With the new year we’re going to make our annual prediction about the U.S equity markets. But first we want to revisit some of the more memorable market predictions of 2016.
“Sell Everything”- Andrew Roberts, RBS Strategist
On January 11, 2016 Andrew Roberts, a strategist at the Royal Bank of Scotland declared the following.
Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small
Note the date this declaration was made. This was after U.S. equity markets had the worst 4 day start to the new year in history. In the opening week of 2016 the Dow Jones Industrial Average was down over 5% and the NASDAQ was down over 6%. U.S. Equity markets would continue to sell off until Mid-January, rebound through the beginning of February, and then sell off again.
Mr. Roberts’ prediction looked prescient for about a month. Then this happened.
From January 11, 2016 through January 31, 2017 the S&P 500 returned 18.46% not including dividends.
Leading up to the referendum on the U.K leaving the European union, polling and prediction markets had “Remain” winning. Then the world was shocked when “Leave” won.
Equity markets around the world sold off. The S&P 500 lost over 5% from the morning after the vote until June 27, 2016. Three trading days later.
On June 27, 2016 amidst all the concern over Brexit and its impact on the world markets famed investor Jim Rogers, co-founder of the quantum fund with George Soros, fanned the flames with this prediction.
This is going to be worse than any bear market you’ve seen in your lifetime,” he said on Yahoo Finance’s “Market Movers” program Monday. “2008 was bad because of debt. The debt all over the world is much, much higher now. Stocks in the US, for instance, have been going sideways for 18 months to 24 months. That’s called a distribution by many people. When you have distribution for a year and a half, it usually leads to bad things.
This is what happened to U.S. equity markets since June 27, 2016 through January 31, 2017.
#2000 2.0 is a catchy phrase with its own hashtag coined by Mark Yusko head of Morgan Creek Capital and manager of the Morgan Creek Tactical Allocation Fund. He has been bearish for quite some time but we only saved this tweet posted by him on May 29, 2016.
Mr. Yusko committed the mistake we all made in Algebra 1. He got his +/- signs mixed up. The S&P 500 did not end 2016 down double digits, it was up double digits.
Rich Dad, Poor Dad, Doom & Gloom Dad
Robert Kiyosaki is famous because of his book Rich Dad, Poor Dad and the housing bubble. In addition to offering dubious investment advice, Mr. Kiyosaki likes to dabble in making dire doom and gloom stock market predictions.
In 2002, Kiyosaki wrote that the stock market would crash in 2016 as the first wave of baby boomers began to hit 70 1/2 in 2016 and started taking required-by-law distributions from traditional individual retirement accounts.
He still believes that: “Demography is destiny,” he said in the interview.
Obviously, the great Required Minimum Distribution Crash of 2016 did not happen.
Lucky for us, Robert Kiyosaki has moved the goal posts on his prediction. Robert now says the baby boomer crash will happen within the next few years.
Rewards Outweigh Risks Over Being Wrong
The problem with the predictions above is they are very specific. The prognosticators know this but that doesn’t matter to them. If their prediction turns out right they will be known as “the guy who predicted the future”. They’ll be invited to appear on many TV shows and reporters will seek them out for their latest market views. Their brand will skyrocket and their business will boom.
If they are wrong they know no one will remember. The risk to their reputation for making an extremely wrong prediction is very low. The rewards far exceed the risks.
AMM doesn’t operate this way. We know we can’t know the future so we have to think in probabilities.
AMM’s 2016 Prediction
In 2016 we wrote
To be as confident as the other market prognosticators, we want our range of outcomes to fall within the 95% confidence interval. The following is our prediction of probable returns for the S&P 500 in 2016. Feel free to use this prediction to wow your friends with your clairvoyance.
The S&P 500 will return between -25% and +25%!
The S&P 500 returned just over 11%. We were right!
We’re still waiting for CNBC and Bloomberg to call us.
Again, we want our prediction to be within the 95% confidence interval.
The S&P 500 will return between -26% and 20%!
Even with our prediction lying within the 95% confidence interval we could still be wrong.
How is This Prediction Useful?
At some point, you’ve heard the S&P 500 on average returns 8% per year. Yet rarely ever does the S&P 500 produce an average return.
The range of our prediction and past returns for the S&P 500 is wide. However, what the chart above doesn’t show is that the skew of the distribution curve is tilted towards positive returns.
Even though no one knows what the stock market will do each individual year, the odds favor positive returns. Over longer time periods, 10-30+ years, the odds greatly favor positive returns.
Investing and growing wealth should never be about who has the best crystal ball. Better to make a plan to save and invest for a long period of time, 10+ years, and then stick to the plan. Avoid the urge to trade around yearly market predictions no matter how confident the prognosticator is or how smart they sound. This is the best way to keep the odds in your favor.
Your Portfolio Management Team
P.S. If you really want to laugh then review this list of 2016 predictions by “Top” psychics.
You have to enjoy the general predictions involving weather or geological events. They usually involve “an event” that already has a high probability of occurring in that part of the world: an earthquake in the Indian Ocean, tornadoes in the South Eastern U.S., a volcanic eruption in Iceland, etc.
5 Years in Review:
Usually in our yearly review letter we provide a brief update on the positions covered during the past year. However, in this letter we wanted to step back and take a larger view of the portfolio because the AMM Dividend Strategy passed its 5 year mark last September.
The table below is the entire portfolio as of December 31, 2016. The image is small but you can click it to get the full-size view. Also, a couple of positions have since been sold.
We’ve broken the positions into five groups based on how long we’ve held a position. We used the date we first purchased the security in the dividend strategy as our point of reference. Your individual purchase date will be different depending on your start date in the AMM Dividend strategy.
Having a Plan & Sticking to the Plan
In the introduction to this letter, we discussed having an investment plan and sticking to that plan for the long-term. The first group listed in the table above are the positions we’ve owned the longest. This group of stock represents our efforts to stick with a plan.
We’ve experienced above average returns for most of the holdings and an average return in one position. However, it is only in hindsight that we can enjoy these returns.
Our investment plan is to find companies that generate high returns on invested capital that far exceed their cost of capital and buy them at a good price. Combine this with some growth and the companies will compound their intrinsic value. We just have to give each position time. As long as each company continues to generate high returns on capital we will continue to hold it.
This strategy does not guarantee success. It only improves our odds. We still have to contend with the random fluctuations of the stock market and our irrational behavioral biases that flare up around each random market move.
Having a plan helps us focus and ignore both pitfalls. After 5 years we can say that we’ve stayed true to our plan.
Importance of Dividends
The other takeaway from looking at the entire portfolio is the importance of dividends to total return. For each position, we calculated returns based on both price and total returns (price return plus total dividends received).
The dividends we’ve received on each position have been a tremendous source of returns. The longer we’ve held a position the greater contribution dividends have provided to total returns.
Dividends are also an immediate source of positive returns on a position.
For example, look at Gaming & Leisure Properties (GLPI). Since we first bought it post spin-off from Penn National Gaming over 2 years ago, its price return is negative. When we add the total dividends received our total return becomes positive.
When we first buy a position we don’t know if it will go up or down. If the stock goes down after we purchase it, we have the dividend providing an immediate positive return to help offset the price decline. Essentially, we’re “being paid to wait”.
The dividend is also a source of cash flow to potentially purchase more of the company as it declines in price. The lower the stock price, the better value we are getting in the long-run as long if the underlying business fundamentals remain intact.
Growing Income Stream
When we invest in a company we are not investing for the highest current yield. Our goal is to build a growing income stream for your portfolio, by investing in companies that can grow their dividend.
The table below shows each position in the portfolio as of December 31, 2016. Again, please click the image to see it in full size.
The key item in this chart is the last column which represents the total dividend growth of each holding since the initial quarterly dividend was received. For foreign domiciled companies like Novartis (NVS) and Anheuser-Busch InBev (BUD), we used the full year dividend because they pay dividends semi-annually instead of quarterly.
* Our Kraft Heinz (KHC) position was a result of buying the original Kraft (KFT) before it spun off Mondelez (MDLZ) and Kraft Foods (KRFT) and then Heinz Co. merging with Kraft Foods to become Kraft Heinz. The multi-step process of getting to our Kraft Heinz position makes it difficult to calculate the dividend growth.
** Yum China Holdings (YUMC) became a holding after it was spun-off from Yum Brands (YUM). Yum China does not pay a dividend and is no longer in the portfolio as of the writing of this letter.
The overwhelming majority of the positions in our portfolio have achieved our dividend growth objectives. A handful have not. It is these positions that are under review. If we assess that they can no longer provide the dividend growth we are seeking then we will sell them.
We want to thank you for investing in our Dividend strategy and we look forward to working with you to help you achieve your investment objectives in the next 5 years and beyond.
All previous letters are archived here.