Can You Uncouple Your Investment Success From Mr. Market?

Includes: DGRW, JPM, SDY, VIG
by: David Van Knapp

I dropped by Mr. Market's control room yesterday. He has been very nice to me since our two interviews (see them here and here). I jumped at his invitation.

There's lots of new technology, far exceeding anything you see on CNBC or can get from cutting edge trading platforms. He made me sign an agreement not to disclose any details about that. Sorry. He has even kept it secret from the NSA (so far, anyway).

But the most important part of his shop, according to him, is an older room that looks like it was built in the 1890's. It was badly painted, had broken floor-boards, and an unpleasant smell.

There are many big, old iron levers in there. I asked Mr. Market what they are for. He said, this is the main room from which he controls the market. (That would be the stock market. Other members of his extended family control the bond market, forex, housing, and other stuff.)

I asked him why the room is so old and badly maintained. He told me that they see no need to update it, because it has worked forever. Same stuff over and over. The levers themselves are brightly painted, and they keep them oiled and smooth, so even though they are old as the hills (as my mother used to say), they still work great.

What do they control, I asked Mr. Market. He said just look at the labels, there's no mystery about it. Here's what I saw in the minute or so that he gave me:

Interest rates

The Fed

Yellen (this was on a yellow post-it note stuck underneath one lever)

Labor & Inflation Statistics

Europe (PIIGS)

Sell in May and Go Away

Santa Claus

I asked him whether he controls what goes out over CNBC. He said no, he can't control TV content. Media humans are independent actors just as investors are. But, Mr. Market said, they do seem to jump around and get louder when he moves the levers. In that respect, he said, they are just like the market. His team monitors all that over in the first room, the modern one. I asked him what he thought about Maria Bartiromo jumping over to FBN. He just rolled his eyes.

I asked Mr. Market about my favorite subject, dividends. His mood got darker. He pointed at a lever that I hadn't noticed. It was the only one with no paint and unoiled. It was filthy, and it looked like it hadn't been touched in decades. I could hardly read the rusted brass plate: Dividends.

I asked him why it looks so bad. He said, well obviously, he can't do a damn thing about dividends. They travel around outside the market. Underneath the panel, he said, the lever is not attached to anything. Its old, stiff wires just hang there. He said they would probably snap if he tried to connect them up, but it doesn't matter, there is nothing to connect them to.

Next to the dividend lever was a small dial, very old, made of bakelite. The knob was clean and obviously gets used a lot. Around it was a polished brass plate with tiny markings. There was a very modern electronic calendar next to it. Given what he had just said about the uselessness of the dividend lever, I became very interested in the little knob.

What's that, I asked. Oh, he said, that is the dial that goes to the exchanges. It is used to lower the quoted price by the amount of the dividend just before trading opens on ex-dividend day. Obviously, because dividends are being prepared all the time, the dial gets used practically every day. He said it was highly accurate, down to thousandths of a cent.

I asked him if it worked - did those price changes stay in the stock? He looked glum. He said that when they thought this up, they believed that it was brilliant. They had a bunch of academic papers that guaranteed (with appropriate hedging) that this would finally give Mr. Market indirect control over dividends. He couldn't control the dividends, mind you, but he could subtract them from market prices, and therefore render them irrelevant.

That was the goal. Investors would see that a dollar in dividends subtracted a dollar from price, so they wouldn't care about dividends any more. Since he can't control dividends, he would make them meaningless. All of the markets agreed to cooperate, since they hate dividends too. Everyone in the industry was excited.

I asked him how it all turned out. He just stared back at me and said look, young man (I am 67), if you want to remain on good terms with me, don't keep going there. He did say that there are still studies and investor guides that repeat the original idea - that dividends are meaningless - but that for the most part, the initiative had run its course.

I asked him if they had thought of trying the dividend gambit with other cash earmarks. For example, I said, Chase (NYSE:JPM) just settled with the Justice Department for $13 Billion. Why shouldn't the markets divide that by the number of shares and subtract that amount from the price of the stock? The shareholders were never going to see any of that money.

He said that after the dividend gambit failed, they just gave up on any such schemes. And sure enough, JPM s shares went to a near-decade high after the announcement. It seems investors were relieved to have the uncertainty removed, and they didn't care about the money anyway.

I asked him why they keep doing the dividend thing if it doesn't work. He told me that it is the most hated assignment in his shop, so he uses it for disciplinary purposes.

We parted on good terms. I asked him if he is keeping up with his meds, and he said that he tries to, even though he does not like some of the side effects. We shook hands, wished each other Happy Holidays, and I went off into the cold November air.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.