The Roaring 20’s on iPhone: “The Stock Market” – the video game

Black Thursday

Black Thursday – October 24, 1929

Keystone/Hulton Archives via Getty Images

[A version of this article was shared with our Inside the Income Factory members and trial subscribers on May 17.]


“The Roaring 20’s on An iPhone” – Beyond Us current volatility

Many readers know that my personal investment strategy and philosophy is based on viewing our stock portfolio as an asset (perhaps a “factory”, but could also be an office building or other income-generating asset such as a toll road, oil or gas field, or a fleet of ships). The point is, we consider the cash flow that our plant produces or whatever the source of value being generated that accumulates over time.

Of course, this is not just my idea. In the 1930s, two books were written that became classics that changed investing forever, transforming the stock markets from a kind of “casino gambling” into a rational (at least in theory) mechanism for evaluating the value of various investments. It was the first book Security Analysis (1934) by Benjamin Graham and David Dodd, who showed how investors can use fundamental analysis (something we take for granted now) to determine what a company’s earnings and cash flows could be.

A few years later, the economist John Burr Williams wrote: investment value theory (1938), where he articulated the idea that a security’s “intrinsic value” is the discounted present value of all future cash flows it will generate: essentially dividends and cash dividends, plus any residual value that is earned when the security is sold or the investment is otherwise liquidated.

This means that in a rational world, the “market” (“Mr. Market” as Benjamin Graham called it) would incorporate all available knowledge about an investment, including its current and future earnings expectations, into the stock price; If not immediately, then eventually. This has led to the idea of ​​’value investing’ where we try to determine the true value of the investment and then buy it at or below that level. We expect the market to eventually recognize the value and price accordingly; But in the meantime, we are not particularly concerned if its mispricing continues for some time, because we derive the advantage of owning it, collecting its dividend and/or distribution and even reinvesting in the security at its current price (i.e. less than we think its intrinsic or economic value).

Once we realize that, take it seriously, and start applying the idea to our own investments, it can free us from the “market price” obsession promoted by the investment media. The reason why CNBC, for example, tracks financial markets the way ESPN does for the world of sports, constantly reporting minute changes to score (i.e. “score” means stock prices, market averages and indices, etc.), is because they have no other choice if they They want to keep their audience engaged and follow up constantly.

If CNBC focused on the underlying values ​​and the actual “income” that is being produced (or not being produced) by all these stocks, bonds, funds, etc., it would be like watching the grass grow. People may tune in once a day or even once a week, but they won’t keep the screen open all day or constantly check prices. [New members who find this theme interesting may wish to read Chapter 2 from my book, which is re-published in this article.]

But before Graham Dodd and John Burr Williams introduce us to the idea of ​​”rational markets,” Wall Street was more of a big gambling casino. Throughout the 1920s, many investors were attracted to the stock market in the way people were later drawn to Las Vegas or Reno. Markets rose and fell because of sentiment, not analysis, or because people received “hot hints” that the stock was moving. Without fundamental analysis and value theory to enable an investor to have their own idea of ​​the “value” of a particular stock, it makes it difficult for them to have “conviction” about holding an investment if the market is moving in the other direction.

This kind of lack of conviction—in other words, no reason to buy and hold a stock other than hope it goes up—makes it easier for a herd mentality to take over and panic and market crash happen. That’s why the crash of 1929 was so sudden and severe, because many investors had no particular reason to believe the original investment decisions they made once they saw market sentiment turn against them (not to mention how effective many of them were, with more liberal margin requirements in those days).

Conviction alone may not be enough

Even if you are “convinced” that your stock portfolio – which consists, for example, of big-cap stocks or “earnings growth” stocks – represents solid companies or funds that will prove valuable in the long run, it can still be difficult for you to wait for when it goes down. The market. Especially if your dividend flow is only 1 or 2% like many growth stocks or dividend growth, and you have to watch your stock prices go down while collecting a little cash in the meantime.

here where Income Factory® Or even some other public high income way of investing can prove its worth. If we invest in stocks where the entire total return (or at least most of it) is paid out through an 8, 9 or 10% cash dividend, then we can see, feel and reinvest the value stream that John Burr Williams was writing about. We don’t have to wait for it, or hope to have it in the future. We’re getting it right now, no matter how the market chooses to price our short-term security.

And if we reinvest it (as many pre-retirement investors do, as well as retirees like me who spend 9-10% of their monthly income stream, but reinvest and multiply the rest, so they never touch but actually grow the manager) then we see our income And our wealth eventually grows every month, even if the paper value of our portfolio fluctuates.

Even better, during downturns like the current crisis, we’re actually growing our income faster than ever before, as we reinvest at bargain prices and higher returns than ever before. Years from now, when we can no longer remember market prices at times like these, we will enjoy a bigger entry than they would have been if the markets today were more bullish.

Does this mean that we will not feel anxious and anxious when we see volatile markets moving all over the place? No no. But for me, I worry a lot less than I would if I were in growth stocks and didn’t collect the cash river to reinvest each month. And if I withdraw cash from the market, to sacrifice income, I will be even more anxious that I have given up present and future income, and risk being left on the platform at the station when the train suddenly starts moving again.

Understand what happened recently

I don’t claim to be a prophet or a market expert, and certainly not a psychologist, but my best guess about what I believe has happened over the past two years is that we have repeated in the modern sense what happened during the “Roaring Twenties”. But it is compressed into a much shorter period of time and amplified by our modern media and technology.

The Covid pandemic and global uncertainty, along with the manipulation of energy prices in early 2020 by the Saudis and Russians, caused the initial crash. Then when it became clear that despite all the turmoil in the economy, the big companies (the ones we invest in, not the small businesses and the moms and dads of people in Main Street America, who really took their chin) were mostly going to beat just fine, the market started to recover.

But at the same time, you had a large number of people, now working from home, or just “at home” and not working, with iPhones, investing apps and time in their hands, who discovered a neat new video game called: “The Stock Market.” Many of them (and we probably all know a lot) didn’t know anything about investing or the companies they were investing in, but they knew it was fun and easy, and best of all – the stocks they bought went up. So that encouraged them to keep playing, so their stock went up even more.

But all good things, especially if they seem too easy, come to an end. There have been and still are real challenges in the global economy, such as supply chain issues and imbalances, labor and material shortages, and inflation whether short-term or permanent or both. All of this eventually caused the bubble to start leaking and then to burst, partly for some underlying reason, but mostly (I guess) because we had many new investors who were doing it for fun but without much knowledge or conviction, and who were probably soon in They gave up on the game as soon as they saw that it was harder and less fun than they originally expected.


This is my take on what has been going on over the past year and in recent months. I think there are a lot of economic and geopolitical uncertainties, As I wrote recentlyAll of this makes me feel more comfortable earning my higher returns mostly from less “heroic” investments, such as credit bets, rather than the more heroic bets of the kind we make when we buy stocks.

But in addition to that, I think the volatility of the market – the degree to which it rises, the depth and the suddenness of its fall – and the additional volatility that may still lie ahead, reflects the influx of a whole new investment group that has little knowledge or experience, and therefore will be more “irrational” than the pre-Covid investment audience we were Everyone is familiar with it.

It reinforces my conviction that we have to look at ourselves and our investing principles to justify what we’re doing. for members Inside the income factory Community, which still means having well-diversified, high yield, sustainable cash-producing portfolios that grow their income through thick and thin, regardless of market price fluctuations.

[Bibliographical note: If you are interested in some of the parallels between the late 1920s and our post-Covid market experience, check out John Kenneth Galbraith’s classic The Great Crash 1929. It was required reading for economics majors at Georgetown a half century ago, and still makes fascinating reading today.]