Do You Really Know How Well Your Stocks Are Actually Performing?

With this article, I will attempt to illustrate what I believe is a more rational way to evaluate how well your stocks are performing. Good companies that have been overvalued for a long time, could become reasonable or even cheap again. FAST Graphs Friday Analyze out Loud Video: A Better Way to Measure Performance.

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Do You Really Know How Well Your Stocks Are Actually Performing?

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After reading comments in the Dividend Kings’ chat room it became clear that many of you are worried about certain stocks whose prices have fallen. Additionally, the recent market activity has shaken your confidence. In other words, falling stock prices are traumatizing many of you. Although I feel your pain, and simultaneously recognize that what is happening is real, I am also motivated to try and ease that pain by sharing how I have learned to handle tumultuous markets.

The stock markets are clearly extremely volatile lately and unnerving as a result. For the most part, this is attributed to fears surrounding the coronavirus outbreak. Personally, I agree with that sentiment, however, I don’t believe that the virus is the whole story. For some time now, I have been suggesting that for the most part the stock market is fully valued to overvalued in the general sense. Additionally, I have also been pointing out that premier blue-chip dividend growth stocks are for the most part even more overvalued than the market in general. This last fact is very relevant to dividend growth investors. The most recent article and video I posted on Seeking Alpha’s free section and here on Dividend Kings elaborate on these points.

Consequently, I have been subtly cautioning that any negative catalyst could easily revert stocks back to normal valuations. The coronavirus is obviously a quintessential example. However, it’s important to also add that the virus is not just a fear-based catalyst. There are certain industries and countries that will be feeling an economic impact. Hopefully, the impact will be shorter term in nature and not cause permanent disruption. Nevertheless, there can also be long-term benefits and opportunities associated with markets becoming more fundamentally rational than they have recently been. In other words, good companies that have been overvalued for a long time, could become reasonable or even cheap again.

Moreover, volatile markets create investor angst, always have always will. Additionally, it always has been and always will be human nature for investors to primarily judge their common stock investments principally based on stock price action. On the other hand, I personally do not believe that this is the best way to judge how well your stocks are truly performing. With this article, I will attempt to illustrate what I believe is a more rational way to evaluate how well your stocks are performing. More importantly, I will be presenting the logic behind why I believe that the approach I am recommending is a better way to judge how well your investments are truly doing.

Dividend Growth Investing Is A Business Perspective Investing Approach

When you think about it, investing for dividend income and potential growth of that income is automatically a long-term strategy. Dividends are paid quarterly, and typically only increased annually. Therefore, being a dividend growth investor means investing in the business for the long haul. Therefore, it only logically follows that since you intend to own the investment for many years to come, short-term price volatility doesn’t or at least shouldn’t really matter very much.

From a different perspective, as a dividend growth investor you are, in reality, investing in the business more than you are investing in the stock. Consequently, the results that the business is generating on your behalf are significantly more important than how the stock market may be currently pricing – or more precisely -mispricing the business. Therefore, when I see the market pricing my great business for less than my assessment suggests that it is worth, I do not immediately feel that I am losing money. Instead, I simply understand that my great business has temporarily become illiquid. Therefore, if I did sell it, I would be selling it for less than it was worth. Frankly, I don’t believe in selling anything I own for less than it’s worth.

By this I mean that I am currently unable to find a buyer that is willing to pay me the true worth value of what I own. However, this really doesn’t bother me too much because I wasn’t planning on selling it today anyway. Instead, I intend to own my stocks for many years in the future. Therefore, I also logically recognize that over the upcoming months, quarters and years, the price will most certainly change thousands of times. But most importantly, the only reason I would worry about how the market is pricing my stock would be on the day I intended to sell it. Until then, I simply ignore market action, but I do not ignore business results.

Furthermore, since I have positioned myself as a shareholder partner in the business who is primarily interested in the income it can generate on my behalf, I focus intensely on the dividend income it provides me. This is beneficial to me both economically and psychologically. The economic part is obvious, the investment is producing me income that I can utilize to either live off or use to supplement my lifestyle. Even better, if I choose the right stock, it is also paying me more income every year. The psychological part comes from the predictability of evaluating a dividend income stream versus the impossibility of trying to predict erratic price movements.

To add further color to this concept is both my belief and experience that the most predictable aspect of investing in a common stock (business) is its dividend income stream. A company’s dividend is often more consistent than even its earnings or cash flow production, and significantly more consistent than its daily, weekly, monthly or even yearly price movement. As a result, I have convinced myself at least, that it makes much more sense for me to measure my performance based on the level of income my dividend growth stocks are providing me over how much temporary capital appreciation or loss I might be experiencing at any moment in time.

Furthermore, in addition to focusing on the dividends, I also focus on the company’s operating results. These include but are not limited to the company’s production of earnings and cash flows as well as the strength of its balance sheet. This is truly how I implement the great and profound lesson that Ben Graham taught me as well as many other investors when he said: “in the short run the market is a voting machine, but in the long run it’s a weighing machine.” Investor sentiment, good or bad, drives short-term market movements. However, the results the business produces are ultimately what drives investor returns over the long run. Therefore, doesn’t it make more sense to focus on how well the business is doing than it is to worry about how the market price is currently behaving? It certainly does to me.

Moreover, I have often written in the past that the advantage of investing in a stock when it is attractively valued is that it positions the investor to fully participate in the success of the company. To supplement that thought, if you buy a stock when it is significantly undervalued, you get the additional natural leverage of potential P/E ratio expansion as the discounted valuation moves into alignment with fair value. On the other hand, the opposite is true when you overpay for a stock. In this case, the company can do great and you can do poorly. At the end of the day, the most important questions that investors should ask, at least in my humble opinion, are: How’s business? What is the business Worth?

FAST Graphs Friday Analyze out Loud Video: A Better Way to Measure Performance

I believe it is only appropriate to interject that I am not suggesting that people are being foolish for only measuring performance primarily based on price action. In truth, price action is mainly all most investors have in order to base their judgments upon. Frankly, this is precisely why I originally developed theFAST Graphs fundamentals analyzer software tool for my own benefit and use. As a result, I can measure potential capital appreciation performance based on how the business is performing in contrast to what the market price is reflecting. Additionally, I can also measure how well my dividend income is doing based on how well the business is performing.

Therefore, I am going to cover the following stocks that are both on our current Dividend Kings “Top Buy List” while simultaneously also suffering from poor market price action: Carnival Corp (CCL), Unum Group (NYSE:UNM), Bristol-Myers (BMY) and Simon Property Group (SPG).

Additionally, I would respectfully suggest that you also review my most recent Dividend Kings’ video where I covered ViacomCBS, Meredith Corp., Foot Locker and Tanger Factory Outlets. Both my most recent previous articles and this article are covering a similar subject but from slightly different perspectives.

Summary and Conclusions

Those of you who have followed my work for a long time, might remember a common refrain of mine regarding portfolio performance that I have often presented. It goes like this: “measuring performance without simultaneously measuring valuation is a job half done.” With this article, I have attempted to elaborate on the true meaning of that phrase.

In simple terms, I have trained myself and my experience has verified the validity of my training that markets often do misappraise the value of a stock. Consequently, as I said so many times before, I trust operating results more than I trust price action. Perhaps even more to the point, I have learned to be much more fearful about overvaluation than I am undervaluation. Most people behave the opposite. When stocks are high people tend to get overconfident and even happy, but when stocks go on sale and represent incredible opportunity, they become fearful and melancholy. Remember Warren Buffett’s sage advice: “be fearful when others are greedy, and greedy when others are fearful.”

More to explorer

When Cash Equivalents Don’t Equal Cash

Analysis of the price volatility in “cash equivalent” ultrashort duration ETFs. Capital preservation tied to underlying portfolio composition and credit quality. Reevaluate your risk tolerance.

3 Essential Facts For Staying Safe And Sane During This Bear Market

Right now market fear and volatility is hitting record highs. Uncertainty about the short-term effects of the pandemic and effects on economic and corporate earnings growth is driving the market. It’s precisely for times like these that a diversified, and properly risk-managed portfolio is essential. These will allow you to ride out the bear market without selling quality stocks.

The Stock Market A Pragmatic View

As long-term dividend growth investors, we are best served to take the long-term view and ride the short-term volatility out. I am confident that we are going to see fundamental deterioration over the short run as a result of the fear that the coronavirus has instigated. FAST Graphs Friday analyze Out Loud Video.

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