When writing about the stock market, it can sometimes be difficult preparing something original. Admittedly, when I’m struggling for ideas, my mind will wander and I often start to lose focus. This probably explains why I recently flicked through the calendar on my desk and discovered that today (8 January), would have been Elvis Presley’s 91st birthday.
Ironically, one of the American’s songs was Who Needs Money? Sadly, when he died in 1977, he did. He owed the tax authorities more than double what his estate was worth.
My calendar also says that on the same day in 1952, Albert Einstein, the German-born physicist, was offered the presidency of Israel. I didn’t know this. Apparently, he politely declined the opportunity saying: “I lack both the natural aptitude and the experience to deal properly with people.”
At first sight, these two icons appear to have nothing in common. But I reckon they offer beginner’s a useful framework for thinking about the stock market. Let me explain.
Interesting…
It’s often said that Einstein described compound interest as the eighth wonder of the world. He didn’t. But as a clever man, I’m sure he would have recognised how powerful it can be.
To explain, let’s take a real-world example and look at the dividends paid by Lloyds Banking Group (LSE:LLOY) since the end of 2020.
Over the past five years, the bank’s payouts have been 12.12p a share. A £10,000 investment made in December 2020, would therefore have earned £3,473 in dividends. At the same time, the shares would now be worth £28,481. That’s a return of £21,954.
But had those dividends been reinvested buying more shares, the gain would have been £25,519, 16.2% more. Impressive.
Not only does this demonstrate the power of compounding but it also highlights Lloyds’ generous payout. And by 2027, analysts are expecting it to rise by 51% compared to 2024.
However, the recent rally means its shares are expensive. In fact, they have a price-to-earnings ratio higher than the five other banks on the FTSE 100.
Fools rush in
As for Elvis, he built his success on being able to adopt many different musical styles and adapting to changing tastes and cultures. He could sing the blues, country music, gospel, and rock ‘n’ roll. This could be a metaphor for encouraging an investor to own a diverse portfolio of stocks spread across different sectors and countries.
That’s why I’m cautious about Lloyds. The bank’s earnings are too concentrated for my liking. Nearly all of its profit comes from customers in the UK. And while it provides a variety of products and services, there’s a near-100% exposure to domestic individuals and businesses. This concerns me as I think the British economy is fragile. A downturn could result in loan defaults and losses to the bank.
Final thoughts
Weighing things up, I don’t want to invest in Lloyds. Although I appreciate its above-average dividend (no guarantees, of course), I have concerns about the bank’s valuation. I think investors have already priced-in much of the anticipated earnings growth over the next three years.
Okay, connecting Elvis and Einstein might be a little contrived. But I reckon the concepts of reinvesting those dividends and having a diversified portfolio are valuable lessons for an investor to consider.
