Heard in the Village: November 2009

“...the Great Depression was not the result of the stock market crash (or now, the housing bubble the villagers thought). The Great Depression was caused by misguided government policies adopted to avoid the “unsatisfactory conditions” signaled by crash. The run-of-the mill recession that ought to have followed the crash was magnified by the policies of the federal government during the administration of Herbert Hoover.” -Thomas Donlan’s commentary in the November 2, 2009 issue of BARRON’S.

Donlan said Hoover had policies like the New Deal that were anticompetitive and price fixing. He concluded,”… Americans blamed Hoover for relying on the free market instead of government intervention which caused some of the misery.” Most villagers had not realized government intervention in the economy was in place before the New Deal. Misguided policies were the topic that went on to what investors are doing for their retirement. Wall Street and the academic world have convinced too many people into thinking that enough time in the market with long term capital gains was the road to riches and they could ignore dividends because of the taxes paid.

People bought and held stocks without thinking of value. People were chasing the biggest gains from stocks and ignoring the compounding effects of bond or equity income. Now people are finding out taking out 4% a year for their retirement is eating up capital. If they had dividends growing over the years, they could be getting much of their 4% income from dividends rather than capital gains. Some villagers came up with a solution for some misguided policies. Value growth and income was their program. They went with Benjamin Graham’s idea of splitting your money between stocks, bonds and cash; keeping at least 25% in mostly income producing stocks at all times. Stocks could go to 75% if they were cheap.

Buy and hold was modified to accumulate growing dividend paying stocks by selling fewer shares than you bought and applying the profits to the stocks held to lower their cost base. The idea is to keep the profits in the market while preserving the original principal. Compounding dollars or number of shares while controlling losses were also part of the plan. They were ready for most any misguided policies or market now.

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