The Intelligent Investor

“Everyone Who Thinks the Stock Market Is a Game Loses”

Interesting Read from Wall Street Journal

Good afternoon. How long ago does last year feel to you? To me, New Year’s Eve feels more like six years ago than six months ago. Yet if you’d pulled a mini-Rip Van Winkle and started a six-month nap on Jan. 1, you’d wake up today and think not much had happened in the financial markets.
A typical portfolio of 60% stocks and 40% bonds is down less than 1% for the year to date. To get back to the breakeven point, however, investors had to survive the breaking point, a 34% loss in five weeks. That was followed by an equally shocking 40% bounceback. Together, it was one of the sharpest collapses and swiftest recoveries Wall Street has ever seen. The first half of 2020 should remind us that investing isn’t about conquering markets; it’s about mastering ourselves. To be an intelligent investor is to recognize that you’re in a lifelong struggle for self-control — an unending effort to keep yourself from yielding to fear or greed, believing that you know what the future holds or letting short-term news knock your long-term plans off track. Self-control means not becoming your own worst enemy. My latest column, Markets Bombed, Investors Carried On, shows that the vast majority of individual investors didn’t lose their heads during the crisis. Some did, of course. One of the most common mistakes I’ve seen investors make is to treat investing like a sporting event in which, after every big play, the markets say to them, “Your move.” But investing isn’t a game, and you almost never have to move. It’s a long, repetitive process. As the investment consultant Charley Ellis told me many years ago: Go to a continuous-process factory sometime — a chemical plant, a cookie manufacturer, a place that makes toothpaste. Everything is perfectly repetitive, automated, exactly in place. If you find anything interesting, you’ve found something wrong. Investing is a continous process too; it isn’t supposed to be interesting. It’s a responsibility. If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses — everyone, to the last man, woman and child. So, the purpose of an investment policy is simply to ensure that your continuous process never breaks down…. Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you’re guaranteed to be wrong. Trading a little can be entertaining and fun — so long as you limit how much you risk, you can afford to lose it all and you keep your speculation isolated from your investing. Self-control is such a delicate balance that a short hot streak of irresistible gains, followed by inevitable losses, can ruin years of discipline. If you made it to June 30 without changing your investment plan, congratulations.
Henry Ossawa Tanner, “Daniel in the Lions’ Den” (ca. 1907-18), Los Angeles County Museum of Art
And now, let us together wish a hearty good riddance to the first half of 2020. The 4th of July falls on a Saturday this year, so there’s no Weekend WSJ this coming week. The week after that, I’m off. The next edition of the newsletter will be July 14. Talk to you then! Be well and invest well, Jason Did a friend forward this email? Sign up here.  
Some Stories You Shouldn’t Miss
Here are some of the best things I found last week outside The Wall Street Journal: Don’t blame the stock market’s crazy recent swings on individual investors, argues John Rekenthaler of Morningstar Stock returns that don’t include reinvested dividends distort investors’ decisions, say finance professors Sam Hartzmark and Dave Solomon Now — not just December — is the time to think about minimizing capital-gains taxes, urges portfolio manager David Allison Investigative journalism can find what regulators overlook: behind the Wirecard accounting scandal, by Financial Times reporter Dan McCrum (video; free registration required) We take the time of day for granted, but time itself used to be for sale, scientist Ainissa Ramirez explains Poker proves that a large part of life isn’t skill but luck, says journalist Maria Konnikova The social and cultural history behind barbecuing for the 4th of July is rich, shows food writer Adrian Miller Here are some of the best things I read recently in The Wall Street Journal: A stubborn and tireless doctor saved the life of a young Covid-19 patient against all the odds, by Jennifer Levitz Parents are getting huge discounts on college tuition, up to 40% — just by asking, writes Josh Mitchell Companies are cutting back on the proliferation of product choices, and consumers may be better off, report Annie Gasparro, Jacob Bunge and Heather Haddon What happens to the economy, asks Justin Lahart, when the stimulus money runs out? How operatives linked to the Chinese government have poured money into U.S. politics, by Brian Spegele eBay Inc. allegedly intimidated and harassed critics by shipping them cockroaches, funeral wreaths and porn videos, report Kirsten Grind and Sebastian Herrera How Lin-Manuel Miranda and his brilliant musical Hamilton are responding to the protests for racial justice, by David Kamp  
Money Mailbag
Q: Hello Mr. Zweig, Aging investor and wife well into retirement years. Conservative in nature…Modest pension income…Available investment assets…held mostly in cash or equivalents. Expecting low interest-rate environment to last for foreseeable future. Understanding that market timers usually lose, but nonetheless expecting that recent market bottom will be tested and broken on the downside this year. Requiring modest income for wife and self only. Wondering if you have pro and con arguments about the wisdom of investing in good-quality, dividend-paying equities. Perhaps some ETF’s or mutual funds tracking the “Dividend Aristocrats.”  Thanks for your consideration.  I’ll keep an eye on your future columns.  — Bert Williams
A: “Dividend Aristocrats”are companies that have raised their dividends for 25 years in a row. That doesn’t make them as safe as bonds, however. A portfolio of S&P 500 Dividend Aristocrats lost almost 22% in 2008, largely because many were bank stocks that got crushed in the financial crisis. As I wrote in 2009:  The whole point of holding bonds and cash is to provide income and safety to temper the risks elsewhere in your portfolio, like the risks of owning stocks. No matter how fat a dividend they offer, utilities and other high-yielding stocks are still stocks. Preferred stocks, convertible bonds and junk bonds behave like stocks. Piling this stuff on top of the equities you already own makes a portfolio riskier, not safer. Dividend Aristocrat index funds weight stocks equally. The resulting portfolios are much different than the overall stock market, with only a few dozen total holdings and a big stake in industrial and consumer-staples stocks. That suggests they could do well if the economy rebounds quickly from the coronavirus pandemic — but languish if it doesn’t. High-yield aristocrat strategies have their own quirk, investing the most in the stocks with the highest dividend yields. As I explained in January, that can force them to gorge on stocks with falling prices (and, thus, rising yields), only to have to sell if those stocks fall below a minimum market value. Such disruptive trading can hurt returns. The yields on Aristocrat funds, about 2.7% to 3.2%, aren’t much higher than the 1.9% yield on the S&P 500 itself. So they don’t add a lot of extra income in exchange for the reduced diversification and increased concentration relative to the S&P 500. They yield a little more than bonds but carry quite a bit more risk. In the first quarter, the ProShares S&P 500 Dividend Aristocrats ETF lost 23.3%, while the S&P 500 lost 19.6%. Higher income never comes at lower risk.   → Have a question, thoughts you’d like to share, a story idea or a tip you think I or my WSJ colleagues should investigate? Just reply to this email and tell me about it.  
Thomas Eakins, “John Biglin in a Single Scull” (1873), Yale University Art Gallery
Last Word
“A lot of people say discipline is doing what you’re supposed to do, when you’re supposed to do it, the way it’s supposed to get done – do the right thing, the right way, the right time, all the time. But I think self-discipline is something I define a little bit different….Here’s something I know I’m supposed to do that I really don’t want to do. Can you make yourself do it? Then over here there’s something that you know you’re not supposed to do, but you want to do it. Can you keep yourself from it? If you can make those sort of choices and decisions, you’re always going to be able to stay focused on the path of what you have to do to accomplish the goal that you have.” — Nick Saban

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