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This Time It’s Different

The late Sir John Templeton once commented that “the four most expensive words in the English language are ‘this time it’s different.’”

No truer words have ever been spoken.

It’s true for degenerate gamblers, drug addicts and serial womanizers. It’s true for politicians peddling failed policy ideas. And it’s true for ne’er-do-well employees or business partners who can never quite seem to get it together. No matter how many times they tell “this time it’s different,” it never is.

But perhaps nowhere is the quote more appropriate than in finance. This seems to be one area of human endeavor where people seem constitutionally incapable of learning from past mistakes.

Making loans to uncreditworthy borrows? Banks seem to do that about once every ten years like clockwork. In fact, they’re doing it now. Delinquent auto loans recently hit a new all-time high.

Lend money to perpetual basket cases like Turkey or Argentina? Bond holders seem to do that once per decade or so as well.

And getting caught up in the latest, greatest bubble?

Sigh…

Yes, that seems to be a rinse and repeat cycle as well.

I pondered this as I read Barron’s last Saturday, [CS1] as is my weekly ritual. I wake up and play with my kids for an hour before making an espresso and unrolling my issue of Barron’s.

Writing for Barron’s, Adam Seessel of Gravity Capital Management, commented that “reversion to the mean is dead.”

In other words, the classic value trade of buying beaten down, out-of-favor stocks and selling expensive hype stocks is over. Value investing no longer works:

As for returning to normal, does anyone really believe that is going to happen, for example, to Amazon.com or Alphabet? E-commerce and digital advertising still have only a small share of their global market, despite nearly a generation of growth. Other industries—ride-sharing, online lending, and renewable energy—are smaller still, but also show every sign of being long-term winners. How are these sectors going to somehow revert to the mean? Conversely, how will legacy sectors that lose share to these disruptors return to their normal growth trajectory?

Reversion to the Mean is Dead

Seessel isn’t some wild-eyed permabull growth investor. By disposition, he’s more of a value investor. But after a decade of underperformance by value investing as a discipline, he’s wondering if it really is different this time.

It’s a legitimate question to ask. Not all trades revert to the mean. Had you been a value investor 100 years ago, you might have seen a lot of cheap buggy-whip stocks. But they ended up getting a lot cheaper as cars replaced horse-drawn carriages.

Likewise, might banks and energy companies today be at risk today from new disruptors like green energy and peer to peer lenders? And will the winners of the new economy just continually get bigger?

Well, maybe. Stranger things have happened. But before you start digging value investing’s grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.

The following is a snippet from Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:

There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.

“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much…

I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.

The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds.

Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Tech stocks rolled over and died not long after he published this, and value stocks had a fantastic run that lasted nearly a decade.

Today, I see shades of the late 1990s. The so-called “unicorn” tech IPOs this year were Uber and Lyft. Neither of these companies turns a profit, nor is there any quick path to profitability. These are garbage stocks being sold to suckers at inflated prices.

No thanks.

I’ll stick with my value and income stocks, thank you very much. And in Peak Income, we have a portfolio full of them.

This month, I added a new pick offering a 7% tax-free yield. That’s real money, and I don’t have to worry about selling to a greater fool.


 [CS1]https://www.barrons.com/articles/reversion-to-the-mean-is-dead-investors-beware-51556912141

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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20 New Dividend Stocks

John D. Rockefeller – one of the wealthiest men who ever lived – once said that the only thing that gave him pleasure was to see his dividends coming in.

That’s a strong statement. But if Rockefeller meant it, he must have truly been the happiest man in the world. Rockefeller was the founder and majority of Standard Oil, which was the predecessor of both ExxonMobil and Chevron. And he insisted that 2/3 of the annual profits of the largest energy monopoly in history be paid out in dividends. That’s a lot of income rolling in every quarter.

For most investors, a dividend is simply a check that arrives in the mail every quarter (or more likely gets posted to their brokerage account). And to be sure, this is a nice perk. Getting a regular stream of income allows you to realize regular profits along the way without having to sell your stock. You can think of it as enjoying the milk from a cow without having to slaughter it for meat. Sure, steak might be tasty. But once it’s gone, it’s gone, whereas the milk can last a lifetime.

But dividends are about more than just income. They’re about being a better kind of company. Earnings can be manipulated. Even sales can be manipulated. But dividends have to be paid in actual cash. There’s no amount of dodgy accounting that can fake cold, hard cash.

Furthermore, knowing that cash has to be on hand to pay dividends forces management to be more disciplined. They are less likely to burn shareholder money on expensive vanity projects when they know they might need that cash to fund the dividend next quarter. They’re also less likely to dilute their shareholders with stock-based employee compensation or secondary stock offerings, as they’d have to pay dividends on any new shares created.

Some might argue that initiating a dividend is an admission by management that the company’s best growth days are behind it. But as Sonia Joao, President of Houston-based RIA Robertson Wealth Management explains, “Paying a dividend doesn’t suggest slower growth ahead. If anything, it’s the exact opposite. Precisely because the company expects durable growth, they’re more willing to part with their cash.”

This isn’t just academic. Dividend-paying stocks have been proven to outperform their non-paying peers over time. Research Ned Davis Research showed that the equally weighted S&P 500 index enjoyed a compound annual growth rate of 7.70% over the 1972 to 2017 period. But breaking the index down gave very different results. The dividend payers collectively enjoyed returns of 9.25% per year, while the non-payers lagged with returns of just 2.61%.

Even better, stocks that initiated or grew their dividends fared best of all, enjoying compound annual returns of 10.07% per year.

So, not only do dividend stocks put a little change in your pocket every quarter. They also massively improve the performance of your portfolio.

Today, we’re going to take a look at 20 stocks that have initiated a dividend in recent years. As these are all new dividend payers, not all are exceptionally high yielders. But all have made a commitment to start rewarding their patient shareholders with a regular cash payout.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Have a Plan and Stick To It

The difference in life between success and failure, more than anything else, is having a plan and sticking to it.

Whether you’re talking about launching a business, getting through Navy SEAL training, becoming a concert violinist, or even getting a date on Friday night; success comes from seeing a plan through to completion.

This is particularly true when it comes to investing.

Warren Buffett, the legendary Oracle of Omaha and by most accounts the most successful investor in history, is probably a little smarter than you or me. I say “probably” because Mr. Buffett has never published his IQ score, and measurements of intelligence can be subjective.

But, in Buffett’s own words, in order to be a great investor, “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ.”

To put that in perspective, the average IQ falls in a range of about 85 to 115. An IQ over 140 is considered genius level, and theoretical physicists Albert Einstein and Stephen Hawking were believed to have respective IQs of about 160 each.

So, according to Buffett, you need to be a little above average to be a good investor. But you certainly don’t need to be an Einstein or Hawking.

Buffett attributes his own success to “being greedy when others are fearful and being fearful when others are greedy.”

In other words, Buffett is Buffett not because of his intelligence but rather due to his emotional control, which allows him to stick to an investing plan even when most other investors are pulling the ripcord.

Now, I don’t claim to have Warren Buffett’s talents. But some of my greatest investment successes have come from being equally stubborn about seeing a plan through to completion.

I don’t have a large enough nest egg to retire today. But it’s big enough that I don’t really need to keep adding to it with fresh savings. Even with very modest growth assumptions, the savings I’ve accumulated already should be more than sufficient to take care of me and my wife in retirement when that day comes in another 20 years. Savings I continue to add just put the icing on the cake.

It wasn’t fantastic investment returns that got me to this point. It was having a savings plan and having the discipline to see it through to completion. I max out my 401k contribution every year, even when doing so is painful. Even when the market looks scary. Even when I’d prefer to blow the cash on something else or when I have to tell my children that I can’t afford something they want right now.

I’ve enjoyed competitive returns on those funds over the years, but the high savings rate has had a much bigger impact on my ability to grow my capital base than my returns.

As another example, I bought 288 shares of Realty Income (O) in 2009 that I swore at the time I would never sell. I committed to reinvesting my dividends into new shares and letting it compound… for the rest of my life. My children may sell the shares when I’m dead and in the ground, but I never will. When I’m old and gray, I’ll simply turn off the dividend reinvestment and take them in cash instead.

Well, after a little over nine full years of dividend compounding, those 288 shares bought for an initial purchase price of $6,620 are now 454 shares worth $32,383.

Using conservative assumptions on dividend growth, I would expect my investment to double every eight to ten years. So, in another 20 years, when I’m getting close to retirement, I’ll have something in the ballpark of $140,000 in Realty Income… still trucking along and throwing off dividends. And all of that on an initial investment of just $6,620.

Now, I’m not recommending you run out and buy Realty Income. I wouldn’t make a major new purchase at today’s prices. My point is simply that having a good plan – in this case buying and holding a high-yield dividend stock bought at crisis prices – works when you actually stick to it.

Disclosure: Long O.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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How to Build “Old School” Wealth

If you’ve read my work, you probably know that my grandfather was my inspiration for getting into this business. He did well in the stock market, and his enthusiasm for investing rubbed off on me.

My grandfather lived by his own homespun version of Peter Lynch’s advice to “buy what you know”; he had a strong preference for the shares of local companies.

Well, as it happened, my grandfather lived in Fort Smith, Arkansas, and there was a certain local company up the road in Bentonville that was shaking up the retail market in the 1970s.

You might have heard of it… goes by the name of Walmart (WMT)!

My grandfather never retired. Working was such an important part of his identity that he continued to go to the office until the very end. But the modest investment he made in Walmart shares ended up paying for my grandmother’s retirement, my college education, my sister’s college education, and my mother’s modest retirement today.

The funny thing is, that was never his plan.

He never expected to hit a home run like that in the stock market. He owned a small warehouse downtown, and he always imagined that, once he was gone, my grandmother’s expenses would be taken care of with the rental income from that property. (He owned that property free and clear of any mortgage, I might add…)

Renting out the warehouse ended up being more trouble than it was worth. My grandmother sold it, and she ended up living on her Walmart dividends, bond interest, and Social Security.

There are some important lessons we can learn here – they are the foundation of what we do in Peak Income.

To start, capital gains are nice, but you can’t assume they’re going to be there when you need them. That’s not something you can control.

As a man who lived through the Great Depression, my grandfather knew that. If you lived through the markets of the 1970s or 2000s, you might have gotten a similar lesson. Between 1968 and 1982 and from 2000 to 2013, the S&P 500 Index went nowhere.

If you’d been counting on capital gains to meet your retirement expenses during those stretches, you might’ve had to move in with your kids.

Second, diversification is critical – and “diversification” doesn’t mean owning five slightly different mutual funds. It means owning assets that don’t rise and fall together.

For my grandfather, this meant tying devoting significant capital to his small businesses and keeping his liquid assets divided roughly evenly among stocks, bonds, and cash.

For me, in today’s market, “diversification” means keeping my assets divided among complementary short-term trading strategies, longer-term income strategies, and income-producing real estate.

For you, the mix might be different. The key is making sure the pieces of your portfolio move independently of one another. It does you no good to save for a lifetime if it all gets flushed down the toilet in a major bear market.

And, finally, make sure you’re getting paid in cold, hard cash. It seems so “old timey” now, but my grandfather carried around a money clip with a big wad of cash in it. I don’t remember ever seeing him use a credit card.

Hey, times have changed. The only people carrying around wads of cash today are drug mules. But that doesn’t mean that cash isn’t king.

Investments that generate regular cash payments allow you to realize gains without having to sell anything. It’s like the old analogy of slaughtering a cow for meat versus keeping it alive for milk. (Remember, my family’s roots are in rural Arkansas…)

With the former, you eat well for a bit… but then it’s gone. With the latter, you can enjoy fresh milk for a lifetime… and you still reserve the right to slaughter the cow for meat later.

Dividend-paying stocks, REITs, MLPs, and other income investments are the same. You enjoy the milk every quarter… and you can still have your steak later if you ever decide to sell.

And, while you’re waiting, that cow just fattens up and produces more milk…

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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LyondellBasell Is Set for a Strong Second Quarter

The following is an excerpt from Best Stocks for 2019: LyondellBasell Is Set for a Strong Second Quarter

As we near the end of the first quarter, the competition is fierce in InvestorPlace’s Best Stocks for 2019 contest. Cannabis product maker Charlotte’s Web Holdings (CWBHF) is leading the pack, up 67% at time of writing, but onshore oil and gas producer Viper Energy Partners (VNOM) isn’t far behind at 29%.

Against this competition, LyondellBasell Industries (LYB) and its modest 4% would seem to be getting left in the dust.

But it’s still early, and we still have a lot of 2019 left to go. And I’m expecting LyondellBasell to make it a competitive race, come what may in the market.

LYB Stock Valuation

I’ll start with valuation.

A cheap price is no guarantee of investment success, at least over short time horizons. But it certainly creates the conditions to make outsized gains possible. LyondellBasell trades for 7.2 times trailing earnings and just 0.83 times sales.

To put this in perspective, LyondellBasell’s P/E ratio was over 16 in late 2012; by this metric LYB stock is trading at less than half its valuation of seven years ago despite price/earnings multiples expanding prodigiously across most of the stock market over that same period.

Likewise, LYB’s price/sales ratio has been bouncing around in a range of 1 to 1.4 since 2013. Today’s 0.9 takes the stock’s valuation back to early 2013 levels.

Again, a cheap stock price doesn’t guarantee a hefty stock return, at least not over any specific time horizon. But it certainly creates the conditions that make outsized returns possible.

To read the full article, see Best Stocks for 2019: LyondellBasell Is Set for a Strong Second Quarter

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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