The resurgence of dividends according to Peter Bernstein.

Once in an occasional generation, some phenomenon or event occurs that permanently changes some of the basic rules of investing. It happened in 1958 when, for the first time in the modern history of U.S. financial markets, the yield on stock dividends fell below the yield on bonds.

But most other changes prove to be transient, as the old cliché about the four most dangerous words about investing reminds us. When someone says, "It's different this time," it's usually time to look out and run for cover.

But when that person happens to be Peter Bernstein, even the most jaded and cynical skeptics do a double take. A founder and longtime editor of The Journal Of Portfolio Management and his Economics and Portfolio Management newsletter, this self-described "social worker to the rich" has led a kaleidoscopic life as a financial advisor, money manager, author, scholar and always-perceptive student of investing.

So when in early 2003 he gave a speech entitled Points of Inflection that questioned if some underpinning tenets of portfolio management, such as the theory of efficient markets and buy-and-hold strategies might no longer work in the current environment, many financial professionals were shocked. Bernstein himself was stunned at their response. "I give talks all the time," he notes, adding that they never caused these kinds of shock waves in the past.

An octogenarian who was pushed by his family to quit commercial banking and start working on Wall Street, where no one wanted to work in 1951, Bernstein's five decades of experience provides him with a perspective few money managers possess. And he shows no signs of slowing down in his other activities. His book, Against The Gods, a history of risk, has sold 500,000 copies since its publication in 1997. He is now completing a history of the Erie Canal, which simultaneously opened America's Midwestern industrial heartland while solidifying New York City's place as the nation's commercial and financial center.

In late May 2004, Bernstein addressed a group of financial advisors who gathered in Oak Brook, Ill., to attend a wealth management symposium sponsored by JP Morgan Fleming. Before turning to his main subject of the night, the dividend paradox, he recapped a few highlights from his provocative 2003 talk.

Essentially, the theme of the two-part talk was not that investors aren't in Kansas any more. His first point centered on the changing character of Wall Street research.

The abolition of the fixed 2% commissions on stock transactions that existed up until May Day 1975 meant that Wall Street research could no longer pay for itself, so that investment banking fees became the revenue source that paid analysts' salaries. Although most securities analysts became subservient to the investment bankers, a few like Jack Grubman became rainmakers on a big scale and put together huge telecom mergers. But the last factor Salomon Smith Barney used to calculate Grubman's eight-figure annual bonus was the quality of his investment research.

"Now that it's tainted, research will become more expensive, but it's going to be a lot better," Bernstein predicted.

The next subject he tackled was indexing. An early fan of indexing, he believes the increasing turnover in major indexes has reduced their reliability. "It changes too fast and no longer provides diversification," Bernstein declared.

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