When the stock market has a bad day, (like it did this Wednesday) do you feel bad about losing money? When the economy goes into recession and markets drop day-after-day, do you feel yourself getting depressed?
“Oh no! All that hard work, down the tubes! Years of savings destroyed by the uncaring stock market!”
This fear is what keeps people from investing, and actually achieving financial independence. Instead of investing, they hoard cash and buy low-return investments to keep their dollars “safe”.
That’s great, except it’s a completely wrong-headed way to think about investing!
Yes, it’s time once again to get on my angry pulpit!
Falling Markets Are Actually A Good Thing!
“Dow sheds 370 points; stocks close lower and wipe out monthly gains on Trump fears”
“The Dow and S&P recorded their worst day since September of last year.”
“The Nasdaq composite posted its worst session since June 24.”
On Wednesday, these headlines absolutely get my tentacles tied in knots! The financial media may be right about the facts, but was ABSOLUTELY WRONG in the interpretation.
As an investor in shares of companies (either directly or indirectly through funds), I absolutely want prices to fall.
Think about it — if I go to a restaurant for avocado toast, and it happens to be 20% off today… then that’s fantastic! I do my little happy dance and eat my toast, because I’m paying 20% less for exactly the same thing! Better value for my money.
Investing is no different — I want to buy my avocado toast at the best possible price. On days when prices are down, that’s a good thing! I’m buying business assets for less!
So why do people constantly want shares to go up? It’s an exceedingly common way to think about investing, but has people looking at exactly the wrong thing — market prices.
You Don’t Invest In the Stock Market
Part of the reason why I think this backwards thinking exists, is because people believe they’re investing in the stock market.
Sorry, no! You’re not investing in the stock market!
A market is just a place where things are bought and sold — Like a farmer’s market, or that fancy hipster organic market where you feed your avocado toast addiction. You don’t actually invest in the market itself! (Not unless you’re buying shares of ICE. Then, yes, you would be an actual owner of the NYSE.)
Instead, you’re buying pieces of businesses at the market. If you’re buying index funds, you can think of a fund as one giant business you buy at the market.
When the stock market “goes down” on any given day, you’re not actually losing any money (assuming you don’t buy or sell).
What’s happening, is Mr. Market is merely offering prices. On a “down” day. he’s not feeling very confident in future prospects, so he offers a low prices. On “up” days, he offers higher prices.
You don’t have to take Mr. Market’s offer! As an owner of a business (or businesses) you should know exactly what it’s worth based on the state of the business….not what some random asshole offers on any given day.
Think about it — if Mr. Market offered you $50 for your house or your car, would you take it? OF COURSE NOT! Because you know your house is worth far more than that. Besides, you still need to live in your house and drive your car.
But what if Mr. Market offered to sell you his share for $50? You’d absolutely love to buy at the discounted price!
Stocks (and avocado toast), are absolutely NO different.
In most cases, when I invest, I plan to own my businesses for decades. I’m a very long-term shareholder.
Unless I see a business environment deteriorating (like I did recently), there’s absolutely no reason why I would need to sell. Instead, I’m mostly waiting around for Mr. Market to sell me his shares at silly prices.
This is why I focus on dividend growth investing. My money comes from the business, not from trying to buy shares low and then selling high.
My early retirement is derived from the income generated by assets, NOT from market price differentials. I simply sit back and sip my iced tea… occasionally checking to see if any new dividend checks arrived.
Ask yourself — “Where does your money come from?”
But What About Retained Earnings?
Inevitably, whenever I talk about dividend growth investing, some smart-ass in the room always asks about retained earnings…
“But Mr. Tako, most large companies retain a significant amount of money to fund future growth. Those retained earnings should be reflected in growing stock prices. Selling those shares to fund my retirement should be exactly the same as a dividend.”
Yes, well it’s not exactly the same.
When a company retains earnings, it’s not like that money sits around in a bank account. In most cases that money can (and will) get spent on ANYTHING — hiring new people, paying for private jets, “research and development”, gold plated washrooms, executive bonuses, catered lunches, corporate “retreats”, new carpet for the boardroom, etc etc.
While all those things make work “fun” for certain individuals, they don’t increase the ‘asset’ side of the balance sheet from which shareholders benefit.
Typically only a small fraction of retained earnings gets spent on assets that generate additional cash flow.
Remember, you have absolutely NO control over how retained earnings are spent. You hope management does something smart with the money.
Hope is not a strategy. Certainly not one that’s going to fund your early retirement.
The beauty of a good dividend is that YOU (the shareholder) get to waste that money, not some corporate executive who wants to “live the good life”.
In my (sometimes) humble opinion, the behavior that creates this irrational thinking, is watching prices… not watching actual business activity.
Every day people sit in their cubicles, with real time quotes pushed directly into their eyeballs. They watch the Dow or the S&P, and maybe a stock or two… because that’s where the vast majority of their money is invested.
People call this “investing”, but they never look beyond share prices. Is that really “investing”, or is it merely “speculating”?
One of the more common themes of my blog is to “dig deeper”. Go to the places where mere mortals fear to tread. Go deep. Head to the depths where only the Kraken resides. Don’t be just be a know-nothing investor.
Find the dividend growth rate of the S&P 500 in relation to earnings growth. Calculate the earnings yield of your favorite fund. Understand how corporate earnings change in relation to GDP growth. Read 10K’s and 10Q’s. Learn how your businesses work, and where your money comes from.
Whatever you do, don’t just watch prices rise and fall.
Now… if you’ll excuse me, I’m going to go “invest” in making some avocado toast.