Is it time to reconsider how we measure stock market performance? And why you might want to exclude unrealized capital gains from your sense of wealth. Yes, I’m serious.
Daniel, I applaud you for raising this issue and stimulating thought about it. Certainly looking only at price return misses things. I certainly agree that market price gains are "Maybe Money." And that Total Return is a better overall measure.
To my mind the important point you make is that dividends are far less volatile than stock prices. I spent some time with the historical data and found that to be broadly true across the 30s and the 70s. Besides, it makes intuitive sense.
One of the key things I track in my own portfolio is the dividend income stream. That is the main focus for my income positions. Yield also does matter, as it helps make decisions about diversifying.
But it remains a bad decision to invest by yield. The companies that produce the dividends need to be able to sustain and grow them. Some yields are not worth having.
Importantly, I also track the Maybe Money value of the entire portfolio. And for growth positions, there is little else to track.
In the bigger picture what can we do with realized gains? Unless we are ready to spend them, or want to stick them under the mattress, they go back into Maybe Money. My view is that investors do need to be advertent about their Maybe Money.
Even if a company does well, it's stock price can drop in half. If one's plans do not account for this, then they are incomplete.
Some follow-on reflecting a recent comment exchange on Seeking Alpha: I had noted how my dividend-focused portfolio represented preparation for possible poor forward returns from broad markets. My responder alleged that dividend stocks are far more volatile than growth stocks, as though this were a problem. My response was that I could care less what the prices of those stocks do. My focus is on the underlying businesses and their ability to grow earnings and dividends.
This highlights a trend that is prominent everywhere. Vast amounts of investment strategizing and commentary is devoted to the alleged importance of minimizing volatility in a portfolio. To my mind, this focus is just plain wrong and does not promote the growth of wealth.
One often hears that we are all so irrational that we will reliably panic and sell low when prices fall. Certainly many individuals do that but good investors do not. It seems a better path to me to teach people to be better investors, and tell those who can't to stop putting themselves in that position.
Not certain about your interlocutor's claim. Over longer measurement periods, div returns have much lower vol, b/c ~"half" their return is a given. But over the past 15 years or so, there have been brief periods of steady market melt up such that the STD of the leading names might drop into the low teens, about the same as the high div portfolios. But I've not seen a period in which the std of total return of the growth names was ever below the more steady hands. That is unlikely.
For mature company wouldn't compounding dividends at the risk free rate be a better TSR incentive insofar as the ability to diversify one's holdings can be a significant benefit to the shareholder.
I do not follow the argument for Total Return being imprecise. First, assume I invest in liquid shares with real time pricing; and that I do this in a no tax form - ISA or SIPP.
Of course no return can be certain until I sell to create cash; but the precise cash return could be achieved at the click of a Sell button: Maybe Money is converted to Cash.
Evaluating potential future Total Return is a separate matter, requiring estimate of future Div % and future capital growth. For any share we make this judgement.
Yes, when looking at unrealized capital gains with an expectation for realizing them a few seconds later--- in that case, the difference between Maybe Money and Cash in the Kitty disappears. But who actually is looking right now at their investments with a realistic expectation of turning them into realized gains in a few seconds? Not many. For the rest of us, holding investments for months, years, decades means the contingent nature of unrealized gains is unavoidable.
Daniel, I applaud you for raising this issue and stimulating thought about it. Certainly looking only at price return misses things. I certainly agree that market price gains are "Maybe Money." And that Total Return is a better overall measure.
To my mind the important point you make is that dividends are far less volatile than stock prices. I spent some time with the historical data and found that to be broadly true across the 30s and the 70s. Besides, it makes intuitive sense.
One of the key things I track in my own portfolio is the dividend income stream. That is the main focus for my income positions. Yield also does matter, as it helps make decisions about diversifying.
But it remains a bad decision to invest by yield. The companies that produce the dividends need to be able to sustain and grow them. Some yields are not worth having.
Importantly, I also track the Maybe Money value of the entire portfolio. And for growth positions, there is little else to track.
In the bigger picture what can we do with realized gains? Unless we are ready to spend them, or want to stick them under the mattress, they go back into Maybe Money. My view is that investors do need to be advertent about their Maybe Money.
Even if a company does well, it's stock price can drop in half. If one's plans do not account for this, then they are incomplete.
brilliant!
Some follow-on reflecting a recent comment exchange on Seeking Alpha: I had noted how my dividend-focused portfolio represented preparation for possible poor forward returns from broad markets. My responder alleged that dividend stocks are far more volatile than growth stocks, as though this were a problem. My response was that I could care less what the prices of those stocks do. My focus is on the underlying businesses and their ability to grow earnings and dividends.
This highlights a trend that is prominent everywhere. Vast amounts of investment strategizing and commentary is devoted to the alleged importance of minimizing volatility in a portfolio. To my mind, this focus is just plain wrong and does not promote the growth of wealth.
One often hears that we are all so irrational that we will reliably panic and sell low when prices fall. Certainly many individuals do that but good investors do not. It seems a better path to me to teach people to be better investors, and tell those who can't to stop putting themselves in that position.
Not certain about your interlocutor's claim. Over longer measurement periods, div returns have much lower vol, b/c ~"half" their return is a given. But over the past 15 years or so, there have been brief periods of steady market melt up such that the STD of the leading names might drop into the low teens, about the same as the high div portfolios. But I've not seen a period in which the std of total return of the growth names was ever below the more steady hands. That is unlikely.
For mature company wouldn't compounding dividends at the risk free rate be a better TSR incentive insofar as the ability to diversify one's holdings can be a significant benefit to the shareholder.
I do not follow the argument for Total Return being imprecise. First, assume I invest in liquid shares with real time pricing; and that I do this in a no tax form - ISA or SIPP.
Of course no return can be certain until I sell to create cash; but the precise cash return could be achieved at the click of a Sell button: Maybe Money is converted to Cash.
Evaluating potential future Total Return is a separate matter, requiring estimate of future Div % and future capital growth. For any share we make this judgement.
I fear I am missing some (obvious?) point.
Yes, when looking at unrealized capital gains with an expectation for realizing them a few seconds later--- in that case, the difference between Maybe Money and Cash in the Kitty disappears. But who actually is looking right now at their investments with a realistic expectation of turning them into realized gains in a few seconds? Not many. For the rest of us, holding investments for months, years, decades means the contingent nature of unrealized gains is unavoidable.
Thanks. BTW Excellent interview of you re Dividend Investing on podcasts.