The Big Picture for the Week of January 1, 2012

After listening to the umpteenth segment on CNBC where both guests extolled the virtues of some version of dividend stocks, dividend growers or high yielders or the like, it has become clear that we have a very popular theme here. Over the last couple of years I’ve had some posts where I have tried to isolate the importance of dividends to a portfolio but tried to warn of the risk of a cultish devotion to them hence the term dividend zealot. Also during the week I read a post at Seeking Alpha with a cautious tone on a dividend stock bubble and all the usual suspects chimed in about why dividend stocks can’t be a bubble. For people not cultishly devoted (read all the comments on dividend articles at SA and tell me there isn’t a cultish tone) but still very interested in the topic I thought of a different way to articulate my thoughts on this subject which hopefully is useful. In listening to the aforementioned CNBC segments and the articles that have popped up people seem to think of dividend stocks as an asset class which I don’t think is the right way to look at it. People also think of dividends in terms of various strategies like dividend growth and so on and the strategy idea is a correct way to look at it but I don’t think it is the only way. I think of dividends, more precisely yield, as an attribute to be managed in the portfolio. In the trade we executed during the week we added a name that has a pretty easy...

The Big Picture for the Week of January 1, 2012

After listening to the umpteenth segment on CNBC where both guests extolled the virtues of some version of dividend stocks, dividend growers or high yielders or the like, it has become clear that we have a very popular theme here. Over the last couple of years I’ve had some posts where I have tried to isolate the importance of dividends to a portfolio but tried to warn of the risk of a cultish devotion to them hence the term dividend zealot. Also during the week I read a post at Seeking Alpha with a cautious tone on a dividend stock bubble and all the usual suspects chimed in about why dividend stocks can’t be a bubble. For people not cultishly devoted (read all the comments on dividend articles at SA and tell me there isn’t a cultish tone) but still very interested in the topic I thought of a different way to articulate my thoughts on this subject which hopefully is useful. In listening to the aforementioned CNBC segments and the articles that have popped up people seem to think of dividend stocks as an asset class which I don’t think is the right way to look at it. People also think of dividends in terms of various strategies like dividend growth and so on and the strategy idea is a correct way to look at it but I don’t think it is the only way. I think of dividends, more precisely yield, as an attribute to be managed in the portfolio. In the trade we executed during the week we added a name that has a pretty easy...

A Reader Asks, I Answer

An exchange I had with a reader in the comments from Monday’s post: Reader: You said,“…if some industry, for example semiconductors, collectively goes down 30% for some reason it is very unlikely that the typical investor will pick the one that somehow goes up.” So why doesn’t that reasoning apply to countries? For example, there are 45 countries in the MSCI ACWI. If the market collectively goes down 30% for some reason, isn’t it very unlikely that the typical investor will pick the one country that somehow goes up? My reply: I addressed that many times before and then during the crisis. My belief going in was that countries with different fundamental attributes (like commodity based) might be on different economic cycles which might mean they are on different stock market cycles such that there is some zig when the US zags. Also a fundamentally healthier country than the US might also only have a more cyclical event as opposed to secular. Whether it was by luck or otherwise this is what happened and it happened with the countries I talked about before the crisis. Brazil and Norway kept going up until June 2008 and Chile only endured a normal cyclical decline dropping a little over 30% as the US was going down 56% and Chile has since gone on to a new high. I also wrote often about not expecting much real diversification from countries most similar to the US like Big Western Europe. The work that lead me to these conclusions was far from complicated and involves a fair bit of common sense. A reader (maybe you,...

A Reader Asks, I Answer

An exchange I had with a reader in the comments from Monday’s post: Reader: You said,“…if some industry, for example semiconductors, collectively goes down 30% for some reason it is very unlikely that the typical investor will pick the one that somehow goes up.” So why doesn’t that reasoning apply to countries? For example, there are 45 countries in the MSCI ACWI. If the market collectively goes down 30% for some reason, isn’t it very unlikely that the typical investor will pick the one country that somehow goes up? My reply: I addressed that many times before and then during the crisis. My belief going in was that countries with different fundamental attributes (like commodity based) might be on different economic cycles which might mean they are on different stock market cycles such that there is some zig when the US zags. Also a fundamentally healthier country than the US might also only have a more cyclical event as opposed to secular. Whether it was by luck or otherwise this is what happened and it happened with the countries I talked about before the crisis. Brazil and Norway kept going up until June 2008 and Chile only endured a normal cyclical decline dropping a little over 30% as the US was going down 56% and Chile has since gone on to a new high. I also wrote often about not expecting much real diversification from countries most similar to the US like Big Western Europe. The work that lead me to these conclusions was far from complicated and involves a fair bit of common sense. A reader (maybe you,...

Diversification Evolves?

Jason Zweig had a column up over the weekend that included the following observation; It thus takes roughly 40 large stocks today to equal the diversification benefit investors got from just 20 stocks in the early 1990s, warns Mr. Sullivan of the Financial Analysts Journal. Anyone who doesn’t use index funds should be aware that portfolios of only a handful of stocks are more prone to sharp fluctuations than ever. It appears that the conclusion above is tied to the proliferation of index funds buying and selling many different stocks at a time but the work behind coming up with 40 being the new 20 was not disclosed and so I cannot vouch for it–based on the article it might simply be an assumption of some sort. Regardless of the accuracy of the numbers cited the idea is fascinating; does it really take many more holdings today to create diversification than it did 20 years ago and if so how many more stocks does it really require? This concept is more about the evolution of portfolio construction and markets more than anything else IMO. Top down analysis says the most important decision is whether to be in or out of the market. More practically this means whether to be defensive or not as getting completely out has some logistical issues (taxes, commission drag) along with strategic issues too (what if you’re wrong?). A point about top down analysis I have made several times in the past is that if some industry, for example semiconductors, collectively goes down 30% for some reason it is very unlikely that the typical investor...

Diversification Evolves?

Jason Zweig had a column up over the weekend that included the following observation; It thus takes roughly 40 large stocks today to equal the diversification benefit investors got from just 20 stocks in the early 1990s, warns Mr. Sullivan of the Financial Analysts Journal. Anyone who doesn’t use index funds should be aware that portfolios of only a handful of stocks are more prone to sharp fluctuations than ever. It appears that the conclusion above is tied to the proliferation of index funds buying and selling many different stocks at a time but the work behind coming up with 40 being the new 20 was not disclosed and so I cannot vouch for it–based on the article it might simply be an assumption of some sort. Regardless of the accuracy of the numbers cited the idea is fascinating; does it really take many more holdings today to create diversification than it did 20 years ago and if so how many more stocks does it really require? This concept is more about the evolution of portfolio construction and markets more than anything else IMO. Top down analysis says the most important decision is whether to be in or out of the market. More practically this means whether to be defensive or not as getting completely out has some logistical issues (taxes, commission drag) along with strategic issues too (what if you’re wrong?). A point about top down analysis I have made several times in the past is that if some industry, for example semiconductors, collectively goes down 30% for some reason it is very unlikely that the typical investor...