Expectations, dividend strategies, factor performance in pandemics and Rob Arnott - the best investing blogs and podcasts from the past week
Morgan Housel’s latest article - Expectations and Reality - is, as always, a thought-provoking look at something that affects everyone but is so much clearer after he’s deconstructed it.
He explores how personal perspective shapes our own expectations and how that, in turn, influences how we feel with the reality we end up with.
With low expectations, you can set yourself up for almost anything being a bonus. But when expectations are too high, then you’re more likely to be destined for disappointment.
While I was reading his article I was thinking to myself (as a writer) how this was so artfully constructed for him to tie it all back to investing, as he so often does. It was ironic then, that my expectations were dashed and he didn’t. Maybe it was just too obvious.
Anyway, on the subject of expectations, it’s third-quarter earnings season in the United States and all eyes are on the number and size of positive earnings surprises coming out of the S&P 500. The most recent update that I’ve seen suggests that, on both measures, profit surprises are below their 5-year and 10-year averages. That’s (literally) no surprise.
Perhaps more eye catching this week have been some of the specific earnings stories. Apple, the tech giant, beat earnings forecasts as it continues to win customers, but there are ominous signs of a slowdown in some of its segments. Others are already suffering, with Alphabet, Meta and Amazon all missing expectations.
For shares in a sector where earnings surprises had become second nature in recent years, expectations (and reality) are resetting.
The authority on expectations and reality in investing is Michael Maouboussin (he wrote the book Expectations Investing). For a primer on some of this thinking there was a good article in the FT last year (written by Mauboussin’s co-author Alfred Rappaport) called Valuing stocks: why investors should look harder at expectations - which you should be able to read freely via this internet search).
To take all this one final step, economic conditions have forced investors to take cash flow much more seriously than they might have done in recent years (see above). This article from Aswath Damodaran on what to look for is a useful accounting primer (he has a video at the end): Earnings and Cash Flows: A Primer on Free Cash Flow.
Top posts from the past week
Excess Returns - Show Us Your Portfolio: Rob Arnott
Rob Arnott is one of few in the field of quantitative and factor investing research who has turned his work into a billion dollar business. As the co-founder of Research Affiliates, most conversations you hear with him are about strategies and performance, but this one is all about how he manages his own money.
There are no great revelations - he’s a patient investor, a big fan of value, prefers equities but mixes things up a little. For what it’s worth he’s having a flat year. But all told, this is interesting just for hearing what this guy really thinks, not only about investing, but the way he rationalises a lot of the narratives that are moving prices at the moment. He also has some interesting views on the challenges of setting his children up in life, and giving money to good causes. Overall, definitely worth a listen.
Link Group - UK Dividend Monitor Q3 2022
New analysis of UK dividends paid between July and September was out this week. In summary the weak pound had the effect of adding £1.9 billion to the payout, which totalled £31.4 billion overall. In headline terms, that was down by 8.4% on Q3 last year, with the delisting of big-paying mining giant BHP a major part of the reason. Strip that out and the dividend payout was up 1.0% year on year. The current mean yield on UK equities is 4.2%.
J.P.Morgan - The advantage of high dividend stocks in a stagflationary environment
Dividend strategies have been one of very few bright points when it comes to investment themes this year. This note explores that. The crux is that recessionary phases drag on earnings but that dividends are actually much more stable - as this chart shows:
Payout ratios (the proportion of dividends paid versus earnings) tend to rise in these phases - but they are currently already low because of dividend cuts that took place during the pandemic. That could be good news. As always, it’s the long-term progressive payers that you need to look out for - and they are cropping up in more sectors than usual at the moment.
Robeco - Equity Styles and Pandemics: COVID-19 versus the Spanish Flu (or use this direct link to the PDF)
Equity markets sold off hard as the Covid pandemic unfolded in early 2020. But then recovered quickly as the world wrestled with the aftermath. In this brief, rapid-fire research Pim van Vliet and other analysts from Robeco update previous studies of market reactions to pandemics. In particular, they go hunting for the impact on different factor premiums. This chart gives you an indication of what they found:
Low volatility and dividend yield factors held up best, while small cap and momentum factors suffered during the initial crash. But those factor performances completely flipped in the recovery.
Have a great weekend,
Ben
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