In order to succeed at investing you need to separate your emotions from your money. Too often investors get caught in the trap of thinking that their feelings and desires will somehow influence the fate of their investments as opposed to market forces. Bad investments need to be cut loose from portfolios and good investments held on to with the understanding that the dividing line between good and bad is not personal opinion or instinct but rather the fundamentals of a business, its industry, and the market as a whole at any given time. Many if not all of us have listened to friends and family “cheerlead” for their favorite stock, smiling on the days when it rises and moping on the days when it falls. What is the investment returning to them? What is their exit strategy? How do they actually intend to profit off of the supposed hot tip? Don’t make the same mistake as they did. Stop investing based on hope and feelings and instead invest with a plan based on the realities of a business and its environment.
This article was inspired by a couple of conversations that I’ve been present for (but did not participate in out of tact) regarding a particular stock that some of my colleagues are invested in. I do not know the name of the company because they have never mentioned it. They only refer to it by its ticker which I seem to have remembered incorrectly as I cannot track it down in Google Finance. I’m fairly certain it is an energy type company working on some kind of fuel that “hasn’t caught on yet, but it will”. Why do I know so few details about this company? Because the people who own it seem to know as little as I do about it, even though it is their money that is tied to its performance (it does not pay a dividend). This is a problem.
By the way, as a general rule do not take investing advice from people who refer to their holdings only by ticker symbol because it is usually a good sign that they can’t remember the name of the company. If you can’t remember the name of the company you invested money in do you think you would really know what its return on equity and payout ratios are? Food for thought.
Back to this mystery energy company. I don’t follow it but I always know when it has gone up 3%-5% in a day because it is all the guys can talk about at lunch. On days when it is down the conversation is directed to other topics. On days with more modest gains they might discuss the “analyst report” that one of them got their hands on which apparently projected a 300% gain for this stock once whatever its revolutionary product is catches on. In the meantime the stock’s price, like that of any other company’s, continues to fluctuate on a daily basis, generally moving in the same direction as the market with a few days of above average gains or losses thrown in for good measure. For the sake of my friend’s financial health I do hope that the stock trends upward and turns a profit for them however I myself will be looking for opportunities elsewhere.
Before explaining my decision let me just say that if this company ends up being the next Apple and my friends the next generation of 30-something stock market multi-millionaires then mea culpa, no hard feelings. That said, I want you to remember how the time value of money works. The short version is that a dollar in my pocket today is worth more than the promise of a dollar in my pocket a year from now. If you want me to wait a year to get my hands on that dollar I am going to demand say an extra ten cents from you in order to make that year of not having the dollar available to me worthwhile. What I see my friends doing is waiting for that dollar next year and hoping that they will get an extra fifty cents or even an extra two dollars for their trouble. They might also end up receiving less than a dollar back, only time will tell.
On the other hand my portfolio of dividend growth stocks is my way of demanding to be compensated on a quarterly basis as I wait to claim my dollar (should I ever choose to do so). Frankly if the fundamentals of all the companies I am currently invested in were to never change then I would be more than content to collect my quarterly dividend payments (which increase every year) for decade after decade and leaving my dollar unclaimed. While there is no such thing as a 100% guaranteed for eternity dividend there is such thing as a stable and sustainable one. That dividend is the difference between how my friends invest and how I invest. I know my investments are going to return a certain amount of cash to me with or without a rise in their stock price while my friends are solely dependent on the stock price for profit.
There is nothing wrong with investing aggressively. Dividend growth investing is generally regarded as a more conservative style, and one that I prefer, but that doesn’t mean it is the best for everyone. It may, on the other hand, be the best for me. If I determine I have a much higher success rate of selecting quality dividend growth stocks than I do non-dividend paying growth stocks then it would make sense for me to take the dividend payers every time and twice on Sunday. On the other hand if every stock I purchased became the next Apple, Amazon, or Netflix then it would make sense for me to pursue those types of investments instead. You must play to your strengths: the trick is being honest enough with yourself to recognize what your strengths are.
Here is the bottom line: if you don’t know what you are investing in, don’t invest. If you can’t name the company you just put a month’s salary into, don’t invest. If you don’t know the difference between a cash flow statement and your phone bill then don’t invest. Take the time to learn what makes a particular business tick and how well it stacks up against its competitors. Research how it makes money and conduct an objective investigation into whether the model has validity moving forward. Commit yourself each and every day to becoming a better investor, not a better cheerleader.