Since 1900, there have been two sets of conditions in which it has been extraordinarily difficult to be a long-term, buy-and-hold investor. Those were the Great Depression conditions that surrounded 1973 (no duh), and the 1973 bear market in which the earnings of even great non-cyclical companies (think Pfizer, Johnson & Johnson, PepsiCo, Coca-Cola, Procter & Gamble) collapsed. 2008 is an honorable mention if you were an investor in the financial sector.
With many blue-chip stocks cutting their dividends in half and earnings falling by at least that much (and prices falling by 75% or more), you couldn’t assess the present fundamentals of the company and see that the prices were irrationally cheap—maybe in the narrow sense that you saw that the prices plummeted more than profits, but it had to be weird to see AT&T go from earning $4.88 per share to $2.8 per share, Procter & Gamble go from earning $3.25 per share to $1.79 per share, and so on. If that’s what the dominant firms were doing, you can guess how the rest of a stock portfolio might have fared.
In ’73, you saw corporate profits decline 25% across the board for most S&P 500 firms, presenting a milder case of the Great Depression where a portfolio containing 3M, Colgate-Palmolive, Procter & Gamble, Coca-Cola, Exxon, and Emerson Electric still got to see dividend increases throughout.
When I get asked about what the worst-case scenarios for blue-chip dividend investors can look like, that’s what I have in mind—dividend cuts and collapsing earnings that require you to think out to five, maybe even ten, years ahead to see the rebound in earnings power because the dividends being mailed to you are on the decline and when you checked out the annual report, you would see substantially lower reported profits.
Hard investing conditions require broad dividend cuts and a decline in profitability to match that.
I mention this because sometimes I wonder whether the general prosperity (from a stock market perspective) of the 1980s, 1990s, and parts of the 2000s have created false expectations for consistent linear growth in the 9-10% range and created a willingness for investors to ignore the inevitable fluctuations in the business cycle to discard otherwise excellent companies that aren’t perpetually performing to expectations.
You’re seeing investors nowadays talking about discarding McDonald’s and IBM from their portfolios because they don’t like McDonald’s stagnating store growth in the United States or IBM’s inability to grow its revenue. These aren’t difficult business conditions, relatively speaking. Heck, McDonald’s is growing earnings per share by 5% annually, and IBM is growing earnings per share by 7-9% annually. These businesses are growing the profits that each share earns, and you can see it right before your very eyes, and yet, there is a vocal minority of shareholders that are talking about liquidating their ownership positions.
If you get bothered by a business that is growing while we are in a generally upward moving market, you should reconsider your commitment to stocks. Seriously, if those facts bother you, what on earth would happen if a 1933 or 1973 condition showed up? The kind of person who gets worried and sells a McDonald’s or IBM position while they are growing profits per share is likely going to dump his holdings when real adversity—in terms of dividend cuts and collapsing earnings—show up sometime in the next few decades as is inevitably the case.
Maybe it would be good if you learn that stocks aren’t your thing, sell now while there is no real damage, and pursue a life in real estate or something that doesn’t contain frequent quotations because if the current business conditions are bothersome to you, what would you do when something truly terrible for your business holdings happens?
Originally posted 2014-10-24 08:00:49.