Do you know what your problem is? Your problem is that you look at your brokerage account balance. If it’s up, you think you are making money, and if it’s down, you think you are losing money. No wonder falling stock prices make you sick to your stomach.
The good news for you is that you’re completely wrong. You aren’t making or losing money when stock prices go up or down. If you own stock in a business (as every stockholder does), then you are making money when your business is generating earnings and losing money when your business is losing money. The stock price has nothing to with it whatsoever.
Oh, you don’t believe me? Don’t worry, you aren’t the only one. So, let’s do a wee little thought experiment together. Imagine that you and a buddy buy a house for $200,000, you own it 50/50 and rent it out to a tenant for $500 a month.
Question: How much money are you making? Answer: $250 a month.
Now imagine that I come skipping down the street, thumbs entwined in my snappy suspenders, whistling a jaunty tune, propeller beanie spinning in the breeze, and as I approach you, I pause. And then I spontaneously offer to buy your share of the house for the generous sum of $1.
Question: Have you just lost $99,999 on your investment? Are you suddenly gulping down the taste of adrenaline fueled panic? Are you desperate to sell me your share of the house before my offer drops even further? Answer: NO!!!!!!
You dismiss me as an obnoxious moron, is what you do. You coolly decline my offer, wave me aside like an unwelcome housefly and go back to doing whatever it was you were doing before.
Follow-up question: As I slink away with a dejected look on my face, how much money are you making on your investment? Answer: $250 a month.
Follow follow-up question: One of your idiot neighbors, in a fit of terror, sells me her house for $1. Does that have any impact whatsoever on whether you have made, lost, or are continuing to make money? Answer: Nope.
Follow follow follow-up question: How much money are you making after your neighbor freaks out and sells me her house for $1? Answer: Still making $250 a month. Yup. Just like before.
Let this sink in for a moment.
Now explain to me how owning stock in a company is economically any different from owning a share of a rental property.
The only difference between these two situations (that I can think of) is that in the stock market, I am not the only sole obnoxious moron wandering around making random and occasionally absurd offers to buy your shares or sell you mine. We are legion here! Not to imply that a vast number of idiots wearing propeller beanies becomes somehow smarter and more rational than a sole idiot wearing his propeller beanie. But none of that even matters. Unless you sell us your stock, we have no impact on whether you are earning money or not – and trust you me, thank your lucky stars that we don’t.
“But wait!” you exclaim. “My brokerage statement says that I have a loss because my account balance is down!”
Does it, now? Would it surprise you to know that every brokerage statement ever printed throughout history is incomplete and packed with damnable lies and obfuscation? See, your brokerage statements only show you the wrong information (i.e., how much would the obnoxious morons like me pay for your shares right now) and do not show you the relevant information rational investors like you care about (how much money your companies are earning and what share of that money belongs to you).
With a Sensible Brokerage Statement (which you may view, copy, and adapt to your own purposes), you would ignore your account balance and focus entirely on your share of corporate profits. What does a “Sensible” Brokerage Statement look like? This:
Imagine you owned 10 shares apiece of Apple (AAPL), Johnson & Johnson (JNJ), Lockheed Martin (LMT) and Coca-Cola (KO). A Sensible Brokerage Statement shows nothing but what you own, how much of it you own, what share of corporate earnings you own (Google Finance automatically fetches that data for you) and, most importantly, how many more shares you could buy at current prices (also automatically updated) with any extra cash you have sitting around. It’s all the information you need, none of the information you don’t. In this example, I assume you’ve hoarded up $1,000 (maybe from dividends you’ve received, or maybe savings from your salary).
Obviously, the lower the share price, the more shares you can buy and the higher your potential earnings will go. Right now, based on the current price and earnings data for LMT, I can see that your portfolio earnings would rise to $473 if you invest your extra $1,000 into more shares of the company. But now for some fun. What would happen if LMT stock suddenly dropped by 50%?
Well, would you look at that! Your potential share of corporate earnings just soared to $523.58!! Score!! Cha-Ching!
How do you feel? Are you wild-eyed with piggish greed now that your LMT stock just plunged by 50%? Don’t you wish it would fall even more so you could buy even more shares, and by so doing, make your potential portfolio income rise even faster than before? And hopefully stay low for a really long time so you can keep buying more shares at low prices as often and for as long as possible?
The Sensible Brokerage Statement is a lens that inverts your investment motives. In a very direct and practical way, it uses math to help you become greedy when others are fearful and possibly fearful when others are greedy. It gives you a real-time mathematical framework for becoming, as the late, great Benjamin Graham once put it, a “Rational Investor.” If traditional brokerage statements compel you panic when prices plunge, a Sensible Brokerage Statement is a way better tool to survive (and thrive) during the next bear market.
The reason why you are shaking your head is because there’s a glaring problem with my analysis, and that is you can’t actually use your share of corporate earnings unless the company either distributes some out as a dividend or you cash in by selling some stock. It seems to you that the Sensible Brokerage Statement might work well for someone just starting out, but as you near retirement, you might start to care more about cash in your pocket than undistributed corporate profits.
Fine. Add a line for dividends. (I found that information on Seeking Alpha and manually input the data for each position.) If you can live exclusively off of pensions, social security and dividend income and save even a little bit each month, then you’ll see your potential portfolio dividend income rise when stock prices fall. Lower prices mean that you’ll be able to afford more shares. Lower prices mean more dividend cash in your pocket. Lower prices mean you’re making money, not losing it.
I see that you are still shaking your head. That’s great, you tell me, if you have a whopping portfolio, but what if you need to supplement your dividend income with occasional sales of stock?
Then the answer gets more complicated, but bear with me (and it might help to open a copy of the spreadsheet and read along). Start by adding in a line to The Sensible Brokerage Statement to show dividend growth rates. (I just pulled the historical dividend growth rates for each stock off of Seeking Alpha and input that data manually into Column I of the spreadsheet.)
Column J of the spreadsheet shows what your total portfolio income might be by the end of the year if you cash out of shares of the company for each row, and assumes that all companies you own continue to raise dividends for your remaining shares. Column K calculates your overall portfolio income growth taking into account the impact of selling shares for the company in each row. Column K actually might give you some idea about which stocks you might want to sell to cover your budget shortfall, taking dividends, current stock prices and dividend growth all into account.
In this example, you have a budget of $500 but dividend income of $180.80, so you are going to need to raise that extra $319.20 by selling some stock. At current prices, it looks like selling some AAPL shares is the best way to go in order to get the highest possible portfolio income growth, which in this case is 11.32%.
Look at Row 14 – the spreadsheet calculates how many years it might take (all things being equal) until this portfolio generates enough income to cover your budget entirely with dividends if you sell shares that give you the highest portfolio income growth on your remaining shares (in this case, AAPL shares). You can see that if you sell AAPL at the current price of $319 per share, it would be 9.5 years before you could theoretically live off dividend income only.
Now for some fun. What if AAPL stock crashed by 50%? You are going to be worse off, make no mistake about it, but the question is how much worse off would you really be? Answer? A little over one month.
If AAPL plunges by 50%, you’d have to sell 2 shares of AAPL rather than one share if you want to cover your budgetary shortfall, and it looks like your portfolio income growth would drop to 11.14% if you did that. But if you were to sell 2.1 shares of JNJ instead of AAPL, then your portfolio income growth would be 11.20%. Maybe that is the way you’d want to go. If so, then it would now be 9.6 years before the portfolio theoretically generates enough dividend income for you to fully fund your budgetary requirements by using dividends only. That’s only about a month longer than it would have been if AAPL stock did not plunge 50%. Not good, but not catastrophic either.
Falling share prices don’t help you if you are a planned seller, but if you put the exercise into the context of becoming a dividend-only retiree, the impact of a severe price decline in one of your shares is not necessarily as gut-wrenching as a traditional brokerage statement might imply.
You and I both know it. One day, the stock market is going to crash and take down the price of most assets you own. I say make a plan now for how you want to handle that particular inevitability. If you want to panic, make sure to watch your portfolio balances on a daily (or minute-by-minute) basis. If, on the other hand, you wish to greet the next bear market with open-armed enthusiasm, watch your earnings per share, dividends per share, or both – and toss your traditional brokerage statements into the trash before you even open the envelop.
Disclosure: I am/we are long AAPL, LMT, KO, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not an investment advisor and this is not investment advice. Nothing in this article or the online spreadsheet tool can be relied upon by any person for any reason. The spreadsheet is an idea, an example, something you can play around with and adapt to your own purposes, making sure that I haven’t messed up any of the functions by mistake which is perfectly likely because I do that sort of thing all the time. You know what they say. If you want it done right, do it yourself.