The Hindu Business Line : Three investment directives

Dividends, international, and valuation: these three are ‘the D-I-V directives' prescribed by Jeremy J. Siegel in The Future for Investors: Why the tried and the true triumph over the bold and the new ( www.landmarkonthenet.com).

The first is about buying stocks that have sustainable cash flows. The primary function of management should be to maximise cash flows to shareholders, and the payment of dividends has provided management with that discipline throughout most of the stock market's history, Siegel explains.

Stock returns, he adds, are based not on earnings growth alone but on growth relative to expectations. “Market cycles, although difficult on investors' psyches, generate wealth for long-term stockholders.”

As the greater number of shares accumulated through reinvested dividends can cushion the decline in the value of the investor's portfolio, Siegel calls such dividends the ‘bear market protector.' And, when the market recovers, those extra shares will greatly enhance future returns, thus becoming a ‘return accelerator.'

The second component in the formula, ‘I,' is about recognising the international forces that will swing the balance of economic power away from the US, Europe, and Japan towards China, India, and the rest of the developing world.

Betting on ‘the dramatic shift in the relative wealth of the developed and developing worlds' over the next half century, the author's counsel for dollar-based investors is to have 60 per cent in the US-headquartered firms and 40 per cent in non-US-based firms (such as Toyota, Novartis, Nestlé, Siemens, Nokia, and Samsung).

The author emphasises the need for tangible evidence of the profitability of firms. Also, avoid the growth trap when buying international stocks, especially those from emerging countries, he advises, because no matter how fast firms are growing, there are limits to valuation.

Finally, the ‘valuation' piece in D-I-V is on the importance of accumulating shares in firms with reasonable valuations relative to their expected growth, and avoiding ‘IPOs, hot stocks, or other firms or industries that the consensus believes are must-have investments.'

One example is the innate propensity of investors to overpay for the ‘new' while ignoring the ‘old.' Siegel notes that the rapid pace of technological change does, and will, attract investors to firms using the latest technology to produce new and innovative goods and services. But most of the ‘story' stocks that arise from these new industries will disappoint investors, he warns.

“History has shown that those less exciting, tried-and-true firms whose managements have stuck with winning formulas and sold their products in the expanding global market will be better investments.”

Worth a deep-dive read.

A call for a new gold standard

It may take many more years, even decades, but the era of soft money is slowly coming to a close, predicts Nathan Lewis in Gold: The once and future money ( www.landmarkonthenet.com). The world really has no choice but to move back toward a framework of hard money, because the never-ending and completely unnecessary difficulties of floating currencies can be solved in no other way, he adds.

The best system, in the author's view, is the one that maintains the greatest stability of currency value, over a week, month, year, decade, or century; and one that is easy to implement, without causing disruption on its introduction. “As for accomplishing this task, even today there are no serious challengers to a gold standard, not even in the form of a proposal, and certainly none that has weathered the test of history.”

For starters, a gold standard links the value of paper currencies to the value of gold, the book explains. “This is accomplished by some system to adjust the supply of base money such that the currency maintains a fixed value relative to gold, in much the same manner as quarters and dimes maintain a fixed relationship with dollar bills.”

The hard-money system of the future will be based on gold, just as were the hard-money systems of the past, Lewis foresees. “Gold has not been a flawless foundation for monetary systems. Perfection does not exist in human affairs. It has, however, been the most flawless.”

D. Murali