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Sound Advice: April 21, 2021

How is the Market Doing? Despite all the noise being trumpeted by the media, the daily prattle about market moves is often wide of the mark and overloaded with information that is misleading or just plain inaccurate.   How else to explain a jump of several hundred points one day followed by a plunge the next day?   That makes no sense. Over time, the foundation for stock valuations is underlying profitability of the companies involved.   As profits increase, stock prices rise, though not necessarily in perfect reflection.   The relationship tends to be meaningful over extended periods, but often not in shorter spans of time.   That’s all about changes in investor psychology.   So let’s begin by defining the “market”.   If we are referring to stocks, the most common reference is to the Dow Jones Industrial Average, which consists of 30 major companies whose progress might be considered representative of the U.S. economy as a whole. The majority of the companies included here are r
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Sound Advice: April 14, 2021

Up, Down & Sideways   In past years, the warmer months brought with them a time to turn one’s thoughts to more blissful endeavors.   Although childhood may have been many years ago, what lingers is the apparent freedom from care we felt when at last we were done with school.   Much has changed since those halcyon days when time hardly seemed to move.   Back then, the days went by slowly and the important decisions were few.   Now it’s almost as if you don’t know which direction to turn first. It’s all about communications and the seeming necessity of keeping up to date with what’s going on.   Much of the rising flow of developments may have little impact, but even so it’s no longer a time when we can disconnect until September. From an investment perspective, the challenge is to sort through the rapidly growing mountain of information to isolate the data that is critical and take action where it is needed.   On a grand scale, it’s a matter of separating the wheat from the cha

Sound Advice: April 7, 2021

The High Dividend Strategy: Pros and Cons Let's start with the bottom line about investing in high dividend stocks: It works, but there are significant wrinkles.  A while back, I did a 20-year study of investing in high dividend stocks.  The approach was straightforward.  I began with the S&P 500 universe and divided it into 10 groups of 50 stocks each.  The groups were arranged by dividend yield, highest to lowest, at the beginning of each of the years.   I then tracked the total returns (dividends plus capital appreciation) of these groups for the full period. The results were illuminating.   The highest total returns were from the group with the highest dividend yields.   The returns then descended in perfect order down to the group with the lowest dividend yields.   What's more, the aggregate return from the group with the highest returns was greater than that of the Standard & Poor's 500 and its volatility over the period was lower. That did not mean all

Sound Advice: March 31, 2021

The Market Drops Every Year . . . and Ends Up Higher Over Time The market drops I refer to take place over a period of a few months within one year or starting in one year and running into another.   These short periods of weakness are not to be confused with 12-month changes from yearend to yearend. Since 1980, the Standard & Poor's 500 Index has had average interim drops of 14.3%.   In more than half of those years, the corrections, as they are euphemistically known, were 10% or more.   We hit the worst air pocket back in late 2008 to early 2009: 49%. When this happened, more than a few investors started to wonder what was going on. Yet each time, the pullback was followed by a full recovery and annual returns ended up positive in three out of four years. The lesson learned from this pattern is that short-term movements are for the most part reflections of changes in investor psychology.   One day, there may be a series of encouraging earnings reports.   The next day,

Sound Advice: March 24, 2021

Technical Analysis, a.k.a. Voodoo   Among Wall Street researchers, there are two main approaches: fundamental analysis and technical analysis. Fundamental analysis subscribes to the belief that the shares of companies will reflect changes in forward progress and financial health. In contrast, technical analysis concentrates on stock price action and how such changes reflect shifts in investor psychology. Technical analysis is totally indifferent to underlying company developments. Therein lies its fatal flaw. As one might suspect, there are different approaches to technical analysis and there is what purports to be an academic treatise on the subject: Technical Analysis of Stock Trends , the Ninth Edition of which devotes nearly 800 pages to the subject. Devotees worship this tome much as fundamental analysts pay homage to Security Analysis, by Graham & Dodd. The book is filled with all kinds of lines, shapes, and other graphic devices in a comprehensive attempt to convince the
Compound Interest Compound interest refers to the phenomenon in which the interest associated with an investment increases exponentially—rather than linearly—over time since the periodic gains on the investment increase the size of the principal that is the basis for the total return (dividends and capital gains). The term compound interest can be confusing and misleading, especially in view of the current historically low interest rates.   The word interest as it used here refers to gains on investment, not interest on the funds invested.   Compound interest refers to the gains on your investment as well as the gains on those gains over the period the funds are invested. Here’s an example.   Let’s assume we begin with an account of $1,000,000 with a total return of 10% a year.   If that total return of 10% (or $100,000) is withdrawn each year, the total return over time is nothing more than $100,000 times the number of years the funds are invested.   This is a linear increase.
The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exceptions almost ev