Dear Valued Clients and Friends,
I have been looking forward to this Dividend Cafe for some time. It is not because I have been looking forward to turning fifty; it really is just because I find what we are doing in the Dividend Cafe today to be exciting.
I will avoid an elaborate introduction this week and just say that today, we are going to do a bit of a tour through history and see what this history lesson has to say for investors. I would hope that any investor looking back on the last fifty years will find themselves saying at the end of this Dividend Cafe the same thing I am saying about life in general – I can’t wait for the next fifty years.
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Living in delusion
Yes, age 50 has come and gone this week. I have long been in the phase of life where birthdays are now celebrated only every ten years. If people knew how distorted my views and sensibilities were from reality when it comes to this age, they would question my qualifications to manage people’s money. I have pulled my hamstring three times over the last nine months just doing routine runs, and yet I still tell myself I am the same physical creature I was in high school. I fight with my kids constantly about the actual color of my hair (I say brown, they have this bizarre idea that it has an accent of gray to it???). Kids are mean.
I don’t complain and don’t talk about it, but yes, I am at the age now where my knees hurt all the time, my back hurts all the time, and just bizarre little injuries come and go in my exercise constantly. It doesn’t stop me from my rigorous daily routine. I am a creature of habit, and I stay laser-focused on my exercise commitments. But let’s just say that the cardiovascular capacity shown on the pick-up basketball courts of Orange County in 1992 is not exactly being replicated on an East River boardwalk run in 2024. The sound effects are louder. The breathing is more, shall we say, intense. And sometimes, when I am stretching, I think I have snapped something.
But it is what it is, and no matter how insane it sounds to even say, I am now fifty years old. Ben Affleck said to Matt Damon in the masterpiece movie, Good Will Hunting, that “tomorrow I am going to wake up and I am going to be fifty,” The real-life people of Damon and Affleck and the characters they were playing said that as roughly 23-year olds in 1997, and a 23-year old in 1997, well, all I can say is, I woke up, and now I am fifty. But 1997 seems like it was five days ago. And even though I have loved every minute of my 20’s, 30’s, and 40’s, even minutes I wouldn’t wish upon my worst enemies, Affleck was right. You just wake up, and you’re fifty. But 23 doesn’t feel as far away as it actually is.
Until the hamstring goes out on you in the middle of Central Park.
Connecting this to investing
What does my disconnection from reality about my own age, stage, and physical stamina have to do with the market, the economy, and your portfolio? Well, now that I think about it, nothing, but it’s my writing and my birthday so I guess I can say what I want to say. But in all seriousness, I could try to pivot this into some type of message like:
“Just because you want a stock trading at 65x earnings to one day trade at 85x earnings doesn’t mean it will, just like wanting your lower back to not hurt after 16 hours in an office chair will not make it so.”
I mean, sure, there is some sense in which age-delusional people like me could be said to have overlap with portfolio-delusional people, where hope is constantly confused for strategy. But that actually isn’t where I am going with this today.
A tale of five decades
On May 30, 1974, otherwise known as 18,262 days ago, or 438,291 hours ago, or 26.3 million minutes ago, the S&P 500 was at 89. The Dow was at 803. That 803 would see 577 by the end of the year, and both market indices would be down on the year over -25% in what was the process of a -40% drawdown in both markets.
Who would have invested $100 in the S&P 500 then? It was a brutal market.
Well, someone who wanted $100 to become $20,753 in fifty years, that is who. A 20,000% return
Getting to grade school
Now, my parents wouldn’t have had $100 to throw in the S&P 500 for me then. They already had an almost three-year-old son, and my father was finishing his PhD at the University of Southern California under the great Dallas Willard. And while Anthony Davis was running touchdowns back against Notre Dame at will, the budget of a grad student with two babies (soon to be more), working as a part-time staffer at a church in Manhattan Beach, was not, well, filled with disposable income.
But all would be okay, as my father did complete his PhD at USC, and we all know how much money those USC grads make! However, it turns out, a philosophy doctorate headed to a seminary professorship in Jackson, Mississippi is NOT on the same pay scale as a MBA grad at the Marshall Business School. Now, an Ethics and Apologetics professor in Jackson, Mississippi did have one advantage economically: When gold was going through a generational bubble that would pop at the end of the decade after every newsletter writer on earth was peddling it to a middle class struggling under 1970’s stagflation, ethics professors in Jackson, Mississippi did not have the disposable income to buy gold at $800/ounce, just in time for a multi-decade drop of 75% (worse if you count inflation).
See, there can be benefits to not having disposable income!
But one didn’t need gold as we entered the 1980s, as I was in grade school, and as a former actor named Ronald Reagan was headed to the White House to put on the greatest show of the 20th century. Jimmy Carter and the malaise were gone, as was the end of a 1966-1981 flat market in the Dow (from 800 to 800, though that ignores dividends). The largest marginal tax rate cut in history, combined with a substantial focus on deregulation, promoted a business optimism that had the economy growing net of inflation at 4.58% in 1983, 7.24% in 1984, and 4.17% in 1985. My parents decided it was a good idea to skip second grade in 1981 because, you know, being eight years old in fifth grade sounds like a really good idea. [Tip for good students in 1st grade: Don’t talk too much about philosophy, theology, and history, or your parents might think you don’t need to waste your time with silly second grade frivolities]. But Ronald Reagan survived an assassination attempt from John Hinckley Jr., and I would survive missing second grade, especially by doing a year of home school in 1984 where I could “get caught up with my grade and age” by studying the Reagan/Mondale election for a year, along with the history of the Irvine Company (Bren, I know all about you!), and most importantly, memorize the greatest chapter in the entire Bible, Romans 8.
The economy was flying, the stock market soaring, and I was back near the age of my classmates.
Capital is never the scarce resource
Markets would continue flying in the second half of the 1980s, even as corporate raiders would take over magazine covers, high-yield bonds would get called “junk” bonds, a “Black Monday” would take the market down -22% in one day (“you mean ‘portfolio insurance’ didn’t work??”), and the phenomenal growth of the economy in the 1980s would run into the need for more capital to drive ongoing expansion. Venture capital would evolve past an embryonic stage into a real factor in making Silicon Valley the epicenter of technological growth and innovation. Entire industries, let alone really substantial companies and ideas, would find new access to debt and equity capital, as American capital markets would keep up with the innovation and creativity underneath them driving a gross output the world had never before seen. Though demonized and slandered (before being vindicated by history and a rare righteous pardon), Michael Milken would teach us that “capital is never the scarce resource.” Ideas are what drive economic growth – there is always capital. Have ideas, capital will follow. Execute on these ideas, capital will overfloweth. In all thy getting, get that.
The 1990’s were more than AOL and Monica Lewinsky
I am not going to sugarcoat it. The early 1990s were a tough time. I’ll spare you the details of what happened in my life from 1989-1991 (home, church, school), but it was a rough go for a while. Adversity builds character, as they say. And besides, it’s never all bad as a few rough years in life personally were still coupled with the golden age of hip hop and gangsta rap (I kid, or do I?), not to mention the Michael Jordan era in basketball. Every time I think about some of the truly difficult things I lived through in the 1990’s I remember that I also got to experience some things from which the world will always have to look back on, because they don’t get better than that.
The stock market from 1995-1999 may feel the same – that like Michael Jordan, it doesn’t get better than that. Greenspan may have called it “irrational exuberance” in December 1996, but the S&P 500 would go up +34.1% in 1995, +20.3% in 1996, +31% in 1997, +26.7% in 1998, and +19.5% in 1999. Yep. The Michael Jordan era of championships also included a second decade of a bull market that would be one for the ages.
It also would manage to captivate the hopes, dreams, and ambitions of a nerd kid who lost his dad in 1995 and needed to find his place in the world. I found it in the business of financial advice, thank God.
An unsettling decade
I found the love of my life shortly thereafter (her name was not Paine Webber, her name was Joleen). And we found out that a honeymoon which begins with the worst attack on American soil of our lifetimes is a surefire way to remember your honeymoon! The go-go years of the 1990s left me with some unforgettable lessons when it came to a career in wealth management:
(1) Overpaying for good companies can be very bad
(2) Buying bad companies at any price can be very bad
(3) Human nature is a failed investor (thank you, Nick Murray)
Our love did not pay the rent, but it did launch our marriage of now 23 years. And we did pay the rent. We also watched people who made 20% the money we make buy houses two times the cost of ours. That didn’t seem to end super well. But the 2000s were an exciting decade in life, with Pete Carroll bringing USC to greatness, us beginning our family with kids born in 2005, 2007, and 2010, and, of course, the seminal moment of my career, the global financial crisis.
I have written so much about it, spoken so much about it, and otherwise pontificated so much about it, I won’t go into all the details of the 2008 financial crisis here. It was not a mere stock market correction or even a mere bear market. It was a time in which the credit markets of the world economy broke, period. The housing bubble and general cultural insanity that surrounded that delusional perversion got taken to the woodshed. And the Wall Street firms that drove so much capital markets activity in our economy, including the one at which I worked, faced an existential crisis. My daughter was one year of age. Let’s just say – I sleep six hours a night now, but I used to not sleep so much.
An unsettling decade, indeed.
And here we are
The last fourteen years saw another bull market for the ages, unprecedented fiscal and monetary interventions, a skyrocketing level of political dysfunction, the shutdown of the world in response to a respiratory virus that was airborne, and the replacement of cable TV with streaming. Economic growth has fallen and stayed below trendline. Forces on the right and the left have become distrusting of free enterprise. And we await a new era, whatever it may be, in the story of the global economy. The free ride of QE, ZIRP, and post-crisis recovery seems over, and a new era and new questions are upon us.
We have armed ourselves with first principles that will take us into the years ahead. Not a market outlook, but an investment philosophy. What can I say, philosophy runs in my blood.
More people
There were four billion people on planet Earth when I was born. There are 8.1 billion today. A doubling of the world’s population in fifty years. The U.S. population has gone from 214 million to 335 million (+56% domestically versus +102% worldwide), and I think a significant amount of those 120 million extra people are trying to get dinner reservations in New York City every night these days (those predictions about the death of NYC did not go turn out very well).
Wage growth and price growth
In 1974 the average income was $11,800 per year. It is $63,795 today. Now, a 5.4x average salary increase in America isn’t all that relevant to most of you because most of you are well, well above the “averages.” … But what counts as the top decile of income has exploded, too. Higher incomes are needed to cover the higher cost of cars, eggs, bread, houses, and more. College costs a lot more, too, but it is worth a lot less, so there’s that.
History is what it is
My life has been filled with joy that only a very blessed and grateful person can claim. I love my wife, I love my children, and I love my business. I wake up every single day excited for what the day will present, even when I know that a new Vegan restaurant is going in somewhere to replace what used to be a wonderful steakhouse. I trust markets to right those wrongs over time. My life has also experienced challenges, scares, and issues. I imagine every person reading this can say the same. And whether we are talking about markets or our lives, time is our friend in getting to the places we want to go. I believe that the present is our future past, and I earnestly desire to be nostalgic about the past in the future, and to do so positively requires a certain posture and determination in the present. That’s my view, anyways.
It applies to investing as well. There are times that feel painful in the present that becomes revealed in the future to be the past moments of tremendous opportunity and success. The job of an investor is to let that happen. And to that end, we work.
P.S. – A dividend agenda
By the way, I mentioned that $100 turned into $20,753 from the year I was born to today. And that is certainly true … if one was reinvesting dividends. On a PRICE basis alone, the $100 is now $5,064. Not bad. But you know, just 75% less than if dividends were involved (the first half of my life the S&P 500 was still offering a sizable yield). The moral of this story:
- Reinvesting dividends is the primary source of return over time because of the reality of math and compounding, AND …
- $100 now with a 4% dividend yield on day one (not 1.25% of the index), with 7% annual dividend growth (just to be conservative), will see a 42,837% return over the next fifty years (assuming just 3% annual price appreciation) – or 12.89% per year. The yield in fifty years on the $100 invested? 8,887%. See you in 2074.
“I don’t believe that is going to happen.” – someone
“You don’t believe in math.” – me
*These are hypothetical illustrations to show the math and not real portfolios or guarantees or anything else.
P.S.S. – There’s still time for you!
I don’t think I knew that Warren Buffett was not a billionaire until he was fifty years old and that at age fifty, he was “only” worth $1 billion. As he is now worth $83 billion and has given $35.1 billion to charity over the years (28.4% of net worth), I guess one could say that compounding works. But so does working #fulltime.
Quote of the Week
“Every man at some point in his life is going to lose a battle. He’s going to fight and he is going to lose. But what makes him a man is that in the midst of that battle, he does not lose himself.”
~ Eric Taylor
* * *
In my fifty years of life, the United States has managed to survive the stagflation of the 70s, win out in the Cold War with the Soviet Union, overcome the national embarrassment of swing-dancing in the late 1990s, and even get on the other side of 9/11 and the global financial crisis and great recession. You are more than welcome to believe the next fifty years are going to be different, one in which the bad guys win, markets fail, and a nerd kid who skipped second grade and couldn’t juggle one ball by itself until he was 15 years old and entered his 20’s parent-less and broke could never find a life of joy and calling. But I am going to take the other side of that trade.
Pessimists sound smart. Optimists get rich.
And my friends, at age 50 and one day age 100 (you know what I mean), I plan to be the most optimistic person in town. And as Bruce Springsteen once said, sometimes “it’s a town full of losers, and I’m pulling out of here to win.”
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
