What Matters & What Doesn’t In Investing

Updated on

What Matters & What Doesn’t In Investing by Sure Dividend

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Every day the financial media pushes hyped-up stories on individual investors. Take a look at the example below (from today, on the front page of Yahoo! Finance):

STOCKS SOAR, CRUDE OIL GOES BANANAS: Here’s what you need to know

The game is to get your attention by coming up with ever more provocative things to say. More attention means more views which drives advertising revenue.

The truth is that 99% of what the financial media puts out is just noise that won’t do anything positive for your investments.

In fact, it will likely hurt your investments. All of the noise and hyperbole of the financial media creates the idea that we must take action… We must do something.

After all, stocks are falling (or rising) due to the terrible (fantastic) crisis (boom) in the [insert region or industry here]. You don’t want to get left out… Do you?

This is all nonsense.

A study of 78,000 individual investor accounts proved that stocks investors sold outperformed those they purchased. In short, individual investors sell at exactly the wrong time.

Not only are individual investors (and institutions, but that’s a whole different topic) selling at the wrong time, they are also incurring transaction costs with every trade.

The more you trade, the less successful you are likely to be in your investments. That’s why I advocate Do Nothing Investing.

The Big Casino

In large part, we have forgotten what investing is all about. It seems many people think of the stock market as some sort of exciting virtual Las Vegas where bets are placed on companies.

I see the appeal of this – it means you aren’t responsible for your losses and you are free to ‘celebrate’ on your wins.

The stock market is not a virtual casino – far from it. It is a place where you can buy fractional ownership of some of the best businesses in the world. Or, if you prefer, mediocre or poorly run businesses.

Great Businesses Reward Their Owners

Investing really is that simple. Buy great businesses that actually reward their shareholders.

This means businesses that pay rising dividends every year. You don’t even have to look around for these businesses…

The Dividend Aristocrats Index contains 52 businesses that have paid their shareholders increasing dividends for 25 or more consecutive years. Click here to see all 52 Dividend Aristocrats.

I’m not just saying that high quality businesses make good investments because I feel it. Rather, the evidence backs this claim up. The Dividend Aristocrats Index has outperformed the S&P 500 by over 2 percentage points a year over the last decade

This shouldn’t be shocking. Businesses that can pay rising cash payments to their shareholders have the ability to grow virtually every year.

Most businesses simply cannot do this. Dividend Aristocrats are special because they have lasting competitive advantages; distinguishing operational characteristics that other businesses cannot match.

The investing process can be simplified to:

  1. Identify high quality businesses with shareholder friendly managements
  2. Buy shares of these businesses at fair or better prices
  3. Hold them for very long periods of time

As you might imagine, this is not an overly profitable message for the financial media. It involves keeping a cool head and focusing on boring, stable businesses rather than having to be up-to-the-minute informed because your risky investments could explode at any moment.

This type of investing isn’t very profitable for the financial media, or for your brokerage. After all, you will execute very few trades this way.

It is very profitable for one person – you. Sure, you won’t need a financial advisor, and he won’t make hefty commissions off you, but he will be okay. Your money should be left to compound invested in high quality dividend growth stocks, not fritted away on high mutual fund fees.

Final Thoughts

Investing can be exceptionally complicated, or extremely simple. It all depends how you approach it.

By focusing on owning high quality businesses with strong competitive advantages, you will very likely do well.

Owning individual stocks means you don’t have to pay mutual fund fees, ETF fees, or other costs to ‘be invested’. You just buy your stock and allow the business to compound your wealth year after year.

It may be boring, but it works.

Leave a Comment