Mr. Market Can’t Make Up His Mind
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As of late, the market seems to have found itself in a seemingly never-ending game of tug-of-war.
One day, inflation is running hot. The next day, it’s not.
One day, tensions in the Middle East are pushing oil prices higher. The next day, things calm back down.
One day, growth stocks (more specifically, stocks related to tech, semiconductors, and AI) are soaring. The next day, investors are piling into more defensive positions.
There seem to be at least a few competing narratives all playing out at the same time, leaving investors, understandably, with a sense of whiplash (and probably a slight case of vertigo).
All of this begs the question: How do you navigate a market that can’t seem to make up its mind? From my perspective, there are two ways to go about it.
Before we get to those, though, let’s first remember who we’re dealing with here. The market, as famously portrayed by Ben Graham’s Mr. Market, is a manic madman. As Owen Wilson would say, he’s crazy as a road lizard.
Mr. Market is prone to extreme mood swings. Some days he is unrealistically optimistic, while others he is full of fear and pessimism. He just can’t help it.
In either case, when Mr. Market knocks on your door every day offering to either buy your stocks or sell you more of his, the prices he gives you rarely make much sense based on the actual fundamental performance of the business.
Plus, when all of these competing narratives are working in conjunction, Mr. Market’s mania tends to become even more amplified. And like I said a moment ago, as an investor in this situation, you have two options.
First, you can try playing to Mr. Market’s unpredictable mood and chase whichever narrative seems to be dominating on any given day.
Or your second option, which I think is preferable, is to tune out Mr. Market and stay focused on what matters. In other words, if the market seems to have no sense of direction, you have to follow your own direction.
Are the companies you own still growing their earnings and free cash flow? Are their balance sheets still strong? Are their dividends still well covered and continuing to grow?
Those are the questions that matter because, while share prices can swing dramatically from one day to the next, the businesses themselves usually aren’t changing as fast.
A company doesn’t suddenly become 3% better because its share price jumped 3% on Tuesday, nor does it become 3% worse because shares fell 3% on Wednesday. Oftentimes, nothing about the business has changed at all.
At the end of the day, Mr. Market can spin his wheels all he wants. So long as the businesses you own are still fundamentally strong, generating cash, and delivering a growing dividend, things should work out just fine in the long run.
Having said all of that, now I want to hear from you: What helps you tune out Mr. Market when he’s acting crazy? Write to me here and let me know.
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"Do you ever get the itch to buy non-dividend-paying stocks? Just holding dividend stocks sounds boring."
- Salvatore | YouTube
I’ll be honest, very rarely do I ever get the itch to buy a stock that doesn’t pay a dividend.
There have been a couple of exceptions though. Every now and then, I’ll come across a non-dividend-paying company whose products I regularly use (like Spotify, for example) and think about investing in it. But ultimately, it goes against what I philosophically find important in an investment and what I want out of my investments.
At the end of the day, I hate the idea of having to part with an investment just to get any sort of benefit out of it. The last thing I want to do is spend decades building up my portfolio only to eventually start stripping away pieces of it to fund my lifestyle in retirement.
And sure, you could make the argument that I could buy non-dividend-paying stocks today and then convert them into dividend-paying stocks down the road when I’m ready to live off the income. That’s completely true.
But as someone who approaches ownership of a stock as ownership of a living, breathing business, I believe part of that relationship involves having a stake in the cash generation of that business. Not all of it, obviously, but some of it.
Philosophically, that’s what investing in stocks means to me: owning businesses that can appreciate in value while also delivering a steady stream of cash.
If you owned a laundromat, a local restaurant, or some other small business, you’d obviously care about what that business might be worth someday. But you’d likely be much more concerned about the cash it generates and how much of that cash you can ultimately utilize.
After all, that’s one of the main reasons you own the business in the first place, and I don’t think ownership of a publicly traded company should be treated all that differently.
In fact, I think the farther I get away from that philosophy, the easier it becomes for me to start treating the stock market like a casino. I want to avoid that mindset as much as I can, and investing in dividend-paying companies helps keep me on the straight and narrow.
Now, regarding dividend investing being boring, maybe it is. But to that, I’d say two things.
First, you have to invest in a way that fits your personal financial goals and your temperament. And that’s going to look different for everybody.
If exclusively owning dividend-paying stocks doesn’t completely align with what you’re trying to accomplish, or if it doesn’t keep you interested enough to stick with your strategy, that’s completely fine. Do what works for you.
Second, I think it’s worth remembering that investing being boring isn’t necessarily a bad thing. In fact, Mohnish Pabrai famously says that to be a good investor, you have to like watching paint dry.
In other words, investing should be a little boring. It shouldn’t be some thrill ride — it shouldn’t be a thing that gets your blood pumping, your heart racing, and your adrenaline going.
If that’s the bodily experience you’re looking for, you should plan a trip here to Las Vegas and spend some time at the roulette table. If you want to build wealth, you're better off staring at a wet wall.
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