Value Creation – The Reformed Broker

All value creation for investors comes from the actions they take in falling markets, not rising ones. If you’re not yet retired and haven’t finished putting money into your retirement accounts, every 5% that the market falls is a bigger opportunity for you to buy things that will be worth a lot more in the future when you sell them. Create value today that will be realized sometime tomorrow.

I do not give financial advice here on the blog or on TV or YouTube or anywhere else outside of my company. When you see me talking publicly about investing to a general audience, what I’m talking about is what I’m personally doing with my money or what we as a company are doing for our own clients. Advice is personal and therefore by definition cannot be given blindly and indiscriminately. However, in my public comments, my goal is always to say something interesting, intelligent, helpful, encouraging, or meaningful. Not everything turns out that way, but that’s what we aim for.

I say this to introduce what I want to say below:

If you’re under 50 and selling stocks now, after the market is down 25% since last Thanksgiving, I hope you have a very good reason to do so. Plus the immediate relief you might feel getting off the roller coaster. Because from where I sit, everything about the current market environment has now arrived better for investors that the environment a year ago today.

In September 2021, a year ago, the Fed thought so no Interest rate hikes would be necessary throughout 2022. “Low for longer” was the mantra. They saw no need for any rate hikes on the horizon until 2023. As a result, cash was yielding zero and the stock was selling for 24 times earnings.

Fast forward to today: We trade at a forward PE ratio of 15x (below the five-year average of 18) and cash now yields 4%.

Which environment is better for investors, one year ago today or the one we are in now?

Of course, today is better. Significantly better. No doubts

For me, the answer is obvious. But that’s just because of the time I’ve been doing this and the things I’ve seen or experienced. For younger and less experienced investors, it may not be so obvious. Much of the work we do with our public comments and content is to change that situation as much as we can.

In keeping with what I said above about not giving investment advice to the general public, please consider the following for informational purposes and not a solicitation for you to invest in this or any other stock…

I personally own shares of JPMorgan. I have dividends automatically reinvested every quarter. JPMorgan is about to pay a dividend this October of $1.00 per share. The dividend will be paid on October 31 to shareholders of record as of the close of business on October 6. That equates to an annual dividend of $4 per share, assuming they don’t have to cut it. At today’s price, that’s an annualized dividend yield of 3.67%, which exactly matches the yield on a 10-year Treasury note. JPMorgan sells for 8 times earnings and 1.2 times book value, outrageously cheap relative to the overall S&P 500.

So consider the person who has a time horizon of more than 10 years for the money they invest today. JPMorgan shares will be substantially more volatile than a guaranteed return of principal plus interest on a Treasury. But they offer significantly greater positive potential in return. Your risk is that the 100-plus-year-old banking franchise won’t survive the ups and downs of the next decade. That’s a risk most of us would be willing to take in exchange for what might turn out well.

Next, I’d like to show you the past twenty years of JPMorgan’s common stock performance (via YCharts)…

The orange line is your total return over the twenty years ending yesterday: a 900% gain for doing nothing but holding it in a brokerage account and living with the ups and downs. As you can see, dividends were a very large part of total return. JPMorgan has increased its annual dividend payout by nearly 200% since 2002 (purple line). The blue line is the price return, minus the benefit of dividends along the way. If you’re trading in and out of JPMorgan, or any other stock, you’re not maximizing the total return you should be getting as a result of the risk you’re taking on long-term ownership. This is your fault. You should try to fix it.

I will never sell JPMorgan as long as the company continues to do what it does for shareholders, clients, employees and other stakeholders. I will experience years when the stock falls (like this one) and years when it rises, like last year. That’s what comes with the territory. And if someone is willing to sell that stock at 107 after it was cut from 167 a year ago this week, that’s their problem, not mine or yours. If they can buy it back at $87, god bless them. If they think they can do it regularly, I have a macro options trading “alert” newsletter to sell them.

Again, this is just my opinion and an example of how I have chosen to allocate assets throughout my career. Your perspective and time horizon may differ from mine.

But one thing is undeniable, and I have a century of data to back it up, market environments like this are where all the value creation resides. With today’s lowest prices and falling valuations, we’re laying the foundation for tomorrow’s success. It may not feel like it right now, but that’s not why everyone succeeds.

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