Getting Back What You Lost (NY Times)

July 26, 2009
Up 40%, but Still Feeling Down
By JEFF SOMMER
DEAR Shareholder:

While we are not satisfied with our performance in the last quarter, we are happy to report that we didn’t lose as much money as the average stock mutual fund.

That wouldn’t be a very sexy sales pitch: mutual fund managers don’t typically phrase their shareholder letters quite that bluntly.

But the truth is that for most investors, it’s more important to avoid big losses than to rack up big gains. That may seem a milquetoast approach, but in the miserable market of 2008 and early 2009, minimizing losses was the best that most people could do. And because of the ugly math of investing, it has been extraordinarily difficult to recover from big declines.

“People often don’t understand why they are still in a deep hole, even after they’ve had a year of great returns,” said John Bogle, the founder of Vanguard and the creator of the first index mutual fund. It is because when your portfolio shrinks substantially, you need an enormous gain, in percentage terms, to climb back to where you started. This is part of what Mr. Bogle (citing Justice Louis Brandeis) calls “the relentless rules of humble arithmetic.”

Here’s how the math works:

Suppose you lost 40 percent in 2008 — roughly the decline in the Standard & Poor’s 500-stock index. One dollar at the start of the year would have been worth 60 cents at the end. Then say that after that loss, you posted a gain of 40 percent (the rough increase in the S.& P. 500 from its March low through the middle of July). That’s a spectacular return.

Time to celebrate? Not really.

A 40 percent gain on 60 cents is 24 cents. Your original $1 is now only 84 cents — you’re still down 16 cents.
Mr. Bogle did some calculations based on the assumption that you invested $1 in the S.& P. 500 at its peak. By March this year, the index had dropped 57 percent, reducing your dollar to a mere 43 cents. After a 40 percent gain, your little stash was worth only 60 cents. Even worse, he said, is the “exponential factor” in losses and recoveries. If your initial investment fell 50 percent, you would need a 100 percent gain to return to the starting line. If you lost 75 percent, you would need 300 percent.

Although stocks tend to outperform bonds over the long haul, gains that big are hard to come by. And that, in a nutshell, is why it’s better to avoid big losses in the first place.
Hersh Cohen, chief investment officer of ClearBridge Advisors, a Legg Mason subsidiary, says he believes in this philosophy wholeheartedly. “Make sure you don’t get killed on the downside,” he said. That’s more important, he said, than “worrying about the upside.”
Mr. Cohen has managed the Legg Mason Partners Appreciation fund for 30 years, over which he has beaten the S.& P. 500, according to Morningstar. The fund has returned 11.9 percent annualized, compared with 10.9 percent for the index and 10.4 percent for the average large-capitalization stock fund. (For the last 14 years, he has co-managed the fund with Scott Glasser.)

Last year was “the worst in my career in 40 years of managing funds,” Mr. Cohen said. Partners Appreciation lost 29 percent, and he said he “went home depressed about it every night.” Still, that performance was much better than the overall market and a vast majority of stock mutual funds.

MR. COHEN focuses on companies with “superior balance sheets” and rising dividends. At the moment, in his estimation, those include Wal-Mart, Travelers, Johnson & Johnson, Cisco Systems and Berkshire Hathaway.
Mr. Cohen holds a doctorate in psychology — a background he calls most helpful in “market extremes.” He says he tries “to act on extremes — but to act the other way,” cutting back when the market is euphoric, and increasing his bets when others panic “and stuff is being given away.”

For his part, Mr. Bogle has reduced the risk of big losses by diversifying most of his own portfolio into safer fixed-income holdings — 80 percent of it — which, he said, is appropriate for his age. He is 80 and holds index funds, and while he remains bullish for the long term, he said that by being cautious he has enjoyed a “consistently good night’s sleep over the last few years.”

The New Dividend Aristocrats ( from the Wall Street Journal)

APRIL 14, 2009, 10:47 P.M. ET

Staple Goods, Steady Payouts


By ANJALI CORDEIRO
Makers of consumer staples like garbage bags, soap and soda have been sweetening their dividends during the recession and are expected to continue boosting their payouts in coming months, a striking contrast with the cuts made by many other industries.

Coca-Cola Co. and Kimberly-Clark Corp. are two large consumer brands that raised their dividends recently. There are likely to be more in the pipeline. Investors and analysts are counting on increases from companies ranging from Procter & Gamble Co. to Clorox Co.

The consumer-staples sector has "far more opportunity for dividend increases than other sectors right now," said Rick Helm, manager of the Cohen & Steers Dividend Value Fund. Consumer staples are generally dividend payers, and their cash flows have stayed healthy even in the recession.

Procter & Gamble, maker of Tide detergent and Pringles chips, could raise its quarterly dividend by 10% to 44 cents a share in coming weeks, said Goldman Sachs analyst Andrew Sawyer.

Clorox typically makes a dividend announcement in May, and this year's increase is likely to be in the double-digit range and could bring the payout to just north of 50 cents, said Mr. Sawyer. A Clorox spokesman declined to comment on future payments, but said the company is committed to its dividend.

These increases would come at a time when many large companies, including Alcoa Inc. and General Electric Co., have slashed their payouts. Financial companies have seen some of the worst declines, and even real-estate investment trusts, which are structured as dividend payers, have been cutting back in this area.

Consumer manufacturers haven't been immune to the sharp slide in spending. Their sales have been hurt by competition from cheaper private-label brands and retailer inventory cutbacks, even as their stocks have been beaten down on concerns they might have to roll back prices for their products. But consumer makers continue to generate strong cash flows because they sell daily necessities.

Mr. Helm warned that dividend increases in the consumer-staples sector may not be as robust as in previous years, but he still expects the payouts for the sector to grow roughly 8%.

Consumers "may not be going out and buying beautiful dresses and jewelery, but they've got to eat," said Tom Cameron, co-manager of Rising Dividend Growth Fund. Mr. Cameron said he is upbeat on PepsiCo Inc. and Nestle SA because both have raised their dividends at a steady clip for years and are likely to keep doing so.

Many investors look at dividends as not just a steady source of income but also as an indicator of a company's overall health. And consumer-product makers have a long history of raising their dividends.

There are several consumer-staples companies on Standard & Poor's "dividend aristocrat" list of companies that have 25 consecutive years of increased payouts behind them. These aristocrats include Clorox, Coca-Cola, Kimberly Clark, PepsiCo, and Procter & Gamble.
According to investment management firm Fayez Sarofim, Altria Group Inc., Coke, Nestle, Pepsi, Philip Morris International Inc. and P&G together paid out dividends worth $61 billion between the beginning of 2006 and the end of 2008. These companies may be able to keep that trend alive.

Cohen & Steer's Mr. Helm said cigarette maker Philip Morris International is likely to raise its dividend to 58 cents from 54 in the third quarter. Altria could move its dividend upward to 35 cents from 32, he said. The two tobacco companies didn't comment.

Altria recently said it was putting its buyback program on hold, but Mr. Helm isn't put off because he believes curtailing buybacks can sometimes ensure that a company has cash on hand for its dividend.

Some staples companies have so far managed to accompany dividends payments with stock repurchases. Procter & Gamble, which declined to comment on future dividends, had repurchased $5.2 billion in stock by the end of its second quarter ended December, with expected purchases of $8 billion to $10 billion for the full fiscal year.

Write to Anjali Cordeiro at anjali.cordeiro@dowjones.com

Printed in The Wall Street Journal, page B5C
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