How does a kid who never made it past the 8th grade become one of the world’s most quoted philosophers, on a variety of complex subjects?
How can an investor using only basic math, be capable of ignoring Wall Street’s most sophisticated predictive models and crowds of anxiety?
You can observe a lot just by watching a few clues these two characters share in common.
A slow-footed and oddly shaped man, standing 5-feet 7-inches tall, became a larger-than-life legend. His nickname was so cool that few know his real name was Lawrence.
Yogi Berra is the all-time winningest player turned coach, in professional team sports history. Appearing in 19 World Series, he won 13. He has the most World Series hits in history. Next up is not even close. Yet, nobody quotes his batting average. The quotes we all stumble into, reading about countless topics, are brilliantly humble. They seem full of wild curiosity and profound simplicity, all at the same time somehow.
For investors trying to win, there will always be debates about which market predictions will be homeruns, and why plans and peace of mind are so elusive.
Hint: that’s why.
Mailbox Math
I am a normally shaped odd man, who likes math even more than baseball, and quotes Yogi’s batting average all the time: it was .285. I’d love to share what that number means to me, in case it can help anybody achieve wonderfully slow-footed peace of mind, and a step toward freedom from ever worrying about a prediction again.
2% current dividend yield
8% annual dividend raises
5% dividend yield on cost* (after 8 years)
*In this hypothetical example, quarterly dividends are reinvested for eight years. Starting in year nine, the dividend yield on original cost would be 5%.
This simple math assumes zero stock price appreciation, focusing only on the dividend. We affectionately call this “mailbox math.” For more than 200 years, a U.S. corporate dividend has been paid. So, you know at least one metric to measure stocks is real, because you can hold it your hand. We know of no other investment idea with that kind of track record, and it’s not even close. In fact, dividends are the exact opposite of an idea. A dividend is a cash payment. No speculation about it is needed.
“When you come to a fork in the road, take it!” -Yogi
There are no black boxes needed, any old metal one will do just fine. No algorithms are needed, you can do the math with the back of an envelope and a sharp pencil. If there is any magic at all, it is that yield on cost becomes your dividend yield. If you are free cash flowing 5%, and rising, by holding a stake in businesses you understand well, you start to worry a lot less about news all around them. Stock prices can move all over the place without touching your mailbox math.
W.H.O.A. !!!!
Simple mailbox math is about to get increasingly important, in our humble opinions. Investors’ biggest challenge going forward may be what they are questioning the least (again), right about now, in markets full of distractions. If I was a good writer or cared about headlines, I’d ask – is it the next big short? Recall, the two primary ingredients for the last one: something considered completely safe on a foundation of math, with fault lines.
W ithdrawing
H opes
O f
A ppreciation
…is not a plan, it’s a prediction.
I am more worried about getting it right, than I want to be right. So, I have no need to predict “safe withdrawal rates” are doomed to fail, but I think basic math is being ignored by too many with too much risk. At the very least, a few more simple questions should be asked from our starting point now, since it has never occurred before.
“The future ain’t what it used to be.” -Yogi
Tailwinds from the bond portion of any allocation, to any withdrawal rate proposal made by any advisor over the past forty years, have been more extraordinary than stocks.
Without a forty-year bull market in bonds backing any need to withdraw interest or principal, the next several decades will be different.
“I always thought the record would stand until it was broken.” -Yogi
If bonds are not appreciating, then more homeruns are going to be needed from stocks. One potential problem is that adjusting swings to try to produce more power can lead to historically bad results. Are we talking about baseball or stocks now?
Yes.
Yogi had multiple seasons with more homeruns than strikeouts. He only struck out 414 times, in 8,359 at bats.
Current Yankee slugger, Aaron Judge has already struck out 631, in his first 1708 plate appearances. Judge struck out in 37 consecutive games. He struck out all five at bats in the same game, twice.
I am not picking on Judge. After tossing a ball to my little son in a playoff game, he has a very special place in my heart.
But as I talk to that little guy about baseball, and we watched one of the most physically gifted players in history, we discussed the downside of a generation of players focused on launch angles for homeruns.
1960 World Series Game 1 | photo credit: Neil Leifer
Thanks to more sophisticated analytical tools, could the game be at risk unintentionally?
“You don’t have to swing hard to hit a home run. If you got the timing, it’ll go.” –Yogi
The first month of the 2021 season saw 1,092 more strikeouts than hits, the largest gap in any month in history. The record for strikeouts in a season has been broken fourteen consecutive seasons.
“It’s embarrassing,” said Reggie Jackson, who struck out more times than anyone in history.
“It’s worrisome,” said Nolan Ryan, who struck out more batters than any pitcher in history.
In a game recently, the ball was never put in play over first three innings. The entire lineup struck out, from both teams. Each one of those players was taught, for many years, they could get paid more to hit homeruns even if they struck out more. They were following the incentives. Strikeouts became tolerated, then even encouraged, in order to swing for more homeruns.
Leading the Yankees to seven of those World Series titles with Yogi, was manager Casey Stengel. He might have made a great portfolio manager if he wasn’t so busy with fifty-four years in baseball. I think he would have had a rare set of sell disciplines, the biggest upside of active management, in my humble opinion. One of his quotes is taped to a screen in my office: “If we’re going to win the pennant, we’ve got to start thinking we’re not as good as we think we are.” That mindset led to winning ten pennants.
I think investment management and financial planning teams that adopt more of that upside down thinking will have uncommon success, as well. Rather than play against leagues of bullish or bearish homerun predictions, I’ll ask an un-crowded question they can both underestimate. What about a stock market that goes nowhere for a lot longer than most are planning for?
It happens a lot more often than many investors realize. The top of this chart is one I keep on the corner of my desk, to remind me of that important planning fact (and an important date). This chart starts on the day I got married. The Stock Market got back to break even, 12 years later. And, that was without taking any withdrawals.
What if the forty years of total return tailwinds from bonds are gone, and stock prices do not always go up? I think it will be more important than ever to be paid rising dividends, as a stakeholder. There were plenty of examples I could have included at the bottom of this chart, but this one made me feel like Yogi would appreciate something about simpler math hiding in plain sight.
To be clear, dividends are not the only solution. They do provide a foundation for a plan, and a powerful combination for advisors and investors unlike any other factor I have carefully studied.
Rising dividends can provide free cash flow, in excess of “safe” withdrawal rates of hoped-for-appreciation and principal.
The peace of mind from seeing that simple math hit your mailbox can unlock doors for more imagination, or speculation around it.
“You can’t think and hit at the same time.” -Yogi