The Dividend Cafe - You Are Where You Came From

Episode Date: January 29, 2021

It is appropriate and perhaps entirely ironic that the subject of this week’s Dividend Cafe comes in a week where we have seen some of the most bizarre, insane, and silly market activity, ever, and that this bizarre, insane, and silly activity is accompanied by totally incoherent commentary from various pundits, politicians, and “pros.” Whoever said investing was all math and science is an idiot. But the drama of this week’s market, and even the circumstances around the big headline story of the week (which has actually morphed into a multi-faceted story), really do serve as a reinforcement of the major principles, beliefs, and applications I want to highlight in this week’s commentary. I began writing this Dividend Cafe last weekend, and had conceptualized my thesis well before the drama hit the tape into the week. And I haven’t altered that thesis or even the way I unpack it at all. To the extent some of this week’s Dividend Cafe connects dots with other news stories, great. But my purpose in this week’s commentary is not to make sense of a four-day story, but a four-decade story. And I really hope it will help you in your journey and understanding as an investor. I have long believed that all professional investors are irreversibly shaped by the era in which they grew up as an investor. This is more true of the lessons learned in that era that proved to be negative lessons than positive ones. Put differently, the major events that damage us in our formative years teach lessons that don’t go away easily. I want to do a little history this week, talk a little investment biography, and ultimately, offer some lessons about my outlook on the present investing era that ought to transcend anything you will find in a chat room, on social media, or in the madness of the moment. It’s a low bar. Links mentioned in this episode: 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 podcast video. I am actually at my apartment here in New York City because I'm getting ready to fly out and it's been a very crazy day. And that might be one of the reasons that this podcast will end up being a little bit more rushed than I wanted it to be. It's definitely the reason why for the second series in a row, I had to turn the topic of this week's Dividend Cafe into a two-parter. I had, if you recall, a few weeks ago, started off on a series about inflation versus deflation as the great macroeconomic question of our time. And the most important and significant issue that investors need to wrestle with as for its impact to debt and to economic growth and interest rates and to the dollar and all these things.

And so that ended up becoming a two parter. dollar and all these things. And so that ended up becoming a two-parter. And I was actually really happy with that, the way it enabled me to kind of unpack it and then into the second part of it, I think, draw the conclusions, connect the dots in the way that I want to do. And what I was hoping to do this week is provide a bit of a summary as to what our investment worldview is right now, given certain conditions in the world and conditions in the market and why we feel the way we do, particularly around what is usually described as a growth versus value debate. And this invites a whole lot of issues into it around investor sentiment, around investor behavior, around history.

And then this week, all hell kind of broke loose in certain aspects of the market. And there's become this sort of side story that I cover in other places. And there's other materials that we can send to you that you can find that where I've discussed all that in much greater detail. But my point being, there's this broader conversation about my view of the next decade of investing, not just in the macroeconomics, but particularly in the tensions that people find themselves in right now. And, and I think that I'm going to share with you the first half of this today around a sort of historical context that even has a little bit of kind of biographical significance. But then I

really want next week to make a persuasive case for a particular side of the issue as to risk adjusted where investors are going to be better off positioning themselves. But it's not going to be along the lines of, oh, well, some people had growth before and now they like value. And what do you like, growth or value? It's not so simplistic. Most things aren't that simplistic and most things in investing really aren't. And that's kind of my view, even on this whole controversy right now in the media and this whole thing of what's going on with this market craziness is that everyone wants to make a good guy and a bad guy. isn't an easy narrative. And hopefully some of the other material you can listen to will help you in that regard. But in this story, I feel the same, that nuance is important. The way we think about quote unquote value investing needs to be thought of differently. That what is going on in

quote unquote growth investing needs to be thought about differently, but yet still really informed by some of the lessons of history. And so let me get into what I have to say for this week and then leave you in suspense for next week. And for some of you, there'll be no suspense at all because you literally couldn't care less about what I have to say on any of this. And some of you, hopefully, you'll benefit from the fact that I broke this into two parts to make it a bit more digestible. One of the big thesis that I have that I unpack at DividendCafe.com today is this reality that I'm completely convinced is true, not just of myself, but of most professional investors that I've either known, read, studied, is that they are largely byproducts of the era in which they became professional

investors. That there is a sort of formative period and that a person can go on professionally managing money for decades after that formative period, but they can never leave behind the influence of that period, the experiences, the lessons taught, the biases formed, the whole enchilada, if you will. And I think if you go back to periods of time, I start off in Dividend Cafe. I'll do it right now here for the podcast. in the early 1970s, but I could easily identify a particular theme and lesson that was preeminent in prior themes as well. But the nifty 50 idea that was so big coming out of the late 60s and post-war America, some of these gigantic blue chip companies and how that ended with these companies that supposedly could never go down

and just were so strong, they were untouchable. And the just carnage that was really created in a lot of blue chip stock America from 1972 to 74, let's say. And I think that that impacted the way an awful lot of people viewed equity investing in America for very good reason, for very understandable reasons. It certainly affected the way a lot of professional money managers transact and think and operate. Almost immediately after that era, we went through a sort of stagflationary period. You could describe it as inflationary, but it really was inflationary in all the bad ways and yet very, very poor economic growth. And so hence the term stagflation. And you had rising commodity prices. And and there were a kind of generation of gold bugs that came out of that era.

There was inflationary pressures that pushed bond yields up. You recall mortgage rates being in the mid-teens. You had 30-year treasury bonds very close to 20%, 10-year bonds well above 10%. And that era does, with the context of history, look much more like an anomaly. There is a lot that did not last in that period, but try telling that to people who live through it. It deeply informed their fears and their composition as an investor, their constitution as an investor for pretty good reasons. I think that I'll quickly go through some of the others, but I think that the 1980s, you had this very robust period of animal spirits, a lot of M&A, a lot of corporate

takeovers, a lot of financial engineering. You had the high yield bond craze come in and help finance a lot of corporate America. You had a lot of event driven catalyst in the stock market, largely with mergers and acquisitions. But the point being, it was a very different period for equity investors. And you had a couple of key firms, Salomon Brothers, certainly Drexel Burnham, you had the Michael Milken phase, where all of a sudden credit became something that was not just impactful to a niche asset class of fixed income, but credit really became a big driver of what was taking place, not only in debt markets, but in equity markets and in the overall economy. And so the 80s had

all, it really created an era of investors that thought differently about the impact of financial capital structure to a stock market. Well, then in the 90s, it was a completely different phenomena. And I think particularly into the late 90s, and now you're finally getting to me, you know, being being old enough to buy a beer, for example, you know, now I'm actually an adult. And, and I was heavily involved in the second half of the 1990s in the whole dot-com phase, all of the insanity that existed around the new era of digital transformation. And it was a really, really fun period. It was very exciting. really, really fun period. It was very exciting. I think that a lot of people, and I certainly put myself in this camp, it was as much an experience as it was a financial strategy. It was sort of fun

and entertainment driven, if you will. It became a real pop culture phenomena. Some of the commercials you can recall. It was definitely the time at which a lot of financial media people became celebrities where previously it wasn't really like that. And it ended in tears. And I think that not just the kind of heavy trading of companies that were really totally speculative, that's a big part of it too. We see some of that going on now. But even really, really big companies that were really powerful, that were really profitable and became even more profitable, and yet their stocks dropped 85%, 50%, 60%, stayed down for years and years. Some of them still down to this day. Not back to the levels they were in 1999, still to this day. Some got back to those levels, but it took 15 years or so, right?

And I'm talking about huge names, like household company names. I'm a byproduct of that era. I entered my career as a professional investor, utterly convinced that there had to be a better way than what I had been doing and what so many American investors have been doing in the 90s. And yet, I needed to research and understand and comprehend what that really looked like, what the right path forward was. And one of the great advantages I had, you know, as I was kind of entering this period of needing to be a mature investment manager, is I had gotten married, which means I had grown up. Okay. So now I'm married. I'm now working for a big wall street firm and instead of day trading my own account with a broker and my journey out of the lessons learned from dot coms implosion was that the, um,

that there was a fundamental investing that was going to help me avoid blowing up my clients and help me blowing up my own balance sheet. My balance sheet back then was nothing like what it is now. So I was lucky. I was in my 20s in the 90s and I could afford big losses. And I assure you, I had big losses. But I, entering the sort of adult world of being a professional money manager, believed that there needed to be something better. And it's where I discovered the world of dividend growth. And right now, there's this big conversation taking place around value versus growth. And I'm going to have a lot more to say about that next week.

I do believe it's pertinent that value and growth have achieved the same return for 40 years. And yet we're right now coming off a 10-year period where growth has outperformed value by 10% per year. I think that suggests there are price disconnections that are going to revert to the mean. But I also believe that we want to look at what is different, what isn't different, and how to apply that in the context of investment portfolio. And I've adopted a worldview of investing through an unbelievably rigorous intellectual journey.

I wrote a whole book about that. I built this whole business about that. The Bonson Group has adopted and formed and grown other advisors and colleagues, all with a shared mission of dividend growth, because I believe that it does not require one to have this binary view of picking between bargain basement prices or growing companies, that in fact there exists an ability to both measure, gauge, and benefit from companies that are reasonably priced and have the growth outlook one would want for the risk they take in an investment. Right now we live in interesting times because the most popular investments have a certain risk that we need to look at,

and the less popular investments have valuation metrics that may be deceiving. And so I think it's a time in which us really carefully calibrating historical realities, the present circumstances. I have charts this week showing the big increase of retail participation. Small investors have opened 37 million accounts. And what that means and what it may not mean, allowing you to kind of suggest, to contemplate for yourself what some of those takeaways may be. Next week, we'll pull all of this more together. I'll put a lot more data out there on the value growth dynamic and then apply it into what we're doing here at the Bonson Group. So I hope that this kind of historical lesson is

of interest and benefiting you. And then I hope that it leaves you wanting a little more next week. But just because of time concerns and the utter insanity of what I'm dealing with here today, that's where we are. Okay. Thank you very much for listening to and watching the Dividend Cafe. Reach out with the questions anytime. Have a wonderful weekend. We look forward to bringing you part two next week. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and 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. This is not an Thank you. Bonson Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information,

or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. Thank you. on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.