-year period of normalcy, and normalcy includes a lot of abnormal things within it. But my point being 16 times as an entry point versus 25 times, I do expect a different outcome. Yet, perhaps the earnings growth overcomes it. Perhaps multiples get even more expensive. A lot can happen there. My point is that, yeah, for an index investor, I might expect lower returns than historically

been available at lower valuations. Not necessarily negative. Yet, I might expect lower returns than historically been available at lower valuations. Not necessarily negative, yet I also mostly view that as pretty irrelevant, where there is an active approach and where there is a kind of philosophical belief that is being invested in that is different than just capturing the returns of the indexes. being invested in that is different than just capturing the returns of the indexes. And I think this is a very important thing for me to say right now in this environment where everyone's looking for a correction, everyone sees some expensiveness in markets, and I'm not even talking about the government debt I talked about last week, about policy things they're worried about, tax increases they might be worried about, the reliance

on the Fed, what the Fed may do. All of those things are out there. My point is it could be those conversations today. It could be different ones in a week or two or a year or two. It will be. And yet, the reality still exists that you have an expensive entry point for markets as an index investor. You have the reality of long-term, requiring some acceptance of downside volatility on the way. And I want to be able to tell you what we are uniquely doing at the Bonson Group. And I spoke a moment ago about dividend growth, which is, of course, the driver of our US equity exposure. And our US equity exposure via dividend growth is our primary core portfolio position.

We downweight it and upweight it client by client. We implement all sorts of other things in our kind of what we call magnify approach to asset allocation. Yet, dividend growth is what I believe generates the right result in a risk reward paradigm. And obviously something I've written about a zillion times and wrote a book about and dedicated my life and my career to. However, this is a very important thing in this environment right now, that besides the reinvestment of dividends that could come from periods of market correction. I believe that the expense evaluations and various macro concerns people may have right now are not perfectly, but just substantially remedied

with an approach on quality, with a bias towards quality. And this is something, chapter three of my dividend growth book was dedicated to this. I really believe that the accumulation of dividends and the compounding that happens is a great benefit for accumulator and the consistent cash flow and reliability of cash flow for withdrawers, not to mention growth of cash flow is a huge mechanical benefit. But that besides those two things, the other piece is that I believe these are better investable companies, that there is more maturity in the business model, there is more alignment with management, there is more focus on balance sheet, there is more dependability and free cash flow. There is an overall structure and business model,

not with every single company and not versus every single company, but as a high level statement, dividend growth is a great way to focus on quality in a period of time where people should be focusing on quality. Sometimes coming right out of a very washed out market, you can focus on lower quality things. And as multiples get ready to expand a lot, there could be a bit more octane there. I think that for withdrawers, for accumulators, for absolute return oriented investors, the active approach to dividend growth is going to be an incredible weapon for the next decade. The second piece does have to do with TBG's unique commitment to the use of alternatives. And even in this case, I say alternatives as a diversifier out of volatility. Bonds have

traditionally done that for investors. And I've spoken ad nauseum as to why I don't expect them to be able to do that in the same way, not with the same carry because of the lower coupon, not with the same tail risk hedge because of the lower yield that you are in a position where bonds don't necessarily function exactly how they have in the past. And yet the need for something that kind of neutralizes a bit of the real left tail risk, meaning the more severe outcomes that can happen in markets that might make you prone to react, that might make you prone to sell, that are just brutally uncomfortable at times emotionally and whatnot. I think alternatives help to provide some of that volatility dampening, not perfectly,

and not without risk. You change the risk to manage your execution, manage your talent, manage your implementation. I think TBG does this well. I think we've been good at our due diligence and our selection of alternatives, particularly since we were removed from the kind of conflicted menu model at the large firms. We have an awful lot of freedom and independence and autonomy to go do this for the right reasons in the right way. And I think it's something we've taken very seriously and done a good job with. But when you combine primary asset allocation around dividend growth and implementing some diversification around alternatives, those things together represent, first of all, they're highly labor

intensive. They force people to work hard, but they create an entirely different risk reward proposition in this environment than most investors are going to get with an index portfolio or their firm's top manager type portfolio. Then the third comment I'd make to what we're doing is, first of all, a very important and significant intellectual realization about leverage, about credit. I don't mean leverage within our portfolio. We don't allow our clients to buy stock that is collateralized by the stock that they're buying more of, what you call margin buying. What I mean by leverage is the underlying assets when you're in credit, high yield,

floating rate, even across other asset classes, certainly alternatives within the equity holdings you own, the debt to income, debt to asset ratios people take on. We live in a very debt dependent society. I talked about that last week. That's extremely true in the corporate economy. It has opportunities, but it has risks too. I'm not anti-debt, but I want to manage it effectively. I want to be aware of what risks I'm taking. I most certainly want to get paid for the risks I'm taking. I think a lot of people are willing to throw caution in the wind, not necessarily understanding or quantifying or right-sizing the debt they're taking relative to various levels of leverage that exist. You have an entirely different paradigm around liquidity risk

and solvency risk when you're already at a somewhat reflated, levered up corporate economy. That's where I think we are. So right now we're in a period of time where there is a lot of buzz, a lot of hype, a lot of noise. There's a lot of fear mongering on certain things. I commented this week in DC today about CNBC running a special feature on inflation watch. And you have graphics and kind of created a little infrastructure around it. And I think it's fine. But I just want to historically contextualize some of this. There is a nonstop talk about crypto, about SPACs, about SPACs being really good, about SPACs being really bad, about all of this type of stuff.

And I listed for you, and this is why you absolutely have to look at DividendCafe.com today. Oh, I think it was five or six magazine covers I put together with a chart next to them where they come in and talk about housing going on forever. And then you see the crash in housing and the death of equities. And then you see equities rallying. And a lot of people know this, but I think it's very fun. I think it's very interesting. But there is an almost incredible correlation between media hype and something falling and media doom and something rising.

And I don't believe that that's ever going to change. I think I've written in recent weeks about that being part of a business model. But the other piece to this is not merely what is happening with the media, but within the financial services sector, I have a couple of quotes here that I put in Dividend Cafe this week. And I'm going to read to you now here. Excuse me. I got to find it, what I did with this. From a book I was reading. I finished it a few weeks ago, and I posted some comments on it in our website recently in our recommended reading section. But it was

incredible to me to read something that was written 20 years ago about something that happened 23, 24, 25 years ago. And to have this incredible deja vu around where we are now and what I think is actually a very, very long-term reality. Financial products are not put together with a primary objective of meeting client needs. Okay, hear from this book written again 20 years ago. Funds appeal to the basic instincts of the investing public. If telecom is hot, let's do a telecom fund. If technology is good, do a tech fund. These things come and go, but they're born to die.

Unfortunately, they take a lot of innocent people's money with them. We brought our internet funds, telecom funds, tech funds, all at the high of the market without any thought of whether any of this would be good for investors. They were good for the managers because they enabled a lot of assets, but bringing out funds only a moron would buy is not illegal. And then Jack Bogle, the founder of Vanguard Funds, said what happened is that the business went from being a management business to a marketing business, a business of stewardship to a business of salesmanship. The idea isn't to sell what you make, it's to make what you sell. salesmanship. The idea isn't to sell what you make, it's to make what you sell. And I think that that mentality, there can be some sinisterism in it. I don't think it's remotely illegal.

And it's only immoral, I suppose, depending on how it's being used by an advisor. In our particular case, we remove ourselves from that mentality entirely. We're not only legal fiduciaries, but we utilize an entirely different approach. Chasing a hot dot because of the media, chasing a hot dot because a new fund has come on, and there's a lot of buzz around it. These things, not only are really bad investment philosophy, but I would argue are probably fatal. And history is on my side here. It's very easy to sell things when they're popular. And so people that are in the salesmanship business instead of a fiduciary advice business, I understand why they may do that.

But I want people that are clients of the Bonson Group to know that you deserve better than that. You deserve an approach that can have mistakes made in it, can feel that it requires patience at different times, but comes from real thoughtfulness, not the ease and convenience of what is popular, what is marketable, and what is media friendly. I not only think those things aren't good indicators, I think that they are indeed generally contrary indicators. What we're going to provide at the Bonson Group for any who will be interested is not a commitment to fads but a commitment to principles our principles are something we're extremely transparent about because I write about it certainly every week in Divin Cafe but more

or less every day with our other communiques that we put out. Our advisors want to be in a relationship with clients to reinforce these principles, not to sell anything, but to maintain your understanding of what's trying to be done and to what objective. This is very different than, I think, what is the norm in this day and age. I think what we're doing is more important now as we enter a more vulnerable period, or at least what feels to a lot of people like a more vulnerable period, as we deal with market valuations, as we deal with the normal stuff in the news cycle I talk about.

All this is happening at the same time.'s some kind of like insane behavior going on with with some of these other issues that we talk about they get they get a little frothy and and fun uh we do not do this for fun and that's an important distinction maybe that's a problem to some degree you know maybe there are people that like the fun of it and and the and and i won't get into the specific examples of what might be illustrations there. But yeah, I'm certainly very transparent about the fact that's not what we do. And so in this environment, hopefully today in this podcast, those of you watching this video, you've heard me lay out some distinctions, some specific differentiators as to what we're doing,

why we're doing it, how we're doing it, why, and what it means for you, and some cautionary tales. Because when you have great big long bull markets, which just so you know, we're in the middle of one now, all right? When the markets washed out 13 years ago and began this 400% move higher, that's called a bull market. And no one knows when it ends and no one knows what corrections come up along the way and so forth. But I think the beliefs that we're implementing are not only very good implementations,

but they are coming out of very good beliefs. And that's more than I can say for a lot of other parties. Thank you as always for listening to and watching the Dividend Cafe. I hope you have a very wonderful weekend. I encourage you to reach out with any questions or comments anytime. If you're not a client of the Bonson Group, of course, you can contact us at our website, and we're happy to talk to you more as well. But be that as it may, if there's anything that you would like to hear from, reach out, hear from us about, reach out,

and we'll do our best to attention it. We want to be effective communicators during these interesting times. Thanks so much for listening to Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC.

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