The Dividend Cafe - Actively Clarifying What Has Passively Become Silly

Episode Date: September 7, 2018

Topics discussed: Market Epicurean Series On 2008 Financial Crisis Active vs Passive Investing Cause of the next Recession Which asset classes are up, which are down Repatriation of Corporate profits Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com Advice and Insights Podcast - Passive vs Active Investing Special Market Epicurean Series On The Financial Crisis Of 2008

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson. I am Managing Partner and Chief Investment Officer at the Bonson Group. And I got a couple quick housekeeping things and we're going to get into what I think is a fun little podcast. First and foremost, if you are all interested in the financial crisis and what exactly it is that took place 10 years ago in that infamous month of September 2008, as we now kind of cross that 10-year marker, for those of us that live through it, there may be a fair amount of nostalgia, not really the positive part. There is certainly a lot of memories. There is a lot of

lessons to be learned. There's a lot of history that you may find interesting. What I'm doing is just writing a series of very short articles that are kind of commemorating some of the big milestone events of the crisis, walking through what was going on with Fannie Mae and what took place the day Lehman went bankrupt and how AIG was bailed out, kind of going through some of those key events with key companies day by day, what it meant at the time, what I was doing through that period. I remember it like it was yesterday. And maybe part of me is writing this series, so it will be therapeutic for me. I can get these memories out of my mind. But frankly, they were horrific times to go through, as a lot of you may recall. But there also was some really incredible value that we got out of

the experience, things we learned things we took away and those are things that I want to be able to to capture for you in this series of articles and and and frankly I believe that it will have some real actionable takeaways even for people that weren't that connected to the September 2008 period that just on a go forward basis, there's some application there. So marketepicarian.com is where we're putting up the series of articles. You could subscribe to it. So you just get them delivered to your inbox or just go to marketepicarian.com and read. And I'll be posting these articles on each of these key kind of milestone days. I think the series is going to be somewhere between

six and eight articles over the next few weeks. And like I said, short little blurbs, very readable. So check that out. The other thing too is advice and insights this week. There are other podcasts where we tackle a single subject. I walked through this week the subject of active versus passive investing. And that subject takes up a lot of the real estate in our DividendCafe.com commentary this week. And I'm going to be skipping over a lot of that in this podcast so that I'm not being redundant. topic, though, of whether or not investors are better off when they tackle a certain asset class by gaining that exposure through an ETF or an index fund, what is so-called passive investing, or whether they want to engage a more active approach and so forth. It's a question that's almost impossible to avoid within our industry, and it's almost impossible in a lot of the pop

media coverage. And one of the things I kind of am pointing out right now through that other podcast and and the dividendcafe.com is it's a horrifically um unhelpful question because every passive investor becomes an active investor um that at some form or another, they may decide that they want whatever they're going to have in U.S. equities in the S&P 500 index fund, for example. But they have to decide how much they want in U.S. equities. They have to decide what international equity exposure they may want. They have to decide what stocks versus bonds they may want, what cash or real estate or alternatives they may want. So by definition, the construction of an asset allocation from a top-down basis, you make active decisions in

doing that. And that asset allocation decision, that process, even if every ingredient in your asset allocation is filled with a passive index replica of that asset class, that decision is not only a highly active process, but it's the primary determinant of what your investment performance will be from an investment standpoint. Now, the other issue that I think the active versus passive debate could never really deal with is the other big determinant, and that is the investor behavior. And that's something I talk about all the time.

I say in DividendCafe.com this week, the answer is not in the stars, but in us. Quoting from a famous Brutus line in Joy Caesar that I utilized in the book I wrote, Crisis of Responsibility, the investment success that most investors are going to have is going to largely in their life come down to decisions that they make and decisions that they do not make. And that primarily means the leveraging up excessive debt in greed-driven bouts of insanity during market peaks, though that risk on decision outside one's real comfort level, driven usually by greed, can be very destructive. And of course, the more common mistake, I think, is the idea of timing and exit from the market. I think, is the idea of timing and exit from the market.

When people say, oh, I'm going to be able to buy back cheaper, and they do it just in time for the market to, in fact, expand further and then create the regret and the difficulty of coming back into the market, I think this is a dynamic and a sensation that very, very, very many people know what I'm talking about, whether they admit it or not. very many people know what I'm talking about, whether they admit it or not. And it's a brutal process that represents a tremendous behavioral drag on portfolio results. The inclination for investors to capitulate to the human nature of greed or fear is the primary determinant in investor success or lack thereof. And it isn't remotely covered by the active versus passive debate. So my suggestion is that we focus on asset allocation, we focus on behavioral finance,

and then within that, the issues, the pros and cons about what asset classes can be best captured actively and what are best captured passively, that's a whole separate subject. By the way, let's talk about recession. I'm going to spend the rest of our time just jumping over the map here because there's a lot of topics I think you want me to cover. At this time, the various metrics that we are looking at in the U.S. economy are really all quite healthy. Bond spreads do indicate very easy access for corporate money. That is not the sign of a contracting economy.

Regulations have all loosened across the banking sector. There's just trouble signs that you normally look for, but they're not flashing right now. And that is the reason why it would seem on the surface that recession is a ways off. Now, I would say an unforeseen escalation in the trade war could reverse all of that. It is also true that we don't exactly have many global partners that are able to stand tall with us right now. China, Europe, Japan, and the emerging markets all have their own vulnerabilities. But I think it was 2013 when I first began writing that the next recession will come from a Fed that has stayed too easy for too long and then has to reverse course and tighten too much too quickly. So if

you're wondering what I believe will cause that next recession whenever it comes, it is absolutely no different than when I was writing about five years ago. The lonely guy in positive territory. I think a little bit of clarity is in order on the year that it's been in capital markets. U.S. equity investors are up on the year a bit. Those sitting in cash are up a bit. But ironically, most who went to cash did so out of fear of U.S. equities being due for correction. But the U.S. equity asset class is the only one on planet Earth in positive territory. Developed international equity investors are not up. Either Japanese

equity investors, U.S. bonds are down in total return. Global bonds are down even more. Gold is down. Commodities are down. Emer emerging markets are down, real estate is down. The reality is that a multitude of asset classes exist to diversify U.S. equity risk, a risk many investors entered 2018 worried about. And in 2018, all of those diversifying asset classes are in negative territory and only U.S. equities are not. There's a thick irony to that. So when you're wondering how you're doing and think that everything out there is rosy, understand that unless one has a 100% U.S. equity portfolio with no international fixed income, real estate, or commodity exposure, chances are there is hardly a monolithically rosy reality to compare it to.

The longest period of media incompetence. The talk about this being the longest bull market in history is picked up. And with each pickup gains more and more incoherent steam. First of all, a basic question. Did the bull market start in March of 2009 when markets bottomed? Or did it start when the last high of the market was reached? If the bull market started in 2009, that means we're counting four years of this run, a bull market, even though all four of those years were spent merely regaining the levels we had been in in 2003, 2004, 2005, etc. In other words, why does the catch-up from a bear market count as a bull

market? But let me make a couple other points. Even if you believe this market should be treated as having started as a bull market in March of 2009, we actually did drop 20% in mid-2011. Intraday, the drop was over 21%. On a closing basis basis it was only 19.6%. Okay, so look, that's 20% in any practical sense of the term. And therefore an interruption to a bull market by the random and arbitrary vocabulary we throw at these things, this becomes a very silly conversation. I would also point out, by the way, that late 2015 through early 2016, we didn't technically see a bear market, but the average stock in the market did drop 25%. It was just that the overall market didn't quite drop 20. Earnings growth declined seven quarters

in a row in 2014 through early 2016. You had an over 20% drop in small cap in the Dow Transports and in emerging markets. So yeah, we didn't technically have that 20% drop in cap-weighted S&P a few years ago, but it was a bear market by any other name, certainly for most investors. I think that the fallacy is this whole vocabulary semantics to begin with.

But again, figures don't lie, but liars figure. Well, let me see. What else do we want to kind of cover here this week? I know we've gone through a whole lot. On the front of the corporate tax side, this is a very interesting point I want to make. It's going to add $83 billion of money, the corporate tax cut, to the economy in 2018.

That's a huge number, but to give you an idea of how big repatriation is on top of that, just Cisco alone is going to be repatriating $67 billion, almost the whole amount of the corporate tax cut. I am seeing data indicating $500 billion has repatriated already in the first half of the year, much more than we even forecasted. There was over $2.5 trillion that had accumulated offshore

before the tax bill. I just think you have a big story here, more and more money coming back on shore, being deployed in different ways that are all real positive for investors. Definitely check out DividendCafe.com this week. Like I said, there's a larger treatment of the passive versus active debate. There's a chart you're going to want to see regarding the relative stability of dividends since the financial crisis versus the way operating earnings work and the way stock prices work and the way PE ratios work. All those things go up and down. Stock buybacks go up and down. And yet through that whole period, the dividend chart is just nice, slow and steady to the upside.

And that lack of downside volatility of dividend growth just can't be forgotten as such a key value proposition in the approach that we take to equity investing. So I'm going to leave it there. Check out marketepicarian.com for our special series I talked about earlier. Thanks for listening to a long podcast this week covering a lot of topics. And please do me a big favor, reach out with any questions or comments you have. And if you like the Dividend Cafe podcast, write us a nice review, give us some stars, subscribe at your iTunes or Google Play or Stitcher, whatever you're listening to. Subscribe at your iTunes or Google Play or Stitcher, whatever you're listening to.

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