In part one of this series, I talked about the po wer of the stock market from a wealth creation perspective, making the argument that it is not rigged against your average Main Street investor. I went even further than that, saying that in today’s economy, the stock market is likely the best chance that your average Joe has to climb the social ladder. Looking back more than 100 years, we saw that the Dow Jones Industrial and S&P 500 averages offered investors ~10% annual returns when dividends received were re-invested. This may not sound like much in the short-term, but I assure you, over a period of time spanning decades, compounding wealth at a 10% annualized rate will lead to impressive results.
In this piece I would like to continue working with this theme. The market is a very complex system so there’s no wonder that so many are skeptical, confused, intimidated, or even fearful of investing. With that said, it’s not fair to blame the market for any personal short-comings. There are winners and losers of either side of every trade. However, it’s not the numerous men and women dashing up and down Wall Street in their fancy suits that retail investors like you and me must focus on beating if we want to achieve our desired results in the markets…it’s the person that we see in the mirror that most often comes in between us and success.
This is the case in any sort of competition. More often than not, it’s our own short-comings that lead to failure. You might not like to hear this, but I imagine that after some sincere introspection, you’ll find that it’s true. A defeatist attitude rarely leads towards success. Instead of making excuses and falling by the wayside as others compound their wealth in the markets, why not focus on attempting to simplify the market, focusing in on an area or two that work for you while drowning out all of the noise coming from elsewhere?
I’m not a psychiatrist, nor am I a financial professional, though I have found success in the markets through trial and error that eventually lead me to a dividend growth management strategy. You may choose to take this article with a grain of salt, but I truly believe that anyone willing to put in the time and effort can succeed when investing.
Everyone’s path will likely be different, but that’s okay. In the stock market, there are many ways to skin the cat when you’re talking about achieving acceptable results. It’s important to understand this when reading a piece like this (or any piece that I write, for that matter). I know contrarian investors and momentum investors, options traders and short sellers, strict buy and hold types and frequent day traders who all meet and/or exceed their expectations for the market on a regular basis. I don’t think that any one of these strategies is better or worse than another. They all have pros and cons that play towards different individuals’ strengths and weaknesses.
You’ll hear people insisting that their chosen strategy is the best, but that simply isn’t true. Hopefully, what is true, is that their chosen strategy is what’s best for them. That should be every investor’s plan in the markets: to find a portfolio management strategy that meshes well with their current financial situation, their long-term financial goals, and most importantly, their appetite for risk and personality.
It might seem a bit odd to say that finding an investment strategy that meshes well with one’s personality is of the utmost importance, but I firmly believe this. If you’re going to manage your own money, it’s paramount to realize that the market is ruled by fear and greed. Both fear and greed lead investors into traps that oftentimes lead to the loss of capital. We’re all flawed individuals who’re susceptible to both of these vices, but I suspect that after some sincere introspection, you’ll realize that you’re likely more prone to fall victim to one or the other. Understanding our own strengths and weaknesses is the first step towards becoming a successful portfolio manager.
I’ve never been one to irrationally rush into the fire. I’ve always enjoyed watching things develop and grow, oftentimes from afar. I enjoy creative problem solving and big picture thinking, though I acknowledge that I have a bad habit of glancing over small details. I have to work hard to maintain an intense focus because even though I like to tell myself that the little things are inconsequential, oftentimes, they’re anything but.
Growing up, I was always an athlete. Fortunately, I was able to compete at some of the highest levels and looking back, I attribute much of my success to the fact that I absolutely loathe losing. Don’t get me wrong, I love winning. That’s the point of any competition, but once you find yourself on top, with everyone trying to knock you off of your pedestal, a hatred of losing (or even the mere idea of it) begins to outweigh one’s love of winning. I don’t know if this is the best mindset to have or not when it comes to competition, but I have heard that highly successful athletes and coaches, such as Michael Jordan, Nick Saban, and Bill Belichick also maintain a similar outlook.
Because of these things, and many more (we’re all very complicated creatures, aren’t we?), I’ve adopted a highly diversified, value oriented dividend growth philosophy. A value oriented system allows me to be conservative with my picks, without feeling any pressure to chase momentum. A focus on my income stream allows me to build something tangible over time and easily track its growth. My unfortunate apathetic approach to certain minute details has inspired me to manage a highly diversified portfolio. I prefer to own baskets of companies within areas of the market that I’m bullish on long-term instead of attempting to pick individual winners and losers. Placing highly concentrated bets on individual names just doesn’t appeal to me because of my desire to spread out risk as a means of capital preservation.
My hatred of losing also applies to my focus on capital preservation. This is also plays a role in why I like to own large cap, highly profitable companies. In the corporate world, profits are symbolic of success. I like surrounding myself with, partnering with, and owning winners. Success begets success and I don’t see much of a reason to take chances with up and comers in pursuit of outsized gains when the established winners have proven themselves more than capable of providing very solid long-term returns. In other words, using another sports analogy, I’ve decided to bat for average rather than swing for the fences looking for the big home run. And luckily for me, the stock market isn’t a baseball game. Several times when I was swinging for singles with fairly conservative picks, I’ve had them turn into home runs over time. You don’t see this happen when you’ve got your foam finger and a bucket of popcorn at the ballpark.
Boeing (BA) is a great, recent example. I chose this company as a long-term hold because of several attractive macro trends (urbanization and globalization) expecting reliable growth. BA has a great brand name, operates with a wide moat in an industry with very high barriers to entry, a history of impressive cash flows, and a very generous shareholder return policy. I thought Boeing had potential for solid returns when I bought it, but I didn’t expect for it to produce such alpha in the short-term. A couple of years after building my position, I’m up well above 100% on my shares. I didn’t foresee these types of returns, but I’ll surely take them.
Although I was surprised by my Boeing results in the short-term, I wouldn’t say that they were accidental. The valuation system that I’ve developed has lead towards many very successful picks (though I admit, it’s rare that I see year to date returns of 90%). Without trying to sound arrogant, I’ve always succeeded at things that I’ve put my mind to. I think it’s easy for arrogance to manifest itself in the form of greed in the markets, so obviously investors ought to keep that sort of thing in check. There’s certainly a difference between irrational arrogance and confidence, but I think there’s oftentimes a very thin line separating the two. It’s important to find that line and get familiar with that threshold. Having confidence is paramount to success in any endeavor, but arrogance, cockiness, and even worse, naivety, will all likely lead to results that are less than desirable.
Confidence is important in the markets because it helps to counteract fear. When you’re putting your savings at risk investing in equity (and as I made clear in the first part of this series, it is always a risk) it’s important to a high degree of conviction behind your decisions. If you’re wishy-washy, you’re likely to sell at the first sign of trouble. It’s my personal belief that selling into weakness created by an isolated incidence is a mistake. Losses on paper aren’t real until you lock them in with a sale. Why do that if your original investment thesis is still intact and strong secular tailwinds remain in place behind the stock? Being able to distinguish between an isolated incidence and a secular shift is one of the most importance skills that an investor can develop and I don’t think it’s possible do to so without a high degree of confidence in one’s due diligence process.
Confidence comes with knowledge and knowledge is gained through experience. Everyone will make mistakes along the way; no one bats one thousand. But, if our decisions are highly examined (rather than misplaced gambles) and we’re willing to stay humble, it’s possible to learn from them. Why? Because the market isn’t a game of chance. Sure, it has plenty of variables, but it’s a data driven system.
In an ever digitized market driven by algorithms and ETFs, it’s certainly possible for the market to sell-off irrationally. Babies are oftentimes cast aside with the bath water. I get it, it’s easy to become downtrodden when you see your babies treated like this. And while it might seem unfair in the short-term, it’s important to realize that time typically heals these wounds.
This was the point in the first article of these series: over the long-haul, there’s a lot of data that points towards the fact that the competitive American financial markets work. As many of you know, I’m a huge Warren Buffett fan; I’ve read much of his work and I believe in his optimism with regard to the U.S. markets over the long-term.
The point of this article is the importance of finding a strategy that you believe in. Ever since adopting my current DGI approach, it’s been easier for me to maintain a long-term mindset through the market’s inevitable short-term hiccups. I don’t think it’s possible to completely conquer fear and even if you could, that probably wouldn’t be advisable because a little bit of fear can be a health thing. It serves as a check & balance against greed, which can be equally as destructive. But, having conviction in my strategy helps to me control both fear and greed, which is why I feel comfortable managing my own money and pursuing my long-term financial goals without the help of a professional (and the added fees associated with professional management).
Unless I get side tracked by some other philosophical notion when I begin writing part 3 of this series, I hope to get away from the macro and into the micro with regard to basic equity valuation methods that have helped me avoid risk (no promises though, because that’s what I planned on covering in this piece at the onset).
Hopefully you found this content to be useful, in some way, shape, or form; or, at the very least, entertaining. More than anything, I hope that my work is thought provoking and as always, I look forward to your feedback. Until next time, best wishes!
Disclosure: I am long Boeing (BA)