Over the past week, we have seen some crazy turbulence in stock prices.
When I saw S&P 500 futures down by 5% on Election Day, I was not happy. However, I saw it as an opportunity to add to my portfolio. Given the rapid overnight turnaround in stocks by the morning however, I was not able to capitalize on the weakness.
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
I did absolutely nothing all week, other than to initiate a small position in a company called CVS (CVS) the day before. Other than that I didn’t panic on Election Day, and just held to my stocks.
As I have discussed before, I did not panic because I have an investment plan in place. My plan calls for maxing out my retirement accounts every two weeks through my paycheck, and then investing anything that is left over in my taxable portfolios. My investment decisions are mostly driven by availability of fresh capital to put to work, and investment ideas to a certain extent.
I do not believe that a decline in stock prices will affect the business model for the companies I am looking to buy for the long run. For example, I believe that a company like Altria (MO) should do fine in the long-run. The only requirement I would have is that it drops below $60/share, in order to add to a position there. Otherwise, holding on to it and enjoying the rising stream of earnings and dividends, strikes me as a logical thing to do. It is easy to ignore the stock price fluctuations of the manic depressive Mr Market, when I am paid 61 cents every quarter, for every share I own. If history is any guide, this payout will get higher over time.
As a holder of a diversified portfolio of equities, I am paid to hold on to it with fresh dividends. Plus, I regularly receive dividend increases. Throughout this difficult week, I still had a business that rewarded me with a dividend raise. This was Automatic Data Processing (ADP), which raised its dividend by 7.50% to 57 cents/share. This marked the 42nd Consecutive Year of Dividend Increases for this dividend champion. I saw this dividend hike as an indication that the business was doing fine, and that management was optimistic on ADP's near term business prospects. I received this raise without having to lift a finger ( though I did have to do the hard work of discovering the company and investing in it since 2008)
In general, I believe that stocks represent the best long-term investment opportunity for me to compound my capital and investment income. I believe in a strategy called buy and hold investing, which looks silly in a world where investors holding periods is in minutes, rather than decades. My stock strategy relies on steady improvement of earnings and dividends over the course of years. This growth in earnings will drive growth in dividends, and hopefully result in growth in stock values over time. The growth will be visible decades down the road. Therefore, my stock holding period should essentially be in the decades.
As a result, it makes no sense to panic over short term market fluctuations.
Any declines in stock prices, should only be observed in an effort to uncover attractive opportunities to buy at cheap values. In my case, it means running my screen against the list of dividend champions ( a list of companies that have raised dividends for at least 25 years in a row) with the following criteria:
1) P/E ratio below 20
2) Dividend yield above 2%
3) Dividend payout ratio below 60%
The next step is evaluating each business one at a time, observing trends in earnings to determine whether future dividend growth is possible, and evaluating qualitative factors.
Until then, my strategy for long term wealth and income accumulation is as exciting as watching paint dry.
1) Earn Money
2) Save Money
3) Invest the savings regularly
4) Reinvest Dividends
5) Keep investment costs low
6) Keep activity low
7) Stick to the plan
Staying the course is the only logical way for a busy investor. It allows you to take full advantage of the power of compounding. Frequent trading is certain to increase the odds of making a monumental mistake, that will set me back years form achieving my goals and objectives. Therefore, I stay the course, and sleep well at night. Investors who try to time the market, usually end up paying a steep price for their impatience, and do not do well over time. There is always a reason not to be invested, and the doom and gloomers are always willing to capitalize on investor fears.
I simply believe that trying too hard to buy and sell stocks, to make forecasts about the future, is usually a very difficult game to be in. After all, noone can forecast the future well. The only defenses against our ignorance about the future includes diversification, staying the course, not abandoning your strategy at the first fear of trouble, keeping our activity and guessing to the minimum, and keeping investment taxes and commissions to the minimum.
My strategy is inspired by the success of the Corporate Leaders Trust, which was a mutual fund with a relatively static portfolio for 80+ years, that managed to produce outstanding long-term performance to its shareholders. My strategy is also inspired by the success of the static portfolio of the original 500 components of S&P 500, which managed to do much better than the more actively managed S&P 500 over a period of half a century.
Lastly, my strategy is inspired by Warren Buffett.
In his 1996 letter to shareholders, Warren Buffett shared the following tidbit of wisdom:
"Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit had reversed his views on the market."
In his 1990 letter to shareholders, Warren Buffett shared this famous quote:
"Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings."
In conlcusion, I believe that my patience, and my ability to hold to my stock investments for decades, are my only edge on Wall Street.
Thank you for reading!
Full Disclosure: Long ADP, CVS, MO
- Timing the Market Is Costly, Risky and Difficult
- Dividend Investors: Stay The Course
- Time in the market is your greatest ally in investing
- Buy and hold dividend investing is not dead
- Time in the market is more important than timing the market
Article by Dividend Growth Investor