093: Versus “The Gathering Darkness,” Part 2 – Support Ownership of Great Businesses With an Adult Memory

0:00:00 – Jonathan DeYoe
Everywhere there was a gathering darkness, there was nowhere to hide from it. The reality is, the darkness is always screaming. It is always there and screaming is all it knows how to do. From within the darkness, progress is inconceivable. It’s laughable. Even when every minute of every day is filled with catastrophism, it’s impossible to see the power of human ingenuity at work For our purposes. Nothing captures this power, human ingenuity, better than the ownership of the great companies of the US and the world.

0:00:40 – Speaker 2
Do you think money takes up more life space than it should? On this show, we discuss with and share stories from artists, authors, entrepreneurs and advisors about how they mindfully minimize the time and energy spent thinking about money. Join your host, jonathan DiYo, and learn how to put money in its place and get more out of life.

0:01:05 – Jonathan DeYoe
Hey there, welcome back to the Mindful Money Podcast. Today we’re continuing my love affair with the great companies of the US and the world. Two weeks ago we talked about two things. First, we talked about the fact that wealth is created by owning great businesses and second, we introduced this idea of the gathering darkness all the reasons people decide not to own or own less of the great companies of the US and the world. Last week we talked about how the words we choose to describe the ownership of the great businesses can affect how committed we are to owning them.

Today our topic is the investing benefits of an adult memory. So humans are incredible adapters. It is the ability to adapt that’s made us such a successful species. Only important adaptation strange as this is going to sound is memory loss.

Most people associate forgetfulness with frustration, but forgetting also serves some very important functions necessary for human survival. According to Simon Norby, limited access to negative memories supports our ability to regulate emotions. Forgetting enables us to return to our bright and cheery selves after successive periods of this gathering darkness. Despite this natural flushing of historical memories, we probably succumb to the weight of it all and be unable to leave our homes. But forgetting also creates a mistaken view of history. Because we don’t remember the challenges we’ve overcome. We begin to see each challenge as something special and unique. Our brains trick us into believing that this time is different. So when the pundits tell us this time is different, it’s easy for us to agree without much examination. We form a generalized belief that today’s uncertainty will pass and become tomorrow’s certainty, because we don’t see today for what it is, just another period of the gathering darkness, inextricably linked to the infinite series of prior gathering darknesses. This is a terrible setup when it comes to our experience of markets and investing, because we think there are periods of calm and joy and certainty in markets and those are the periods that experience great returns. This isn’t true. Nothing could be further from the truth. The market climbs the proverbial wall of worry. As we analyze returns over time, we see that there are periods with horrible headlines and great returns and periods with great headlines and horrible returns. Returns do not correlate with headlines. They don’t correlate with much of anything but with any kind of regularity.

The minute we decide to sit this one out or wait and see, or look for an all clear signal, we begin to fall behind. We don’t actually move from periods of uncertainty to periods of certainty or anything like that. We move from one uncertainty to the next without ever really knowing the consequences of the former or the causes of the latter. Meanwhile, our brains cobble together some muddled version of a shared history that enables us to make sense of our surrounding and cope with the vastness of the uncertainty. We desire a certainty we can’t have. So our brains revise our histories to give it to us.

But when investing, there is an enormous value in an adult memory. The year was 1970. Before we go further, take a moment, maybe pause this session for a second and think about it. I have a call from the year 1970. Personally I wasn’t a twinkle in my parents’ eyes, but thankfully I can read. So I’ve read and I know I’m going to share three stories with you.

1970 was a year marked by the gathering darkness. The darkness always presses its case in a 1970. The darkness presented itself in the form of three stories. Don’t just listen here. Maybe close your eyes. See if you can put yourself back in 1970 and relive this for a little bit.

The first story the first five months of 1970 were the last five months of an 18-month almost 40% bear market that brought the go-go years of the 50s and 60s to a close. You might recall that the go-go years were the golden post-World War II era of a thriving middle class, increasing inclusiveness, strong GDP growth and booming corporate earnings. Things were so good that we compare, often longingly, today’s growth rates with those rates of the go-go years. Things were so good economically speaking that we forgot that they could be bad. The go-go years in the 50s and 60s left investors completely unprepared for the 1969-1970 bear market that ended in May of 1970 in a firestorm of capitulation. It wasn’t so much that investors forgot that bear markets could happen, it was that they started to believe that they weren’t possible anymore, as if there were some new economic rules that eliminated bear markets altogether. As a side note, this sense that risk has been repealed is one of the elements that makes almost every bear market rhyme. The second story Just before the firestorm of capitulation from the bear market, on April 20, 1970, the President of the United States, who was elected for the express purpose of ending the Vietnam War, went on TV to tell the country that we were about to pull 125,000 of our boys out of Vietnam, fulfilling the promise.

Ten days later, april 30, 1970, very same president, very same TV lets the country know that we have escalated the war in Vietnam in an effort to get the Viet Cong. We have invaded Cambodia now as well. This was the direct opposite of the perceived national goal in the moment. It was the direct opposite of the promise he had made ten days early. We had no warning and the country went insane. Overnight, every campus exploded into demonstration and protest. At one campus, kent State in Ohio, mayor Satrim asked Governor Rhodes to call out the National Guard to do what the entire Kent police force had failed to do. The night before, the children attending Kent State started throwing rocks at the National Guard troops. The National Guard troops, children themselves, fired into the crowd. Four students were killed, nine were injured. Third story Finally, towards the end of 1970 and spilling over into 1971, the essential financial fact that defined the post-war world was repealed.

Going into 1970, according to the Bretton Woods Agreement, which was created to promote price stability between the US and its 44 most important trading partners after World War II, the trading partners could peg their currency to the dollar and the dollar would be pegged to the price of gold.

One ounce of gold would always be immediately convertible for $35 US For going on three decades. The global financial order depended on this negotiated monetary order. In 1965, lyndon Johnson, refusing to raise taxes, started paying for his unconditioned war on poverty and the Vietnam War with the same dollar. By 1970, the value of that dollar was in decline and the mounting pressure, along with changes in both global trade and currency exchange markets, made the $35 per ounce of gold impossible to maintain. So the entire Bretton Woods Agreement was abolished and the dollar was pegged to itself the full faith and credit of the United States. If this was a meme, we would all be entering our favorite laughing emoji right now. It wasn’t a meme. At the time, no one knew what would happen next. There were no longer any anchors in the financial system. It was as if we repealed gravity on the planet Earth and we just couldn’t see you know, earth is going to continue to spin.

Is stuff going to spin off into space or is stuff going to stay, you know, attached to the planet? Everyone was just forced to watch and see. No one had any idea what was going to happen. It was an insane experiment that we had no choice but to undertake. I want you to imagine the headlines during this period. Imagine the news punditry, which were thankfully much smaller at that time.

Imagine the morning news and the crosstalk of 1970. Think of the political speeches and the grandstanding on the radio and TV. What are the articles about? And all the papers and periodicals? What were people discussing around the water cooler at work? What did families talk about at the dinner table? What were the presentations given in high school assemblies? What was the roundtable talk in econ 101 class? What were the priests and pastors and rabbis telling us from the pulpit?

Everywhere there was a gathering darkness. There was nowhere to hide from it. The reality is the darkness is always screaming. It is always there and screaming is all it knows how to do. From within the darkness. Progress is inconceivable. It is laughable. Even when every minute of every day is filled with catastrophism, it is impossible to see the power of human ingenuity at work For our purposes. Nothing captures this power human ingenuity better than the ownership of the great companies of the US and the world. Now the rest of the story. Anyone remember Paul Harvey’s the rest of the story? Abc radio in the mid to late 70s. He would present little known or forgotten facts on different subjects. That’s exactly kind of what we’re doing today. At the same time these three stories were happening. Inconceivable progress is launching without any fanfare or appreciation, or even announcements.

In the late 60s, a gentleman named Gordon Moore started a quiet revolution. He observed that the number of transistors in an integrated circuit was doubling every two years and posited that it would continue to do so. This became known as Moore’s law. Gordon Moore was the founder and CEO of Intel, and while the world was ensconced in the 1970s version of the gathering darkness, Moore was launching the semiconductor industry, which set off a technological revolution that we’re still both benefiting from today and deepening 50 years later. So simple question Today which is more important in our day to day lives the three stories that made up the gathering darkness of 1970 or Moore’s law, which is more important to our portfolios? Let’s take a look In 1971, one could purchase a share of the S&P 500 for $92.

You heard that right. It’s a two digit purchase. The S&P 500 enjoyed earnings of $5.51 that year and paid a dividend of $3.19. Note that if we divide the dividend of $3.19 by the earnings of $5.51, we get about a 60% dividend payout ratio. Remember that we’re going to talk about that again in a couple of weeks. Today, roughly speaking, the same share of the S&P 500 trades for about $4,850. Earnings will be in the range of about $220 for 2023. And the dividend is going to be around $70. Note the reduced dividend payout ratio. It’s more like 32% instead of 60%. Again, we’re going to talk about this again in a short while. The price is up 45 times because the earnings are up 40 times and the dividends are up 22 times, versus inflation, which is only up eight times in the same period.

If all you could see in 1970 was the gathering darkness which is, I promise you, all that was reported you could have very rationally convinced yourself to sit this one out to wait and see, to wait for that all clear signal, and you would have immediately begun to fall behind. All businesses attempt to grow their earnings and their dividend all the time. Obviously, this would have to be true for the 500 largest, most profitable, most innovative, most transparent, most soundly financed, most well managed and stable companies in the US. How could it be any other way? There is real suffering in the world. The headlines will always capture the current gathering darkness, but don’t make the mistake of believing that the darkness any of it can overwhelm the inconceivable progress that’s being made at the great compass of the US and the world all the time.

If you want to develop your own understanding of our economic history, check out the resources tab on the Mindful Money website. Scroll down to the category Money History, where I’ve collected 10 of my favorite books on US financial history. While you’re there, check out some of the other categories as well. The gathering darkness will always get the headlines. The inconceivable progress is always made invisibly. You got to be careful which one you allow to lead your portfolio. The gathering darkness suggests that perhaps bonds or cash are a good idea. History marked by the inconceivable progress suggest we should own more of the great companies of the US and the world. I hope you will join me next week as we give specific examples of great companies and their rational refusal to lose money, our money. Thanks for joining me today.

0:15:05 – Speaker 2
Thanks for listening. Full show notes for each episode, which includes a summary, key takeaways, quotes and any resources mentioned are available at Mindful Money. Be sure to follow and subscribe wherever you listen to your favorite podcasts and if you’re enjoying the content and getting value from these episodes, please leave us a rating and review at RateThisPodcastcom forward slash mindful money. We’ll be sure to read those out on future episodes.