What Capitalism Does

We’re halfway through 2021, and it’s safe to assume most investors are pleased with the performance of their accounts. Financial markets behaved well the first six months of the year and especially favored larger dividend paying stocks. Fine by me as I favor them as well.

So, why have financial markets favored larger dividend paying companies of late, you may ask? Here at Iowa Wealth Management, we believe an important reason for increasing stock prices is the expectation of higher dividend payments in the near future.

Just a year ago, we warned investors not to dump stocks during the “COVID Correction” because we were seeing few dividend reductions. We thought 2020 prices were an emotional response to the pandemic, not a rational calculation of damage done to the economy or the stocks in question.

This is easy enough to see now, while harder advice to take at the time. But, if you are reading this, the likely outcome for your portfolio has been quite positive. The value of your portfolio is higher and future dividend payments are also likely to rise. In very real terms, you have been rewarded for being a good steward of your financial assets. One of capitalism’s two roles has been visited upon you; capitalism rewards those most efficient with more resources. This is not just good for you, but for everyone, because resources are limited and society will benefit from more assets flowing into your capable hands. Capitalism isn’t set upon the rich getting richer, just the more capable.

Sure that’s not always true, but it’s mostly true, certainly truer than in Cuba where a “new car” is a ‘56 Chevy with aftermarket air-conditioning.

If you find the first role of capitalism hard to come to grips with, please hang on because you’re in for a bumpy ride when contemplating the second role of capitalism; capitalism punishes those who are inefficient with capital by taking resources away from them. This is a tough rule to come to grips with. Most mistakes are after-all, just that, mistakes. No one sets out to make a bad purchase of a stock or to place a retail outlet in the wrong mall, but there you have it, you’ve lost money. If the mistake is bad enough, you may have lost all of your investment (even more if you’ve borrowed).

I met a young man, just starting out last week who bet on Bitcoin. It didn’t end well. He’s since moved on to some new highflier and asked me what I thought. “Well, you’re young, you have time to learn” I replied…. I hope he learns soon.

The saddest cases are the ones who never learn: the middle aged speculators or the old timers still trying to find the special trade that will make their financial life whole. Capitalism hasn’t treated them well. It never meant to. That’s not what capitalism does.