Corporations are putting more cash in investors’ pockets.
In the past week, more than half a dozen Blue Chip companies
announced increases in their dividend payouts. In fact, Standard and Poor’s Corporation
said S&P 500 companies paid a record $34 billion in cash payments to
investors in August. That’s a pretty nice stimulus!
And, the largesse may continue. Howard Silverblatt, an
analyst from Standard and Poor’s, was quoted in MarketWatch as saying, “2012
should set a record high for cash dividend payments, 16 percent above that of
2011.”
While dividend payouts look good, another part of the stock
market is “diverging” and sending mixed signals.
There’s a century old investment management system called “The
Dow Theory” which was developed by Charles Dow through a series of editorials
in The Wall Street Journal between
1900 and 1902. According to this theory, in a healthy stock market, the Dow
Jones Industrial Average and the Dow Jones Transportation Average should rise
in sync.
The theory is based on the idea that companies in the
industrial average “make the stuff” while companies in the transportation average
“ship the stuff.” If there’s a divergence in the movement of the industrial
average and the transportation average, then you have to wonder which one is
potentially giving a misleading signal about future economic activity.
So, what’s The Dow Theory signaling now? It’s flashing red
because, as of last week, the Dow Jones Industrial Average was up
about 11 percent for the year while the Dow Jones Transportation Average was down
more than 2 percent. And, just last week, the industrial average was flat while
the transport index dropped a significant 5.9 percent – a substantial
divergence in just one week.
Like all investment systems, though, The Dow Theory is not
foolproof and this divergence could just be noise. In any case, it’s worth
keeping an eye on it as a possible early warning sign.
CAN YOU IMPROVE YOUR
INVESTMENT PERFORMANCE BY TAKING A TRIP to the
local drugstore and forking over two dollars to buy a spiral bound notebook? Yes,
says Nobel Prize winner Daniel Kahneman, one of the country’s preeminent
psychologists.
In a recent conversation with Tom Gardner of The Motley
Fool, Legg Mason Capital Management chief investment strategist Michael J. Mauboussin
recounted a conversation he had many years ago with Professor Daniel Kahneman.
Mauboussin asked Kahneman this question – What
single thing can an investor do to improve their investment performance?
Kahneman said buy a notebook and when you make an investment, write down why
you made the investment, what you expect to happen with the investment, and
when you expect it to happen.
Hmm. How does that translate into improved investment
performance?
As humans, we often succumb to what’s called “hindsight bias.”
Hindsight bias means we tend to think our forecasts were better than they
really are. For example, few people predicted the severity of the Great
Recession, but, after the fact, many people said they saw the signs of a bubble
about to burst. These people “misremembered” what they were thinking prior to
the Great Recession.
Kahneman says writing down what you’re thinking and what
your expectations are – at the time you
make an investment – allow you to go back after the fact and see how
accurate you were. This black and white analysis helps keep you honest about
your ability to make predictions and make good investment decisions. It helps
you avoid becoming overconfident. Overconfidence is bad because it makes you
think you’re smarter than you really are which could lead to making riskier
investments and losing lots of money.
Sometimes the best ideas are also the simplest.
Weekly Focus – Think About It…
“Well, I think we
tried very hard not to be overconfident, because when you get overconfident,
that's when something snaps up and bites you.”
--Neil Armstrong, astronaut, first
person to walk on the moon
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