Friday, May 29, 2015

How Worried Are You?

A friend asked me this week, given that you hold stocks how worried are you about a crash or major correction? Charlie Munger was asked a similar question during 2009, and his answer came to mind - "zero."

There is good evidence why that's the case. For investors who are heavy into cyclicals, biotechs, nanotech, tech tech, and all manner of flavor of the month (Michael Kors is hot, oh wait its not), there probably should be some concern. After all, there are plenty of risky stocks. Does that mean "the market" is risky? I do not think so, at least for some corners of the market where defense is prized over offense. So to the evidence, here is the ten year dividend returns for the WMD portfolio members.

Do I think the prices in the stock market are overdue to pull back by a double digit percentage? Sure. I thought it was overdue last year, too. But we just saw a massive pullback in 08-09, which was smack in the middle of the chart above. You know what? Its pretty hard to spot the impact looking at the dividend returns from wide moat companies.

The ability to pay dividends through a crisis like 08-09 is in itself a margin of safety, it shows the company's cash flows are stable, and the cash is useful to an investor who may be able to reinvest it at better prices. Its not to say that investors should be smug, the going in proposition with this type of investing is avoiding mistakes after all, its not swinging for the fences. Will the markets pull back? Sure, but like Buffett says - predicting rain doesn't count, building arks does.  Wide moat dividend payers are as close to an ark that can weather 08-09 storm  as an investor can reasonably expect to find. The quality companies not only manage through but come back even stronger, because they can reinvest through the crisis and take advantage of bargain prices.


  1. Excellent little post. Thanks for that. Certainly, building a portfolio that you would be happy to hold through a correction is a key part of the planning. It may be tantalising to reach for a growth stock now and then, but the dividend payers provide a critical ballast to keep your ship going in the right direction no matter the market "weather".

    Love the Buffett quote. Never bumped into that one before.

  2. TRI,

    As long term investors, our holding periods are measured in decades, not years. Because of this long period of equity ownership, we expect to go through multiple cycles of raising and declining interest rates, stock market panics of various forms, shapes and sizes, plus several recessions.

    As Charlie Munger has said, if you are unable to hold on to your stocks when the market falls by 50%, you should not be in equities.

    Best Regards,

    Dividend Growth Investor