People Are Funny

Be hon­est. When you looked at your 401K options, how did you eval­u­ate your mutu­al fund selec­tions? Wasn’t past per­for­mance one of the main things you con­sid­ered?

Why don’t you have the same stan­dard for eval­u­at­ing indi­vid­ual stocks/companies?

Maybe because the stock mar­ket seems more ran­dom? A mutu­al fund has a man­ag­er (or has man­agers) who man­age the strat­e­gy ((Yeah, they have a strat­e­gy. Can you explain it? No? Then why are you invest­ing in it?)). It seems more intu­itive to look at that man­ager’s past per­for­mance and make a deci­sion. When you eval­u­ate a com­pa­ny, how­ev­er, it’s not per­son­al­ized. And, when you look at met­rics — like prof­it or rev­enue, they don’t seem to cor­re­late to stock per­for­mance. The cog­ni­tive dis­so­nance — see­ing good prof­it results but then watch­ing the stock drop leads to mis­trust and con­fu­sion.

Well, you’re look­ing at the wrong met­ric for mak­ing pre­dic­tions based on past per­for­mance. Stock prices go up-and-down seem­ing­ly at ran­dom. There’s a lot more at play than just the com­pa­ny’s per­for­mance. What’s the mar­ket sen­ti­ment? Are traders gam­ing the sys­tem? Is there some­thing you don’t know? Markets are fair, but not ratio­nal. It is a game, to some extent.

The stock mar­ket is a game. And if you don’t real­ize that, you’re sad­ly in the group being gamed.

— MG Siegler (@parislemon) April 17, 2013

Unlike the stock price, div­i­dends are a met­ric where one can rea­son­ably con­sid­er past per­for­mance. They’re less volatile, and they have more ratio­nale behind their move­ment.

If you could find a stock that increased it’s div­i­dend every sin­gle year for the past 25 years, or even the past 50 years, would you feel you could ‘rely’ on it being increased next year?

I know the stan­dard ‘cov­er your ass’ dis­clo­sure in the finan­cial world is “past per­for­mance is not an indi­ca­tion of future results”. That said, if a com­pa­ny has raised their div­i­dend each year for 25 years I believe that it’s a good indi­ca­tion it’ll raise it again next year, even a token amount just to keep the streak going. And, in cas­es where the div­i­dend streak fails, there’s a clear rea­son­ing behind the fail­ure which helps us under­stand how the game works and make bet­ter deci­sions in the future. For exam­ple, when GE broke it’s streak of about 30 years of con­sec­u­tive increas­es in 2009 dur­ing the lat­est reces­sion. Makes sense that they had to cut the div­i­dend. Of course, now they can “only” claim that “GE has paid a div­i­dend each quar­ter for over one hun­dred years.” (scroll down to the Dividend History sec­tion of the page if you fol­low that link.)

How does one find a com­pa­ny with such a div­i­dend record? Simple. The div­i­dend aris­to­crats.