I have no experience piloting airplanes, and admit there have been several times as a passenger that I have been afraid of turbulence. What helps me stay calm in turbulent flights is remembering descriptions I heard from at least one pilot interview on how insignificant most turbulence is compared with how high the plane is off the ground, and how strong the metal body is. As uncomfortable as it may be at the time, knowing the difference between turbulence vs damage, and soberly remembering how rare truly damaging airline incidents really are, marks a clear difference between a calm and a nervous flyer.
Similarly, the first time I bought a stock in my early twenties, I was very stressed watching the price move up and down (seemingly) so much before I bought it, then hoping I bought it at a low, and then finding it difficult to exhale as I watched it move above and below my purchase price afterwards. I shortly after learned the term “permanent loss of capital”, but it took me several years to fully swallow how that translated into a meaningful difference between market turbulence vs damage to the underlying fundamentals of a company’s stock. As one example, Coca-Cola has paid a quarterly dividend since 1920, and has increased this dividend every year since 1964. The two charts below are small, but simple, visuals I could find showing this difference between stock price and fundamental value.
The first is from South African financial planner Kevin Murray showing Coca-Cola dividends vs stock prices between 1980-2020. This chart shows how KO has been paying steadily rising dividends every year, and how the stock price broadly tracks this rising dividend over long periods of time, but with plenty of turbulence in the stock price. Many long-term KO shareholders point to a “lost decade” in the 2000s when the stock fell and went nowhere for years, even though the dividend was solidly rising.
Chart 2 is from the Motley fool, showing a shorter period of time (only the past 20 years), and showing the turbulence in the dividend yield as opposed to in the stock price. Dividend yield is simply the annual dividend divided by the stock price, so just as we should aim to buy stocks at a low price and sell them at a high price, ideally we should buy at a high yield and sell at a low yield. The clue in this chart about KO’s “lost decade” was its very low dividend yield (below 1%) in the late 90s, when government bonds would still pay you 5-6%. The best time to buy in this chart was when the yield hit a high of around 3.8% in the depths of the financial crisis, when government bonds paid less than 2%.
So to recap:
- “Turbulence” often pushes stock prices around, but won’t harm or delay your arrival any more than turbulence on a plane (assuming it doesn’t drive you to jump out mid-flight).
- “Damage” to a stock would be what impairs a company’s ability to keep earning money or pay a dividend. In the case of Coca-Cola, if people stopped buying drinks in bottles and cans the way we stopped buying pagers, KO stock would see some real damage, and your future dividends might be less than today’s stock price. Without damage, your flight should land safely.
These are all points I had hoped I made clear on earlier related articles:
- The only two ways to make money in stocks.
- 75% of the S&P 500’s returns came from dividends.
- 13 charts from “Stocks for the Long Run”.
Safe investing!