Discard Thumb rules!
We should not become slaves to some of the tenets of investing wisdom that we have heard. Let us look at some of them
- An investor should invest 100 minus age in equities
- Equity markets will always give a REAL return if you hold shares for at least 5 years….etc.
When I started investing in 1979 I being a true value investor (I did not know these words then) would always look for shares that paid dividend – and I wanted 10% dividend yield. Remember dividends were taxable then, but I did not have to worry as I did not have taxable income.
I did find shares like Hdfc Ltd, Tata Power – which were dull boring shares but giving a very good dividend yield, and I did buy them. However the dividend yields now are in the region of 1% – or lesser for companies which are growing well. So will my ‘strategy’ of buying dividend yield shares work now? Nah.
No, I am not saying it, Ben Graham is saying it. He said it in a speech delivered long ago…
“Let me now point out a striking area in which the uncertainty of the proper valuation of common stocks is brought to the fore.
That is this very question of the relationship between dividend return on stocks and the interest rate on bonds. For fifty years or more it was a tenet on Wall Street that stocks should yield considerably more than bonds. In speculative markets stocks might rise until their yield became less than that of bonds. But this very development was a sure sign that you were in a dangerous market – one heading for a bad fall.
Well, since 1958 stocks have been yielding considerably less than bonds, with no sign of a return to old relationships. Hence my broker friend found this concept increasingly hard to stick to. About two years ago, actually not very long before the big market break, in a huge newspaper advertisement he abandoned this concept completely, said it was all bosh to talk about stock yields as the basis of valuation, claimed the main thing was the psychology and attitude of the public; and asserted this factor was strongly bullish and justified confident buying of stocks.”
Not very long ago people would buy a car and insist on selling it ONLY at a price above their cost. So you went and bought an Ambassador for Rs. 30000 and used it for 9 years. Then you went and sold it for AT LEAST Rs. 30000. If they got an offer for Rs. 29000, they would show the invoice and say “I am not trying to make profit…I should at least get my cost” and justify their stand.
When it comes to investing what happens to the investment portfolio of a 102 year old? How much should he invest in shares?
What happens if the Real Estate prices stop increasing? What if we are forced to sell below our cost price after using it for 10 years?
So do not just accept rules that have been handed over to you.
Each client, asset class, time period is different. Keep thinking, and you will know which ones to keep and which ones to abandon!
Ajay
“Well, since 1958 stocks have been yielding considerably less than bonds, with no sign of a return to old relationships.”
What kind of yield are you talking about? Dividend yield is a very limited way of looking at stock returns if the majority of earnings are not distributed. Perhaps back in the 1950s this was appropriate as the capital structures of the listed companies back then was different compared to today where, for most promising companies/industries, re-investment of profits/dividends is required.
In recent decades it has been rightly understood that the yield on stocks is comprised of distributed dividends and retained earnings, hence most people refer to ‘earnings’ yield when valuing stocks. By this measure stocks are still much ahead of bonds.