What The Great Recession Taught Me About Dividend Growth Investing by Chuck Carnevale, F.A.S.T. Graphs
Ever since I first got interested in investing in stocks circa 1965 I have been confronted with a constant and persistent admonition about the next pending market crash. In those early days I contributed much of the negativity toward stocks to a lingering overhang from the Great Depression. Many of the people I was talking with had been literally traumatized by stern warnings from their parents or grandparents about the risk of investing in the stock market. Stocks were too risky for prudent people to invest in and serious money should never be invested there.
Now after working in the industry some five decades later, I still find that the attitudes of many investors have not changed very much. Of course the Great Recession of 2008 has served to perpetuate the negativity toward stocks in these more modern times. It seems the moniker that stocks are a risky asset class is firmly ingrained in the psyche of many people. Rarely a day goes by without my coming across an article, report or comment suggesting that the next market crash is imminent or just around the corner.
Making matters worse, at least from my perspective, is the litany of reasons offered as to why the market will surely and very soon collapse. To me, those reasons seem always to be related to exogenous forces that do not directly relate to a given company’s (stock’s) specific future business prospects. Of course, it’s alleged that they will or do, but I find them usually a matter of opinion and not supported by actual facts.
Typically these external factors are argued with predictions relating to esoteric discussions about the effects of Zirp, QE number something or other, debt levels, the future rise of interest rates, etc. Most unfortunately, they are delivered with the undertone suggesting a major economic collapse, and of course the demise of the value of our stock portfolios. Moreover, these predictions of impending doom imply, although they rarely say so directly, that common stock values are surely headed to zero. In other words, if we don’t heed their stern warnings, we are destined to lose all of our money.
However, somehow common stocks, especially high-quality dividend growth stocks, continue to provide prudent investors with solid long-term returns and a growing dividend income stream. The occasional disruption does come along from time to time, but rarely lasts as long as people fear. Moreover, these disruptions do not hurt prudent levelheaded investors, but only those that are fearful. In other words, smart investors persevere and hold on, and only those willing to sell perfectly valuable assets for less than their worth get hurt - in the long run.
Fellow Seeking Alpha Author Chowder recently penned a terrific article titled “Dividend Growth Investing Requires Perseverance” that speaks loudly to the point I was making in the above paragraph. If you haven’t read it, I highly suggest that you do. I especially enjoyed his sharing of one of my favorite Calvin Coolidge quotes, and I repeat it here:
"Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful people with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan 'press on' has solved and always will solve the problems of the human race." - Calvin Coolidge.
However, as much as I admire the sentiment offered in Chowder’s article and as much as I believe in the validity of the Calvin Coolidge quote, I do feel compelled to offer a qualifier. Persistence is certainly a powerful and salient attribute to embrace - especially for retired investors. On the other hand, I also believe that it must be “intelligent” perseverance.
As it relates specifically to investing in dividend growth stocks, I refer to it as “intelligent patience.” In other words, perseverance and patience become intelligent when it is founded on sound and rational principles. Holding on to a lost cause turns persistence into mere stubbornness. Behaving in that way usually leads to a bad outcome. In contrast, expressing bravery (patience and persistence) to a worthy cause will lead to victory and success.
This then begs the question: When investing in common stocks, when and how can you determine that the cause is worthy, and therefore, validate the value and intelligence of being persistent and patient? The answer is quite simple and is revealed by what you focus on. When you are only focused on stock price you can be easily misled into making horrific investing mistakes. A dropping stock price engenders fear, which as we all know is a powerful emotion that can make smart people do dumb things like selling a valuable business at the bottom of a market for less than it’s worth. This is reactionary behavior rather than intelligent behavior.
What The Great Recession Taught Me About Dividend Growth Investing
Most investors take their lead from stock prices. If they buy a stock and it goes up, they consider it a good stock. If they buy a stock and it goes down, it’s a bad stock. In all fairness, for most investors, stock prices are all they have to judge their decisions by. However, there is a primary reason why I start this section out by discussing stock prices. Investors whose focus is solely on stock prices are not investors under my strictest definition of an investor. Instead, from my perspective, they are speculators in the stock market. Personally, I do not speculate in the stock market - never have and never will.
As it relates to common stocks, I consider someone a true investor when they are focused on becoming an owner/partner in a good business. Therefore, to my way of thinking, the true investor is primarily focused on the business they own. Consequently, they are positioning themselves to be owners of the business they invested in for a long time to come. Therefore, it logically follows that their primary attention is best placed on the operating results that their business generates on their behalf as owners.
Most importantly, the true investor that buys their investment from the stock market understands going in that it is an auction. As such, they understand that prices will fluctuate as other people place bid and ask orders continuously. However, since they have no intention of selling their business ownership in the near future, the daily, weekly, monthly or even yearly fluctuations in price are of no interest or concern to them. They are primarily interested in and concerned about how the business is doing, because from their perspective they own the business, not the stock.
At this point, I would like to turn our attention to the Great Recession and the lessons it taught about dividend growth investing. First of all, I believe that most everyone would agree that the Great Recession of 2008 was severe. In fact, it was one of the worst recessions our country ever experienced, with the exception of the Great Depression of 1929. Consequently, I don’t want any reader to think that I do not recognize and acknowledge just how