Thursday, June 29, 2006
With the market catching a little Bernanke Flu recently, I temporarily suspended The Rising Dividend Story as I used this space to address the economy, interest rates, and the stock market. But for those of you who have asked, the story continues: When a person finds a truth 180 degrees from where he thought it resided, there is a sense of awe, a stillness , and a peace; and when you catch sight of it, it encompasses everything you do and think. We left off last time discussing the last thought that went through my mind before I fell asleep on Black Monday night – “Is it possible to value a stock like a bond?” It had never occurred to me before that night that it might be possible, and there was nothing that had happened during the day to encourage such an idea, but the question kept coming nevertheless. The reason the question hung in the air was because of my purchase of the Indiana University bonds. In retrospect, the realization that I had bought a bond without knowing its market price and in the middle of a stock market crash had astonished me. I realized some people may believe that such a purchase was foolish; but, as I mentioned before, the way the bond buy unfolded was as though I was watching myself doing something that I had never done before, yet at every turn knowing what to do next. It was like time slowed down so that I would understand what it wanted me to know. The unmistakable message the bond buy gave me was that investments have a value apart from their price. Price represents a best guess at value, but it is NOT value. Value is something inherent to an enterprise; price is an opinion, a convenience with which to get in and out of the market. Over the next few days, as I analyzed my purchase of the IU bond, I came to the realization that the key factors that gave me the confidence to buy the bond were its undisputed quality and the ability to calculate its rate of return over its life. Because a bond has a fixed interest rate and a fixed length of maturity, it is possible to calculate its minimum rate of return on the day of its purchase. This meant that with a bond, an investor did not need for the price of the bond to go up to achieve a rate of return. An investor needed only for time to pass to collect the interest payments to achieve the calculated rate of return – time alone produced results, not timing, as was the case when trading stocks. Before Black Monday, I thought timing and trend-following were the truths of investing, but now I understood they were really just forms of gambling. I had devoted 12 years to perfecting these techniques, and now Black Monday had exposed their folly. Black Monday was instead showing me that time, quality, and valuation were the truths of successful investing. But I’m getting ahead of myself here. These may be the truths of investing in bonds, but in the aftermath of the crash of 1987, I did not know how to value a stock like a bond. Indeed, that would not come for several more years. What I did have was the palpable sense that just as the truth of bond valuation had visited me during my purchase of the IU bonds, so too it would one day speak of stocks. This “sense” manifested itself on the following Monday. For many years, I provided a weekly market commentary via teleconference to the brokers of the firm spread across three states. On Monday, October 26, 1987, one week after Black Monday hit, I was in my office early preparing my comments when I noticed the prayer journal lying on my desk. I remembered on Black Monday having the grand idea to use the journal to document my experiences of the crash. As I opened the book, I saw that I had made entries only on Monday and Tuesday. Monday’s comment was about the huge fall in stocks and our decision not to sell. Tuesday’s comment was very short: “Market up 100+ points – glad to see rebound – but not very convincing.” I flipped the pages to the day’s date - October 26th. There, across the top of the page was the scripture for the day: “For God is not the author of confusion, but of peace. . .” 1 Corinthians 15:57 When I read this verse, it made sense on three levels. First, everything about the past week had been confusing. Everyone tried to make sense of it. People I previously considered wise were making fear-induced and idiotic statements about the many disasters that lurked. Chaos reigned. Secondly, my mind replayed my conversation with Billy T. Whether it had been because of my own weariness and wishful thinking, or Billy’s fragile state of mind, I had told him that every good thing comes from God. Investing in quality US stocks had been a good thing for a hundred years; therefore, in someway the stock market was a part of God’s blessing. If God decided to withhold His blessing, we are all doomed. There was no hiding place. But if God is still in control, blessings will continue, no matter what the Wall Street Journal or the gurus say. And if God is still in control, peace will prevail. Lastly, if God is involved in the stock market, it will have an underlying order. Everything in creation has order: gravity, the speed of sound, the parts of a cell, the parts of an atom… If there is order in the stock market, there will be a means to evaluate it, a formula, a gauge, a meter of some kind. I knew if I pursued it long enough, I would find it.
Labels: The Rising Dividend Story