Thursday, October 4, 2012

Positive Outlook

Several days ago my wife and I went to a surprise birthday celebration for one of our friends.  While we were waiting for the guest of honor to show up, we talked with others in attendance, most of whom work at the same place that I do.  The topic of conversation moved to saving and investing.  I met another guy who had been following a dividend growth strategy for several years.  He reported being pleased with his progress so far.  I told him I had been doing my own research into dividend-paying stocks as well and had just started investing this year.

Another guest overheard our conversation and expressed his own opinion of the viability of long-term investing.  He said he was concerned with the direction the country was going, and expressed fear that dollar-based assets would significantly lose value in the coming years due to inflation and the monetary policy of many first-world nations.  He said that lately he had been picking up gold coins at antique dealers and auctions and hiding them in his house.  When pressed, he also admitted to owning some Wal-Mart stock that he bought a number of years ago.  (Maybe WMT is immune to inflation?)

I found the contrast between the two investment philosophies intriguing.  Both of these men work for the same company, doing basically the same job, and yet their investment philosophies could not be more different.  This was more than a difference in risk tolerance or asset allocation.  This difference centered around their future outlook.  One had at worst a neutral view of the future, while the other held a very dim view of the coming years.

I suppose any long-term investor has to have a minimally positive outlook on life in order to be willing to save and invest in stocks (day traders and short sellers excepted).  Whether you are investing with an eye on dividends or capital appreciation (or some combination of the two), it does not seem logical to invest cash in intangible assets unless you believe that the future holds some promise of stability and prosperity.

4 comments:

  1. My thoughts:

    I think many of the dividend growth type companies will be able to weather periods of increased inflation. They can increase the prices of the products they sell. Take KO for example. At the convience store closest to me I can buy a 20oz for $1.50. Back in highschool I remember getting a 20oz coke for $.90 from a vending machine (because the machine gave me a silver dime back as change one time). People enjoy Coke and are willing to pay more for the products over time. Same with McDonald's Big Macs, Marlboro cigarettes, etc. These companies have prospered and raised dividends for many decades, I have confidence that they will continue doing so. KO has increased its dividend for 50 years through periods of high inflation, wars, terrorist attacks, recessions, and everything in between. When they have fully saturated the world and the world population growth grinds to a halt I'll be concerned about KO.

    Personally I'd be worried about holding bonds and fixed income more than stocks if you think high inflation is near.

    Gold is interesting though. I've always looked at it as a store of value. Yet as the US continues to bury itself in debt and expand the money supply gold has done well. There is a limited amount of gold and an increasing amount of dollars. I can see where he's coming from. Until gold can somehow pay me interest I'm not interested in owning it. I don't want to sell assets in retirement, infact that is the complete opposite of what I'm trying to achieve.

    To each there own, there are many strategies that work.

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    1. Gold is weird. On its own it is very limited in its usefulness. Its worth comes from its scarcity. It represents the huge amount of labor involved in extracting it from the earth. But it doesn't work for you, and it's heavy, and it requires careful storage. Even if my friend finds a perfect hiding place in his house for all of his coins, he is still vulnerable to a fire which could either damage or scatter or bury the gold, or else expose it to looters.

      Gold may have a role as part of an overall strategy, but the gold-heavy strategy seems questionable in my mind.

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  2. I think both of these investing philosophies are worth a look in most people's portfolio. I like the idea of holding some tangible assets as a hedge against inflation and as an insurance policy against the government. At the same time, I agree you need some optimism that companies will keep growing their earnings and the economy will keep ticking. I personally hold 50% of my investable assets in stocks, and the rest in a mixture of bonds, real estate, commodities, ... and gold.

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    1. I don't mean to imply that gold itself is a bad investment. Like many other kinds of assets, it has its role to play in the name of diversification and as a hedge. I do however think it is telling when gold makes up the largest asset class (by far) in someone's portfolio.

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