Thesis question: Does the Dividend Growth Strategy continue to deliver better performance than its index peers in good and bad markets, across all market capitalizations, with less risk than the indexes?
First, a look at the past year:
Back in March 2020, the media were asking breathless questions like: “If there is a recovery, will recovery be V shape, a W, a long U, or goodness…an L?” Now in hindsight, recovery took 4 months, and the graph of these past 12 months looks more like the Nike swoosh than a U, V, W, or the dreaded L! What a change 365 days can make.
In turbulent times, many people panic and sell to avert “losses” as was the case in March and April of 2020. Few people have the courage to enter the markets when everybody else, especially those who had previously borrowed money to be invested in the markets (leveraged investors) are running to sell anything to raise cash to service their debt (which compounds the downward valuation pressure).
On the surface, with the benefit of hindsight, what are some of the key investing lessons we might treasure from this last market crash in March of 2020?
- As a personal investor, retain sufficient near-cash liquidity so you NEVER have to sell into the teeth of a declining market. If we told you what we tell our clients, you would think we were stupid; we just happen to believe that holding near-cash reserves is an active investment strategy of increasing importance as one grows closer to retirement. Holding cash is a mindful strategy like breathing.
- Do not borrow short-term funds to be in the market unless you have sufficient liquidity that would not force you to sell to cover calls on the debt.
- If it is okay for Berkshire Hathaway’s Warren Buffet to run into a burning market with cash to invest when others are running out, ask yourself this question: Do you believe in the creative ingenuity of Free Capital Markets in the United States of America? If you do, and you have cash, bring it in when others are scurrying to get theirs out. Many of our clients were handsomely rewarded for viewing this crash as an opportunity and bringing cash into the fray, not out of it!
- If you had no new cash to invest in early 2020, but did not sell one single position in the downturn, did you lose money over the past 12 months? Answer: Many who LOST money in the past 12 months where those who panicked, sold, and then hesitated to get back in for fear of being whipsawed. Once you sell, you lock-in your losses and then inherit a second conundrum of deciding when and how to get back in.
- Are we saying that doing nothing is sometimes the best solution? YES! Especially if you understand why you are invested where you are invested and you have a healthy reliance upon active management strategies where the professional managers can react to changing circumstances at the individual security level.
- Index investing is not a defensive strategy. Index investing looks backwards while active management’s fundamental analysis is timely at a minimum, and forward thinking at its best. For example: what happens to high PE Growth stocks if the current Congress increases capital gain tax rates? Do indexes proactively care about such important issues or only reflect the results? Indexes are like mirrors.
- This chart also reminds us why it is next to impossible to time the market. Successfully timing the market requires knowing in advance of both when to get out and when to get back in. Except for the truly clairvoyant or lucky amongst us, it is nearly impossible to act correctly, in advance, across a rolling 25-year investment horizon. Who could possibly have foretold exit and re-entry points for 2000, 2008, and 2020?! As an old mentor taught me, “Success is not what’s difficult. It’s REPEATING success which is the most difficult feat!”
- Never forget: it is not timing the market that leads to success; it is time in the market that will lead to a successful investing result.
As for Q1 2021 itself, there was a lot of talk of overvaluation in equities. Story Capital provided a diversification study to some clients and found that in January, the technology sector made up 24% of the S&P 500’s value and the five FAANG stocks alone (Facebook, Apple, Amazon, Netflix, & Google) made up 15% of the S&P 500’s value.
Why would a Senior Leader of a large company with equity compensation who is already 50-80% concentrated in the stock of their employer double down on this kind of concentration risk? By comparison, the Technology Exposure in our Large Cap Dividend Growth Strategy is only 12.1%!
Now on the the numbers:
Dividend Growth Relative Performance
For a detailed explanation of these metrics, refer to our original quarterly update here.
The Rest of the Story
For a detailed explanation of how to interpret this table, refer to this previous update.
In this and future editions of the quarterly Dividend Growth report we are simplifying to the two capitalizations most often utilized by our clients, Large Cap and Small Cap Dividend Growth.
Here are a few other Q1 measures for those that really want to dive into the details:
For greater context around these statistics please see our Q2 2020 Dividend Growth Summary
Important note: Story does not utilize mutual funds or ETF’s. All Dividend Growth capitalizations are executed by using individual securities traded in a dedicated account titled in the name of the client or their IRA/401K/Roth/Trust account. This method is most frequently referred to as “Separate Account” investment management, but separate accounts are often confused with being a mutual fund. Our clients and our team maintain full tax and security selection control with the separate account format.
Please give us a call if you have questions or if you would like to further explore the specifics of this evergreen strategy!
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This report was prepared by Story Capital LLC, and reflects the current opinion of the firm, which may change without further notice. This report is for informational purposes only and is not intended to replace the advice of a qualified professional. Nothing contained herein should be considered as investment advice or a recommendation or solicitation for the purchase or sale of any security or other investment. Opinions contained herein should not be interpreted as a forecast of future events or a guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's portfolio. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
Commentary regarding the returns for investment indices and categories do not reflect the performance of Story Capital LLC, or its clients. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.
Investors cannot invest directly in an index.
The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.
This material is provided for informational purposes only. It is not an offer or solicitation to buy or sell any securities.
Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.
Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer and Investment Advisor, Member FINRA/SIPC. Story Capital LLC, is independently owned and operated. Story Capital, LLC is an Affiliate firm of NBW Insurance Group, a Member Firm of M Financial Group. File# 3570730.1