Who are your mentors?

Our son Rob spends most of his available energy doing medical research. He linked me to the best article on any subject that I’ve read in a long time. A post from Everything Is An Emergency by blogger Bess Stillman, “Debugging the Doctor Brain” is good reading if you’ve been (or might be) in an Emergency Room. It’s relevant to any vocation or avocation. Here’s an excerpt:

Do emergency medicine for 80 hours a week for three to four years —the length of an ER residency—and a resident doctor will have spent around 10,000 hours on direct patient care. It’s during those encounters that doctors are (supposed to be) guided towards developing and deepening the fundamental mental models that run in their cognitive background while evaluating each new patient.

Dan Luu’s Why don’t schools teach debugging got Stillman “thinking about the way science and medical education universally teaches the fundamentals: badly.” Stillman wrote, “In medicine, we often mistake the speed of initial understanding with a students’ capacity for mastery.” I believe this is true in every significant human endeavor. Stillman’s post will connect with your life’s experience.

Stillman reminded me of my student pastor days. Years 1-3 were my last three undergraduate years. Years 4-6 were my three seminary years. Stillman helped me see my student pastor time as a “theological residency,” with older clergy colleagues and gracious laity complementing my faculty and fellow students. They were my mentors. Who are your mentors?

From Massachusetts General Research Institute

Closure

The upcoming closure of Birmingham-Southern College awakens memories from my years as pastor in Jackson, Tennessee (2005-2010). While there and into 2011, I was a trustee of Lambuth University. When the university’s president told an emotional student assembly that the school would close, he asked me to offer a prayer. That was tough.

A year or so earlier, at one of many fund-raising meetings with friends of Lambuth, I was introduced by a student as an alumnus. I thanked him for the honor, but said, “I’m not a Lambuth alumnus, but I’ve learned a lot since I’ve been here.” Lambuth had operated on a shoestring for decades and the Great Recession put the school over the edge.

While in Jackson, I remembered with envy the relative strength of Birmingham-Southern. Upon my return to metro Birmingham in 2010, I discovered that BSC was not as strong as in the Neal Berte era (1976-2006). Institutions do not die suddenly and, usually, death is due to multiple causes. Today, it’s difficult to be a small liberal arts college.

Lambuth became the University of Memphis– Lambuth Campus, Jackson’s first four-year public university. Closure is painful for students, faculty, staff, alumni and friends. Church-related colleges are rooted in a tradition that embraces death and resurrection. This doesn’t remove the pain, but it provides a basis for hope to face the unknown with grace.

From “Nearly 170-year-old private college in Alabama says it will close at the end of May,” by the Associated Press, via NBC News, March 27, 2024

In case you missed them

It’s easy to be numbed by data overload in our 24/7 news flow. Two articles stand out:

A letter from Cleveland Plain Dealer editor Chris Quinn, “Our Trump reporting upsets some readers, but there aren’t two sides to facts,” includes this:

The north star here is truth. We tell the truth, even when it offends some of the people who pay us for information.

The truth is that Donald Trump undermined faith in our elections in his false bid to retain the presidency. He sparked an insurrection intended to overthrow our government and keep himself in power. No president in our history has done worse.

Philadelphia Inquirer columnist Will Bunch wrote, “A ship crashed into a Baltimore bridge and demolished the lies about immigration,” which includes this:

(Maynor) Suazo and seven men with stories very much like his — migrants from the neighboring countries of Guatemala, El Salvador, and Mexico — were filling potholes on the region’s major span on a raw March night…. (a job) many other Americans simply can’t or won’t do ….

These six workers who perished were not “poisoning the blood of our country,” they were replenishing it. This is a moment of clarity when we need to reject the national disease of xenophobia and restore our faith in the United States as a beacon for the best people like Suazo. … they died as Americans.

Thanks to Robert Hubbell for sourcing the Chris Quinn editorial. Thanks to Lawrence O’Donnell for sourcing the Will Bunch column. Meanwhile … a Joe Scarborough conversation with Jim Wallis:

From Morning Joe, April 2, 2024

Public Service Announcement

After a career in the grocery business, one of my grandfathers was a public accountant. People would bring their tax information to his house and he would complete their tax returns. He always wore a long sleeve white shirt and a tie tucked into his shirt a few inches below the neck. He insisted that my uncle Ray (1922-2013) wear a tie as a boy when he delivered the news on his paper route.

I thought about my grandad when we sent a check to the U.S. Treasury with our 2023 Form 1040-V. As I read the instructions attached to the top of the form, this paragraph caught my attention:

No checks of $100 million or more accepted. The IRS can’t accept a single check (including a cashier’s check) for amounts of $100,000,000 ($100 million) or more. If you are sending $100 million or more by check, you will need to spread the payments over two or more checks, with each check made out for an amount less than $100 million.

One check was all we needed, but some of you might be impacted by this rule, so I’m passing the IRS instructions along for your convenience.

I would enjoy talking with Irl F. Hicks (1891-1973), Jellico, Tennessee, circa 1950, about the paradox of the IRS notice to those paying over $100,000,000 in taxes while many Americans struggle to save for retirement. I would ask his opinion the Annual Letter of Larry Fink, CEO of BlackRock, the world’s largest asset manager, who’s working to rebuild our trust, our infrastructure and our hopes for retirement.

Nvincible?

I’m a Josh Brown fan, but not a client. He’s a CNBC stock market analyst. For years, I ignored Josh’s bullish view of Nvidia. On 11/18/21, he explained Nvidia’s leadership in tech, but my focus is dividends, and at $321, NVDA looked very overvalued. I dismissed it.

On 3/28/23, Josh said, Many companies will benefit from artificial intelligence and Nvidia will be the “Grand Marshal” of the AI bubble “parade.” Finally, on 11/30/23, after much study, in spite of the $469 price, I bought 25 shares for a long-term investment in my IRA. I added 10 more at $490 on 12/15/23, giving the IRA 35 shares at a cost basis of $475. I planned to add no more and “let it ride.”

On 1/25/24, I sold 5 shares at $619. It usually takes months if not years for one of my stocks to grow enough to trim to keep positions in relative proximity. On 2/5/24, I sold another 5 shares at $690. The IRA now holds 25 shares. Nvidia closed yesterday at $735.38.

Josh said, “You may not see another stock like this in your investing lifetime.” Nvidia’s quarterly earnings report on Wednesday reflected growth that exceeded the most bullish expectations, so the stock rose over $110 per share on Thursday. Stock prices are ephemeral. It could drop sharply today. Nvidia is volatile, not invincible. Caveat emptor.

I’m sharing my Nvidia story to say that I listen to Josh because he’s humble. He owns his mistakes. On Wednesday he wrote about “The New Era of Market Commentary,” featuring two young researchers, Nick Colas and Jessica Rabe. Josh wrote, “Nick and Jessica are not only bright–they are reputable, credible, authentic and humble. They know a lot–and they know enough to know what they don’t know. This sounds obvious–why wouldn’t everyone carry themselves this way? It’s not obvious.”

From “Josh Brown, CEO,” Ritholtz Wealth Management

ETHIC$ 3.0

I promised this final post about financial markets would include a word about “social justice,” which is redundant since society is inherent in the word justice. But, social justice is a useful term, described by the San Diego Foundation: “equal rights; equal opportunity; equal treatment.” I’m for it. Good companies are for it. Justice is essential in a democracy. And, democracy is essential for markets.

The modern investment club movement began in 1951 with the belief that broad equity ownership is healthy for democracy. Though more folks now own financial assets, wealth is even more concentrated, documented by Pew Research in 2014, by the UK Parliament in 2018. and by the 2022 World Inequality Report. This trend is an ethical issue and a direct threat to democracy and the social order.

Authoritarian movements threaten democracy and markets. Today’s US version of authoritarianism presents ethical issues for individuals, corporations, investors–and faith groups. White Christian nationalist movements embrace authoritarian ideology and provide a religious veneer that has caused many well-meaning people to forget what the Third Reich and World War II were about.

From “Understanding White Christian Nationalism,” Yale University Institute for Social and Policy Studies, October 4, 2022

ETHIC$ 2.0

This is the second of three posts about ethics in investing, which conclude a series of posts about financial markets. My goal is to practice a consistent, coherent, holistic approach to financial ethics–making, saving, giving and spending money–as a good neighbor, a faithful member of a congregation, a tax-paying citizen in a democracy, a corporate shareholder and a consumer of goods and services.

Justice issues are a perennial concern. Each era has its ethical challenges. My financial ethics are shaped by the historical moment of my brief tenure on earth. In an era of climate change, this means conserving resources, living simply, encouraging sustainability, and investing in companies with healthy ESG policies and practices. My carbon footprint matters, as does my portfolio’s.

I own shares in three energy companies. I’m for cleaner energy. The technology for totally “clean energy” isn’t yet available. I’ve owned shares of renewable energy companies such as Enviva (EVA), and I discovered that even wood pellets can be controversial. These are tough issues. Every sector has sustainability challenges, but many corporations are making ESG progress.

As a shareholder, I pay attention to executive compensation. I want execs to be long-term shareholders whose interests align with shareholders. Exorbitant compensation is unjust and weakens democracy. Robots and artificial intelligence can free humans for other work and creative activity. The ethics of work are both exciting and scary. If all work is done by robots, how does one earn a living?

From “Highest-Paid CEOs,” Executive Paywatch, AFL-CIO

ETHIC$

Recent posts focused on my 40+ years in the stock market. I’ll wrap-up this series with three posts about ethics. I consistently fail, but my goal is to integrate ethics into all my financial decisions by living with an attitude of abundance, not scarcity and a glad and generous heart.

My life in the market began with an investment club of friends who enjoyed making collaborative decisions. I have remained in the market because I could see its potential to provide supplemental retirement income and to provide a way to help medically disadvantaged family members.

In 2010, the first $1000 distributed from my IRA was a direct gift to a United Methodist college we were trying to keep afloat. This year, 40% of my IRA distribution goes directly to our congregation. Some US tax laws include provisions that encourage generosity to charitable organizations.

One of my early investments was the PAX World Fund, the first “socially responsible” mutual fund, founded in 1971 by United Methodist clergy Luther Tyson and Elliot (Jack) Corbett, who pioneered in ESG investing (environmental, social and governance consciousness).

Tomorrow: climate change, clean energy, and compensation for corporate executives. Sunday: social justice and the threat to democracy by the increasing concentration of wealth in the hands of a few and the dangerous growth of white Christian nationalist movements.

From Generous Frugality: an alternative approach to money, by Canadian (now New Zealander) Brenda Wang

Dividend yield

Business development companies and real estate investment trusts are exempt from federal corporate income tax if they distribute at least 90% of taxable income to shareholders. Congress did this to encourage investment in these sectors. Over the years, I became familiar with, and comfortable with, REITs, but I didn’t have the same level of familiarity or comfort with BDCs.

I learned that my brokerage firm offers strong BDC analysis. Based on the depth and detail of their research, I built positions in twelve BDCs. Today, BDCs account for more than a quarter of the portfolio’s value and more than half of its income. Most BDC investments are in the form of loans to small and mid-size companies. This BDC exposure lowers the average credit rating and adds more risk.

The BDC sector grew and matured since I dabbled in it a decade ago. Some BDCs are run by major financial companies (such as Barings, BlackRock and Blackstone). Institutions (such as Sun Life and the Teacher Retirement System of Ohio) looking for “alternative investments” have been drawn to BDCs. I don’t trust my current ability to manage a dozen BDCs, so I lean on my brokerage firm for this.

With 12 high-yield BDCs in the portfolio, I increased my focus on quality in the other 24 companies, which form the core of the portfolio. I increased exposure to Microsoft and Apple. I added some relatively low yielders I’ve admired, but avoided, for many years: Colgate-Palmolive, Nike, Abbott Labs, United Healthcare and Costco. The day after my first Costco hotdog, I added it to the portfolio.

Nine of the business development companies are rated BBB- by Standard & Poor’s, Fitch or Kroll. Until I develop a ranking strategy I’m using a pre-S&P tool called the alphabet:

• Barings BDC Incorporated (BBDC);
• BlackRock TCP Capital Corporation (TCPC);
• Blackstone Secured Lending Fund (BXSL);
• Blue Owl Capital Corporation (OBDC);
• Capital Southwest Corporation (CSWC);
• Crescent Capital BDC Incorporated (CCAP);
• Golub Capital BDC Incorporated (GBDC);
• Sixth Street Specialty Lending (TSLX);
• SLR Investment Corporation (SLRC).

I could not find current credit ratings for the other three BDCs in the portfolio: Fidus Investment Corporation (FDUS); PennantPark Investment Corporation (PNNT); and WhiteHorse Finance Incorporated (WHF).

As of October 31, 2023, the aggregate portfolio yield was 6.14% for the 36 equity holdings and a 5.83% cash position.

In addition to prior disclaimers in this series of posts, be aware that companies in the relatively young BDC sector tend to be more opaque than traditional corporations. Information is not as easy to find, credit ratings tend to be lower than many corporations, and BDC loans to companies do not have the same regulatory oversight as banks. I’m not a financial advisor and this isn’t financial advice!

From “Top 57 Largest Business Development Company Rankings by Total Assets,” Sovereign Wealth Fund Institute

Dividends

Since 1982, I’ve read the monthly Better Investing magazine. Each issue includes a “Stock to Study” and an “Undervalued Stock.” The November stock to study is Edwards Lifesciences, the world’s leading supplier of heart replacement valves. The undervalued stock is 3M Company. Featured companies may or may not pay a dividend, but BI has helped me see the role of dividends in a portfolio.

Around 2008, as I moved closer to retirement, I adapted William Bengen’s 1994 “Four Percent Rule,” which posits that annually one can safely distribute 4% of the value of an IRA or 401k. I set a goal to create a portfolio with a 4% dividend yield, so that dividends would provide cash for distributions.

Legendary portfolio manager Peter Lynch said his bedtime reading was a Handbook of Dividend Achievers, companies that had raised the dividend for 10+ consecutive years. This led me to David Fish (1949-2018), whose “Dividend Champions” had raised their payout for 25+ consecutive years.

I rank my 24 portfolio companies by their Standard & Poor’s credit rating. For those with the same rating, the tie-breaker is their consecutive years of dividend increases. Johnson & Johnson’s AAA rating earns first place (61 consecutive years of dividend hikes). Microsoft’s AAA rating earns second place with 21 years. Apple’s AA+ rating places third. The next five have AA- credit ratings: Procter & Gamble (67 years), Colgate-Palmolive (60), Chevron (36), Nike (20) and Cisco (12).

CME Group and Abbott Laboratories also have AA- credit ratings and both have ten consecutive years of dividend increases. The tie-breaker is a “dividend safety score” from Simply Safe Dividends. Fifty is SSD’s average score and 99 is the highest score. CME’s 96 safety score bests Abbott’s score of 71. Three portfolio companies have A+ S&P ratings, led by Costco’s 20 years, followed by United Healthcare’s 14 years (safety score 99) and Bristol-Myers’ 14 years (safety score 79).

Prudential and Prologis have S&P credit ratings of A, with 15 and 10 consecutive years of dividend growth, respectively. Four portfolio companies have A- credit ratings: Union Pacific (16 years), United Parcel Service (13 years), EOG Resources (6 years, 82 safety score), and Conoco Phillips (6 years, 61 safety score). The final five portfolio companies are real estate investment trusts. Three are rated BBB+, led by NNN REIT (33 years), WP Carey (26 years), and Extra Space Storage (14 years). Agree Realty is rated BBB and Starwood Property Trust is rated BB.

Please remember (from yesterday’s post) that this is neither financial advice nor a recommendation about any security. It’s just my story.

From “For Dividend Investors, Time Pays,” by Danny Noonan, Morningstar, April 25, 2023