Published on February 4th, 2022
This is a guest contribution by Ryan Krueger of financial advisory firm Freedom Day Solutions. The best way to keep up with Ryan is on Twitter.
The arc of complex data analysis surrounding any question now is expanding so fast that I wonder if we are ending up farther away from the most efficient goal – a simple and repeatable solution.
There is a long-lasting reason that a small piece of cardboard from 1952 hangs in my office. George Mikan is smiling in heaven now, but he must be wondering how the highest percentage shots are now somehow hiding in plain sight, from so many expert crowds.
![](https://www.suredividend.com/wp-content/uploads/2022/02/George-Mikan.png)
After an explosion of analytics in both of my favorite sports – basketball and stocks – a remarkable thing happened. Good old-fashioned two-pointers are now wildly underestimated. We will look at the profound potential of a simple 2% dividend yield, with annual raises capable of solving the biggest problem for future retirees.
Overlooking this simpler math, the financial planning industry’s most sophisticated data models now revolve around their versions of a “safe withdrawal rate” used to predict how much a family can pull from a nest egg for 30 years or so, and hopefully not run out of money.
Withdrawals Are Not Income
To be fair, there are very smart and capable investors who will rely on price appreciation and/or withdrawing from principal (all depending on market conditions and their projections – not my idea of a peaceful retirement) which might work out just fine, for some. But make no mistake, withdrawals are not future income streams, from free cash flow. Current advisors have enjoyed incredible tailwinds from stock and bond price appreciation, from any allocation they chose, throughout their careers.
There is at least one big problem today if you are counting on withdrawing from anything close to those levels of returns, over the next several decades. For all the crowded attention that stock market total returns have gotten, what has been far more unusual is the uninterrupted bull market in bonds.
At least one of these two tailwinds has zero chance of repeating this fortunate math, over the next 40 years. At the beginning of this period, the 10-Year Treasury Bond Interest Rate was 15.8%. At the end of 2021, it was 1.3%.
At this point, “safe” withdrawal rates have an unprecedented challenge going forward. As a result, investors relying on withdrawals will be forced to step out further and further on the arc of risk, with lower odds of success.
It reminds me of another rule change.
Always Be Curious & Never Convinced
Ever since the NBA three-point line was added, more and more deep shots have been taken. Over the past decade, you can see the steady increase rapidly accelerating because new data analytics departments have come up with more sophisticated models. The one they all agree on is shoot more 3s.
When crowds grow completely convinced that more risk is worth taking, simple facts can get ignored, and mispriced… and then become even more valuable.
Consider at this point now, an entire generation of high school and college basketball players have all grown up shooting more 3s and can show you exactly where the “short-corner” is, where the three-point line is one foot shorter. Try it, ask ANY kid where this unquestioned sweet spot is. Add them all up and that is a huge crowd, and entire industries are now built around training with this better data, and coaching is focused on the short corner.
Just one small problem. It is not any shorter for them.
What!? Grab a tape measure and you will find it is not shorter at all on high school or college courts. I even talked to coaches at both levels who had not stopped to actually do their own math and were surprised by this fact. Only the NBA 3-point line is shorter in the corner. For the other 99.9% of players at every other level, it’s exactly the same all the way around the arc.
Remarkably, after more good data is available for better decisions, too much risk is being taken. Are we talking about basketball or stocks? Yes.
WHOA!
California Public Employees Retirement System (CalPERS) runs the largest defined benefit retirement plan, and recently voted to increase risk in order to hopefully keep up with projected returns going forward. They are adding leverage to the portfolio that a couple million people are counting on as their “safe” money.
“Without changes, Calpers said its current asset mix would produce 20-year returns of 6.2%, short of both the 7% target the fund started 2021 with and the 6.8% target implemented over the summer…
Board members voted 7 to 4 in favor of borrowing and investing an amount equivalent to 5% of the fund’s value, or about $25 billion, as part of an effort to hit the 6.8% target, which they voted not to change. The trustees also voted to increase riskier alternative investments, raising private-equity holdings to 13% from 8% and adding a 5% allocation to private debt.”
What if you also don’t get tailwinds from the Stock Market for a while, along with next to nothing from bonds? This is a combination that “safe” withdrawal rates have never factored in, over an extended period.
The notion that stocks prices always go up over the long-term is great marketing for asset managers, but it is not accurate math.
A stock market that goes nowhere happens more often than most bulls or bears would lead you to believe. Here is a recent one I remember well, beginning on my wedding day. Thankfully, my wife did not need to withdraw over the next decade plus.
The problem with using the smartest analytics at any one point in time, when it matters most, is the odds over time no longer matter.
In basketball it may only cost game 7 in the conference championship, with a chance to go to the finals, like I witnessed from the team that was supposed to have changed the game.
Ex-hooper / Current Portfolio Manager sidenote: Use sell disciplines. They solve every cold streak in life before they start. Even my youngest little shooter knows a sacred family rule is you’re not allowed to miss more than three 3’s in a row, before the next make is at the rim or free throw line, like George. No exceptions.
When an investor is preparing to retire, they are no longer net savers with decades of time to accumulate stocks, benefitting from market cold streaks. Instead, they need to count on their nest egg to pay them every year for a change.
Retirement planning analytics departments are crowded around their versions of the “short corner” – convinced that safe withdrawal rates of something close to 4% per year is the smartest spot on the investment arc.
To all of the ‘nearly perfected’ retirement plans, using the best data for the most optimized analysis of what should last after withdrawing from it, I will humbly submit one four letter word that you can use without offending anybody proposing you take that shot:
W.H.O.A!
Withdrawing Hopes of appreciation is not a plan, it’s a prediction.
One principle that built our investment firm is to always remain curious and never convinced. All brilliant ideas in the sport of capitalism attract a crowd. I hate crowds. So, I wondered if there was a spot on the court of the stock market with a little more elbow room, where anybody could achieve unusual success, even during long periods of the stock market going absolutely nowhere.
I believe good old-fashioned two-pointers are now wonderfully uncrowded in both of my favorite sports.
Take More 2s… They Can Add Up Fast
When I was a kid, the very first basketball shot you ever learned was called the Mikan Drill. I never heard the part when George was cut from his high school basketball team.
Openly described as too awkward, the coach told him, “You just can’t play basketball with glasses on, you better turn in your uniform.” George wanted to keep playing so he went to the YMCA where he promptly broke his leg so badly, after stepping on a ball, that he could not walk for a year. Hobbled, George decided to become a priest instead. He enrolled at Chicago’s Quigley Prep Seminary as a sophomore and gave up on basketball.
The priesthood did not work out either. Now enrolled in college and unable to tell his family about changing direction, his father only learned that George picked up a basketball again when he read in the newspaper about “…the Mikan kid on DePaul’s team.” Coach Ray Meyer invested time in his footwork to combat how awkward he was. He told George to even work at it during school dances by finding the shortest girls. George recalled, “Coach figured that would force me to improve my footwork, otherwise I’d step on them and hurt them.”
George tweaked one of Meyer’s drills and developed his own simple routine. He took the ball directly under the basket and with one step learned how to lay it in with his right hand, jumping off his left foot. Catch it from the net with both hands. Then, one step to lay it in with the left hand, jumping off the right foot. Over and over, both the hands and feet learning the basic recipes for scoring anywhere close to the basket from any angle. George made three hundred of these 2-foot baskets per session. The Mikan Drill was born.
All of those two-pointers from point blank range led DePaul to the national championship. George set a Madison Square Garden record with 53 points in the semi-final game.
The year the NBA was born, the Minneapolis Lakers took Mikan and won the championship. To try and help take away Mikan’s short 2s the league widened the lane from six to twelve feet, known as the “Mikan Rule.” The league even tried using 12-foot baskets to slow down Mikan’s signature shots close in. It backfired. The outside shooters were the ones who suffered the most. That experiment was scrapped after one game.
The most extreme example of trying to stop Mikan occurred on November 22, 1950, when the Fort Wayne Pistons decided to keep it out of Mikan’s hands. When the Pistons had the ball, they just held it. During the game fans were reading newspapers in the stands or walking out. The NBA reached its absolute low with a final score of 19-18. Continuing to carve up the middle, Mikan won five championships from 1949 to 1954.
Thanks to George Mikan, the 24-second shot clock was born in 1954, which saved the league. What we now take for granted as moving the fastest sport along with marvelous tempo, started out with one volunteer near the court holding a stopwatch and yelling “Time!” after 24 seconds elapsed. By the end of the season, however, all teams had clocks installed around the courts, visible to all and the NBA survived as a result.
The stock market hit a “new high” in 1954, also. That always makes a better headline than “…back to where it was a few decades ago.” It took until 1954 for the Dow Jones Industrial Average to get back to its previous peak in 1929. Long periods of going absolutely nowhere are much more common in Stock Market history than current advisors have seen.
Mailbox Math
No matter which way prices are headed, stock dividends are the Mikan Drill for investors. For more than 200 years, throughout every market cycle and historic turn, investors have been able to count on one metric that stands the test of time – a dividend. For all the correct or confusing ways to measure a company’s success, only a dividend can we hold in our hands to know what is real.
My only prediction is that Wall Street will be forced to paint all sorts of new “short corners” of investment products, often with leverage, to keep up with yield-starved investors going forward. Longer shots will be recommended, with lower success, and some increased risks completely overlooked.
The vintage two-pointer right at the rim is remarkably now underestimated! You can go get a 2% dividend yield right now from several high quality stocks with growing dividends. Some investors will consider that a “low yield.” The beautiful thing about an uncrowded and relentless focus on only the highest percentage shots is they can add up to a lot of points.
Here is an example of a “low yielding” dividend stock that began the period at 2% yield. Every year-end closing yield is listed. By comparison, you can see one of the most popular “high yielding” dividend stocks, and each of its annual closing yields.
Now, let’s look at what else happened over that same time with the same two companies. The “low yielder,” was always close to 2% current yield over this entire time period, and always less than half as much as the “high yielder.” However, the “low yielder” ended up providing so many dividends increases that its total annual income received by its investors, in their mailboxes to know what is real, was far greater.
This is what we call Mailbox Math. More important than any current yield is knowing your yield on original cost. It’s easy to calculate. You could do it with only the back of an envelope and a pencil. No algorithms are needed. At the end of this time period shown above, that $125k+ annual income (and rising) is a 12.5% yield on original cost.
But look closer at where the real magic of consistency from the Mikan Drill for stocks starts to pay off even sooner. Notice in this example, only five years after investing, your yield on cost is 4.3%, which is already greater than an entirely confusing industry of financial planning models hoping to thread a needle to withdraw 4% from appreciation and principal.
Instead, your Mailbox Math is pure free cash flow from dividends. Rather than relying on market conditions to adjust a withdrawal rate, dividends can provide income raises every year from increased payments, and no withdrawals from principle.
Better than any analytics next smartest answer is a simple and repeatable solution, like layups and dividend growth.