The New York Stock Exchange is set to reopen today after having been closed for two consecutive trading days as Hurricane Sandy made landfall on the Eastern seaboard. The last time this happened due to weather was in 1888, when a blizzard shut down the city.
It could have been much worse. The lesson: You cannot rely on your stocks for liquidity. When the world goes into crisis mode, and you are likely to need cash most, the odds are good that selling off your ownership in businesses is not only the last thing you should be doing, it might be impossible. On its website, the New York Stock Exchange provides a PDF file detailing the closures dating back to the 1880’s. Consider one of the more extreme cases: During the outbreak of World War I, unrestricted trading in stocks was shut down between July 31st, 1914 and April 1st, 1915. That was more than eight full months during which you could have been cut off from your wealth if you held it all in publicly traded securities.
[mainbodyad]If you run your family’s investment portfolio wisely, that shouldn’t matter. I know older investors who have owned certain real estate assets for 30, 40+ years. They never get quotes on the property value. Instead, they measure their success by the net rents generated each year. If you have accounts stuffed full of things like PepsiCo and Johnson & Johnson, Procter & Gamble and Nestle, it probably isn’t going to matter much over a 5 or 10+ year period whether or not you can buy or sell shares. During the hurricane, you couldn’t have traded shares of Coca-Cola, but do you think that people in India or Brazil suddenly stopped drinking Coke? Of course not. The companies themselves were just fine as cash kept pouring into the treasuries from product sales.
That is why one of my favorite pieces of old Wall Street advice that has been around since as long as anyone can remember remains, “Never own anything that would wouldn’t be comfortable owning for five or ten years.” It’s hard to go broke if you follow that rule and you are disciplined in your purchasing.
So let me say it again: Don’t make the mistake of thinking that simply because stocks are liquid, they are a source of readily liquidity. They are not cash equivalents. They are not intended to be. They are intended to generate cash that you can then save, reinvest, spend, or give to charity. Think of it as an apple tree. If you need apples, you don’t go cut down the tree. You harvest apples from the tree, store them, preserve them, and then use them whenever you want to make pies or jelly.
Reader Comments (6)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
Jason Scott Snodgrass
October 31, 2012
Good to know....and to prepare for such contingencies. In a scenario such as the one in 1914, would the companies still send dividends to your mailbox?
Jason Scott Snodgrass
October 31, 2012
Good to know....and to prepare for such contingencies. In a scenario such as the one in 1914, would the companies still send dividends to your mailbox?
Jason Scott Snodgrass
October 31, 2012
Good to know....and to prepare for such contingencies. In a scenario such as the one in 1914, would the companies still send dividends to your mailbox?
Jason Scott Snodgrass
October 31, 2012
Good to know....and to prepare for such contingencies. In a scenario such as the one in 1914, would the companies still send dividends to your mailbox?
Joshua Kennon
October 31, 2012
Replying to Jason Scott Snodgrass
It depends on the company. Procter & Gamble, for example, has paid dividends for 122 consecutive years without missing a payment. That is, literally, every year since it was incorporated in 1890. The corporate culture is that the primary job of the business it generate cash and return a big chunk of it to the owners. It's in the food, the water, and the air filtration system. It is who they are. The same goes for a place like Johnson & Johnson. They not only have paid a dividend, but raised the dividend each and every year for the past 50 years. It is a major part of their internal identity.
Other firms? They might skip a dividend. In and of itself that can be okay in some situations. GE cut its dividend and it is in the process of restoring it, but the move allowed it to recover far faster than it otherwise would have by using the cash it saved and shoring up its financial division. There will still dividends sent in the mail, but they were smaller.
In the case of a localized disaster, and not a global economic collapse, I would fully expect a diversified portfolio of blue chip stocks to continue generating most of its dividend income. There are no guarantees in life - anything can happen - but if you want to improve your odds, look for companies that treat their dividend like a religion. Stanley Black & Decker has paid dividends since 1877. Exxon Mobil has paid dividends since 1882. Coca-Cola has paid dividends since 1893. No CEO is going to want to be the one responsible for breaking that streak unless it is absolutely necessary. The odds of a delay in receiving the checks would probably be reduced significantly if the stock were held directly in book entry with the company itself rather than through a stock broker, but even then, brokers are required to have backup systems for precisely this reason.
Jason Scott Snodgrass
November 5, 2012
Replying to Joshua Kennon
As always...thanks for the detailed response!