The Least Important Question, or ...

... Why Dividenders Buy Well and Never Sell

The important question is not “why did the market crash”; the important question is “why did the bubble happen in the first place”.

Who better than Dr. John Hussman to take us through this?

For those of you who don’t know him, Dr. Hussman is Head Honcho of Hussman Econometrics Advisors (http://www.hussmanfunds.com). Likely the smartest man at any neighbourhood barbeque, he holds a Ph.D. in economics from Stanford University and a Masters degree in education and social policy. He has also been a professor of economics and international finance. (I cringe at my own breathtaking underachievement – what have I been doing with my life?)

As investors, we worry about the market, its ups and its downs. Perspective is tough when our money is at stake. To combat our own anxiety, it is good medicine to look up from our portfolios occasionally and take in a bigger picture view. Voila, Mr. Hussman enters stage left…bringing John Kenneth Galbraith (one of the most widely read economists of the 20th century) along for the ride.

(Interesting factoid: JKG was born in Iona Station, Ontario very near to Dave’s Truck and Auto. For those of you from that neck of the woods, feel free to brag about this to your friends.)

John Kenneth Galbraith, esteemed economist that he is, has something to say about market crashes.

I interrupt our regular programming for a chart ...

*** for those interested, see below for the technical details of the chart.

If what caused the crash is not the important thing, let’s look at what caused the bubbles.

1999 – Dot Com Bubble

Remember the euphoria about the ‘new economy’? How everything was different now and that we didn’t need bricks and mortar? These were the heady days when the growth of a young company was measured by how many customers they had and not on the profitability of those customers. Think… gaining market share at all costs. Everyone was going to be an internet millionaire! That was all great, until it wasn’t.

2007 – Mortgage-backed securities crisis (aka the financial crisis)

So the banks decided anyone and everyone should have a mortgage or two, whether they could afford it or not (subprime…also spelled: S.H.I.T.). Then they packaged up the worst of the mortgages all together and sold that package as investments to the unsuspecting public. That was all great too, until it wasn’t.

If reading financial books leaves you yawning, you can watch the very entertaining (and enlightening) movie The Big Short that explains what the hell happened. As a bonus, the movie stars Ryan Gosling and Brad Pitt – very compelling eye candy; who doesn’t want their financial lessons from a couple of Hollywood hunks?

2020-2021 – The Covid Crisis (or whatever we decide to call 2020-2021-2022)

Our current situation is a bubble caused mainly by unprecedented government spending (I’m not saying it’s unnecessary, just unprecedented) and at some point the debt will come due. It’s all great…until it isn’t.

And now, back to our regularly scheduled programming …

So, now you ask, what does this mean to me? As a DIY Dividender:

You are not looking to capitalize on capital gains. You buy for income.
You don’t fool yourself by trying to buy low and sell high.
You are an investor, not a speculator.

This strategy is the comfy blanket that insulates you from market ups and downs. From the couch, you can coolly observe the madness that drives the bubbles and the panic that causes the crashes and know that your income stream keeps rolling on in – effectively minimizing (if not eliminating) your dependency on the market value of your portfolio – a loss is only a loss when you sell.

And what’s our motto? Buy Well and Never Sell!

*** The Technical Details

This chart, from the Hussman Funds market comment, shows the ratio of market capitalization (of non-financial companies) to corporate gross value-add.

Market capitalization is the stock price multiplied by the number of shares outstanding, or how the stock market values a company.

Gross Value-Add is (roughly) a calculation of profits, or closer to what the company value truly is.

See the full article here.

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