At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history.
Heller responds, “Yes, but I have something he will never have . . . Enough.”
Amid the turmoil in the public markets and the staggering macroeconomic environment, it should come as no surprise that the private markets are also struggling. In fact, there are some important links between private equity and the current economic environment. A closer look at PE reveals that the industry often serves as a leading indicator Read More
As a dividend growth investor, my goal has always been to reach the dividend crossover point. This is the point where dividend income meets or exceeds expenses.
To get there, I did some saving, some investing, and some holding. I basically came up with a strategy to follow, and I followed it thought thick or thin to get to my crossover point. I made mistakes along the way, learned some lessons, and have kept investing and following along my basic strategy. Since I invest with the end goal in mind, my strategy produces tangible results that I can see very clearly how I am doing relative to my needs ( expenses) and my goals for income.
As a result, for as long as the companies I hold are doing well, growing earnings, and dividends, I am a happy camper. I am fine holding on to companies, even if they stop growing but keep at least maintaining their dividends. This attitude allows me to sit through any bear markets, temporary declines and have the patience to endure difficult periods of time. I do pull the plug when there is a dividend cut or a company is acquired however.
Knowing When To Hold And When To Fold
My patience is very long, but not limitless. I know when to hold and when to fold.
A lot of times people ask me about different investing strategies, investments, and usually show me a past investment that has done very well in the past. Now if they made actual money on it, I congratulate them.
There are many strategies out there, so the important thing is finding the one that works for your goals and objectives and sticking to it.
I disagree with the notion that one should abandon their strategy and go chase other strategies, because that could risk them selling low and buying high. But I do get a decent amount of pushback now and then that I should have done this or that. Which I frequently choose to ignore.
I always end up thinking that I could not care less if my retirement portfolio value fluctuates between $500,000 and $2 million, for as long as it throws off enough income to live off.
What I mean by that is that investors should ignore stock price fluctuations. They are meaningless to the investor, unless they have money to invest. So basically, they are to be ignored, unless you want to take advantage of them.
It also does not matter to me if my portfolio is worth $1 million but someone else's portfolio is now worth $2 million, for as long as my portfolio meets my needs. The goal of my portfolio is to meet my investment goals and objectives. Whether my neighbor does better or worse than me doesn't really matter to the achievement of my investment goals and objectives.
Warren Buffett's Farm Investment
You may like the story from Warren Buffett about his investment in the farm and how his crazy neighbor shouts out random prices at him.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me
$280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Decision To Sell Or Buy Johnson & Johnson
He can choose to ignore them, or take advantage of them if they are really out of whack. In my case, if I see Johnson & Johnson (JNJ) selling at $50/share tomorrow, and nothing material has changed about the business, I would be excited. I may even buy a share or two.
But I see Johnson & Johnson selling at $500/share given todays state of the business, I would probably sell it. That's despite the fact that I never sell, I would view selling at close to 60 times forward earnings for a company like Johnson & Johnson to be ridiculous. Now in 10 - 20 years, I don't doubt that Johnson & Johnson share price would hit and/or exceed $500/share.
I have always followed a strategy where I invest when I have money to invest. Otherwise I just stick to my investments and do nothing. Some investors get scared away from stocks going down, and they may end up selling low.
Charlie Munger has said that if you are unwilling to see a 50% correction in net worth a few times per century, you should not be in common stocks.
For historical reference, US Stock prices have fallen by more than 50% in 1929 – 1932, 1972 – 1974, 2000 – 2003 and 2007 – 2009.
Pretty much nobody can predict when we are about to get a bear market. Even if someone managed to predict it, they have to predict when to sell and then also determine when to buy back. Since no one can do that market timing consistently, it is just best to not even try.
As Terry Smith says, there are two types of investors out there:
Those who can't time the markets
Those who don't know that they can't time the markets
Pay Attention To Stock Fluctuations
As an investor it pays to focus on identifying good businesses, buying them at an attractive price, and holding them forever. It pays to ignore short-term fluctuations when you hold stocks. You pay attention to stock fluctuations when you have money to invest.
For example, if Lowe’s (LOW) went from $125/share in early 2020 to a low of $60 in March and now is at $170/share. The dividend was still getting paid every quarter, and even it was recently increased from 55 to 60 cents/share. A shareholder that focused on the business side of it, and stuck to it, did well. Ignoring the fluctuations worked out ok. Other times, ignoring may be a problem but you just never really know too. Many businesses experience temporary bumps on the road.
Second, if I need say $30,000 in dividend income, and my portfolio generates it, why would I care that someone else makes $100,000/day trading tech stocks? I have my "enough" point I should not care.. The point at which I can tell everyone to leave me alone, and I can do my own thing ( within a few limits of course).
This is the point of having "Enough", as discussed in the story with Kurt Vonnegut at the beginning of this article.
The other thing is that I have a strategy that works for me in achieving my goals and objectives.
Let's say that my goal is to have a portfolio of 100 companies paying me $30,000 in annual dividend income. Imagine that this portfolio is worth say $1 million on a given day. However that portfolio is worth say $2 million when I die
If it turns out when I die that doing another strategy could have generated $5 million, it won't really matter at the end. That's because no-one would have known for sure which race horse would have run the fastest to the finish line.
Objectives Matter But Not Keeping Up With The Joneses
All that matters is achieving my own goals and objectives. Not keeping up with the Joneses. Someone will always do better than me in the future. The problem is that we do not have a time machine.
So if I buy Johnson & Johnson, and can live off the dividend stream, and in 30 years it is at $600/share, paying $18/share in dividends, after never cutting them, I would be happy whether it went to $100 at some point or above $2000 in between. And if you buy Amazon (AMZN) and it 30 years it is at $80,000/share, that's fine too.
Again, we do not know today which of the two companies will do best between 2021 and 2050. Only people in 2050 know for sure.
We can tell with the benefit of hindsight, but there is not much we can do about it, right?
Unless you have a time machine of course
In that case, would you please send me a link to next years newspaper?
- Dividend Investors Should Ignore Market Fluctuations
- My General Philosophy on Dividend Growth Stocks
- Are you patient enough to become a successful dividend investor?
- How to have enough
Article by Dividend Growth Investor