Published June 1st, 2019 by Ryan Krueger
There are books, documentaries, movies, and even dreams about climbing Mount Everest – the one in Nature and in the Stock Market. Edmund Hillary is known around the world as the first person to make it 29,035 feet to the top, in 1953. Reaching the world’s highest peaks, in any industry, obviously makes for the best stories.
But, what if it’s not true? Or more importantly, what is a longer lasting truth?
“The secret of all victories lies in the organization of the non-obvious.”
Few people have ever heard of Sandy Irvine. There is some evidence to suggest he may have been first, twenty-nine years earlier than Hillary. Irvine’s climbing partner George Mallory’s body was found just a few hundred feet from the peak. Since the highest temperatures are well below zero, clues are well preserved. Irvine’s camera with the answer has not been found, yet. We will never know, in those three decades in between, if others may have also reached the peak.
This much is clear and true. Hillary gets the credit because he was the first to make it all the way back down and tell the story.
I was trained on Wall Street to climb mountain charts. A dizzying map of different paths to invest in diverse assets. Navigating from the lower left of any page along jagged lines to the upper right was the climb everybody wanted to make. As long as there were higher peaks ahead, the answer to any question about risk was “just hang in there,” along with a nod and point to an Ibbotson chart on the wall, showing the long-term always worked.
It took me many years of studying those little wrinkles in time (we’ll zoom in on one below), which looked so smooth if seated far enough away, before I began to question those stories with math’s tools. I escaped Wall Street’s mountain of conflicted assets because “hang in there” is not a plan. It is recurring revenue for the mountain’s shareholders. That is not wrong. In fact, it is Wall Street’s obligation and business model is to serve shareholders first.
Investors need their own Sherpas, called Fiduciaries, to lead them up AND down mountains, in all weather.
Very few people have heard of Namgyal Wangdi. Born in Tibet, he later lived in the Khumbo region of Nepal. The local Nepalese Sherpas called immigrants like him “Khamas” which meant low status and no money. Beginning in the mid-1930’s, he led more climbs of Mt. Everest than any other Sherpa. According to some accounts, it is entirely possible that he was the first to step foot on the peak with his climbing partner Edmund Hillary.
“If you think an expert is expensive, wait until you hire an amateur.”
Wangdi said whoever got to the top first made no difference to him. He was more focused on the oxygen tanks that made all the difference for both of them. Wangdi was particularly skilled at calibrating, operating and fixing tanks. Turns out, that kind of partner is much more important than the climbing part. For their historic climb he decided to use a more innovative system than climbers before them.
My notes below are from “The Engineer” a British trade publication’s deep research, just a few weeks after the climb in 1953:
Their tank system was built by Normalier, a manufacturer of high-altitude life-support equipment for the aerospace industry. The apparatus for Wangdi’s expedition was designed to provide “open-circuit” breathing which allowed exhaled breath to be released into the air. Previously, climbers preferred closed-circuits to save on weight by recycling the climber’s exhaled air. One other tweak allowed for their system to be able to use other high-pressure oxygen bottles left on the mountain by climbers who didn’t make it.
“The winner of the match is not always determined by who is right, but in the end, by who is left.”
–Victor Niederhoffer, Education of a Speculator
Wangdi changed his name to Tenzing Norgay which as the Encyclopedia Britannica notes, is Nepalese for “Wealthy-Fortunate Follower of Religion.”
The religion of the 1990s when my career began was high growth stocks and the most famous chart climber was Microsoft (MSFT). Even after I missed the first several thousand percent by being born too late (the most underrated data input for projected returns), my first three years in the business were good for another 10-bagger just from 1996-1999.
“Success is a lousy teacher.”
If you are going to retire and withdraw principal from any kind of investment, even the historically successful, stress test the math through this part of the climb also. There are much longer periods of zero price appreciation, than most want to believe.
There are countless ways that brilliant advisors can simulate the right withdrawal rate for the optimal balance of growth and income during different environments. I have learned so much from so many.
But there is a reason that Tenzing Norgay’s photo, rather than a projection, hangs on the most important wall in our building.
Free cash flow is the oxygen of any business, investing is no different. The most important of all the elements for any businesses to survive, which is a key to be able to thrive, is free cash flow. As a sea-level Sherpa planning expeditions toward the business of Financial Freedom, I have found the oxygen tanks are dividends.
The only reason I ran the mailbox money math on these five stocks is they have been paying and raising their dividends since Norgay summited Everest, over 60 years ago. There are plenty of other oxygen tanks to learn about that will do even better. Climate changes on the mountain. Trust but verify your tanks are filled. Then, just like my favorite Fiduciary Norgay, I want to study different oxygen tank technology.
Speaking of which, a funny thing happened to old Microsoft. Left for dead as a tired growth stock, its free cash flow piled up. It has almost as much cash on its pristine balance sheet now, $132 billion, as the entire company was worth just ten years ago.
When Microsoft started raising its dividend aggressively in 2010, its yield was “only” 1.6% just about where it is today. Growth funds abandoned the company for dead, and at the same time its yield was too low to attract income funds. But watch its free cash flow growth rate. The technical screens for price appreciation and the value screens for high dividend yields can both miss these stocks.
Shares of Microsoft purchased ten years ago have a current yield on cost of 9% per year and growing. There is risk, but I will take my chances on a AAA-rated credit quality tank with much more compressed oxygen being added.
Every careful step on either side of mountains comes with it the ultimate investing question – how do you know what is real? Holding a dividend payment in your hand and measuring a company’s success by its ability to offer a pay raise again is the most real answer I know.
“To know the road ahead ask those coming back.”
-Ancient Chinese Proverb
I must disclose a severe bias, however. After being a part of so many expeditions, and learning from others’ successes and failures I came to believe there is something better than retiring at the perfect time with a mountain of assets. Live richly with complete Financial Freedom, for longer.
To be clear, I will always have my backpack of high growth stocks and risk-free bonds. There is no strategy, market level, or age when it’s best to switch from growth to income or back again. There is no allocation of growth and income that changes the fact that I cannot count on prices of stocks always appreciating, even over some long-terms. And, I’ve never had a bond issuer offer to give me a raise of interest payments.
So, along with that backpack, I learned to carry something else. They eliminate the question of growth or income. The best oxygen tanks are dividends providing growth OF income.
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