by Alexander Green, Chairman, Investment U
Friday, April 25, 2008: Issue #788
Most Americans know too little about successful investing. Polls show they understand even less about free markets.
But in his new book “EconoPower: How a New Generation of Economists is Transforming the World,” university professor, prodigious author and my colleague Mark Skousen does a superb job of enlightening readers about both.
Since World War II, technology has exploded, entrepreneurship has blossomed and – despite the many naysayers – the U.S. economy has boomed. So has the stock market.
This strikes many folks as something of a mystery. How has this economic miracle happened, what is responsible and, more importantly, can it be sustained?
According to Skousen, the answer is a qualified “yes.” We can boost economic productivity, reduce poverty, improve education, reduce crime, and vastly increase personal prosperity if we understand the individual and economic freedoms that make it possible and insist that our national leaders promote and protect them.
As Frederic Bastiat observed, “Countries which enjoy the highest level of peace, happiness and prosperity are the ones where the law least interferes with private affairs.” Or, as the Chinese philosopher Lao-Tzu said a couple thousand years ago, “Governing a large country is like frying a small fish. You spoil it with too much poking.”
Mark Skousen’s “EconoPower”
Mark Skousen begins “EconoPower” by showing how the science of behavioral economics is revolutionizing the world of economic forecasting. For decades economists, ensconced in academia, drew up mathematical models that were ineffective in predicting human economic behavior.
Now that’s changing. Empirical studies are creating powerful tools for achieving new knowledge, building better policies and creating winning investment portfolios.
Mark Skousen describes, for example, how investors have a misguided tendency to buy amazing stock stories – about miracle drugs and next-generation technology – rather than focusing, as they should, on the tried and true.
One of the best predictors of business success, for example, is not cutting-edge innovation but – stifle that yawn – stodgy old dividends. Why?
As Skousen writes, “Earnings may be suspicious due to creative accounting. Revenues can be booked in one year or several years. Capital assets can be sold and the value listed as ordinary income. But cash paid into your account is a sure thing, a litmus test of the company’s true earnings. It’s tangible evidence of the firm’s profitability.”
Regular payouts impose fiscal discipline on a company. And history reveals that dividend-paying stocks are both less risky and more likely to beat the market.
Still convinced that your big gains will come from that flashy young technology company working on a cure for cancer or harnessing the power of cold fusion? Well, good luck. As legendary money manager Peter Lynch conceded in his book “Beating the Street,” “I note with no particular surprise that my most consistent losers were the technology stocks.”
(Or, as the great industrialist Andrew Carnegie once said, “Pioneering don’t pay.”)
Mark Skousen’s Examples of High-Return Investing
In “EconoPower,” Skousen also gives numerous examples of “high-return investing,” drawing on the experiences of David Swenson, the market-beating chief investment officer for the Yale Endowment Fund, Dr. Jeremy Siegel of the Wharton Business School and author of “The Future for Investors,” Burton Malkiel, the founder of modern portfolio theory, and Robert Shiller, the Yale economist who warned investors in advance about the dot-com and housing bubbles.
In short, this is a wonderful book. If you want to be a more successful investor, you face long odds without understanding how free markets, the new science of behavioral economics and other forecasting tools are improving our ability to predict economic behavior.
So pick up a copy of “EconoPower” at your local bookstore. Or, better yet, grab it up on sale now at Amazon for 34% off.
Today’s Investment U Crib Sheet
- The power of dividends is substantial, especially when you reinvest them.Take a look…
This chart, from Bernstein Global Wealth Management, demonstrates how reinvesting dividends can substantially improve your total returns.
- Floyd Brown goes into the many advantages of dividend investing and looks at three companies with above average payouts right now in Investment U Issue #772, Stock Dividends: The Difference Between Success and Failure.
- To find some on your own, give Google’s stock screener a try. It’s free. But please note: Be wary of companies whose dividend is excessively high compared to industry peers. This could be a signal that the dividend hasn’t caught up with a declining stock price. Wachovia’s (NYSE: WB) dividend was close to a 10% return. Then the stock price took another dive when the company reduced their dividend to 5.75%.