I have written many times through the years about the benefits of businesses with high barriers to entry. Those barriers often include protection by government regulations, including rights of way, monopoly power, and intellectual property. In November of 1996 I explained the value of intellectual property and how difficult it is to generate. I wrote:

Have Mercy!…

Back in the spring of 1964, XERF was the most powerful commercial radio station on earth. With a thunderous quarter-million watts of energy pumping from its massive transistor deep in the Mexican Coahuila Desert south of the Texas border of Del Rio, the XERF signal could bounce off the ionosphere on a clear cold night all the way from the Rio Grande to Cleveland, Ohio.

A nighttime spin on an AM radio dial to XERF 1570 brought in the tortured wail of Wolfman Jack. With his patented intro of “Aaaooooooooo…all right, baby, have mercy,” the Wolfman influenced thousands of rhythm-and-blues fans of the sixties, including the creator of Star Wars and American Graffiti—George Lucas.

George Lucas Preceded Star Wars Fame With American Graffiti

Needing a link between the teenagers and music for his groundbreaking movie, American Graffiti, Lucas cast the Wolfman playing himself as that central link. Lucas’ genius of tying together great rock ‘n’ roll music from the fifties and sixties with then-unknown actors (Richard Dreyfuss, Ron Howard, Cindy Williams, Harrison Ford) and their trusted nighttime ally, disc jockey Wolfman Jack, made American Graffiti one of the biggest selling pictures of all time. It stands today as a true American icon.

Intellectual property, like that created by George Lucas and certainly Bob Smith for his long-running “Wolfman Jack” syndicated radio shows, is the stuff that can make for great investing. Intellectual property is not created on an assembly line. Rather, it is crafted one story or image at a time by unique individuals. A company that epitomizes America’s ability to create intellectual property in a seemingly never-ending flow is Disney (NYSE: DIS).

Working in an industry with high barriers to entry allows companies to limit gains of competitors attempting to take market share with identical or only slightly improved products. Many of investors’ favorite companies today are working in industries with very low barriers to entry. If you are investing in companies operating in low-barrier-to-entry industries be sure to account for the additional risk.

Back in December of 1997, I explained Wall Street analysts’ fixation with earnings, and more specifically, earnings guidance. I wrote:

Forget Wall Street’s Myopic Attachment to Quarterly Earnings

It’s important for you to grasp the primary control force of short-term market action. The control force is quarterly earnings reports versus Wall Street projections. Companies that fail to meet Street projections face utter carnage. However absurd this senseless, myopic concentration on quarterly earnings may be, it is reality. The gyrations brought on by earnings’ hits and misses confuse and worry individual investors. Forget these reports, and forget the gyrations as well. I beg you, with every market gyration, do not watch the bulging-eyed TV commentators who look like they’re hooked on heroin.

Instead, adopt a compound interest-based, long-term game plan that features prudent diversification, common sense, patience and rigorous adherence to rock-solid, time-tested principles. You will accumulate wealth at a rate beyond what you might never have considered possible.

It’s over twenty years later, and Wall Street hasn’t changed a bit. Despite having been walloped hard—twice—by mega stock market crashes, analysts are still focused on the ups and downs of quarterly earnings and guidance. Such a short-term view can wreak havoc on investors’ portfolios when market volatility appears.

If you want to sleep well at night, adopt the compound-interest based, prudent, diversified, common sense, patient and rigorous methods I described in 1997. For help with that approach, sign up in the form below to be contacted by a seasoned member of the investment staff at my family run investment counsel, Richard C. Young & Co., Ltd.  We can help you build a balanced portfolio.

Are you a trader or speculator? Or are you long term investor saving for a comfortable retirement? What’s your field of play?

In December of 2011 I wrote to readers explaining that each sport is dependent on the field of play. Coaches and players enter the game with a clear understanding of what they are trying to achieve, and the area within which they are trying to achieve it. Does that describe your current investment planning picture? If not, your first step is understanding your field of play. I wrote:

Football, baseball, soccer, hockey—each has something in common that can be translated into the investment world: Management knows in advance that 100% of the action will take place in a designated space, whether arena or field. As such, the focus is on a significant known. While it is true, certainly in baseball fields, that performance venues are different, the differences are known well in advance and are likely to remain static for a long time. Let’s take the Boston Red Sox. Whom, by the way, should we blame for this year’s disaster? Was it not convenient of Theo to leave bodies (see Crawford’s outrageous contract) strewn all over Fenway Park and then simply quit, walk away from the carnage, and jump to the Cubs?

Here’s the play. The Sox develop a team that is theoretically built to take advantage of the oddities of Fenway Park. The Yankees do the same tailored to a completely different mix of ballpark physical oddities. Many decades ago, I decided that field of-play thinking was necessary, at least for me, in order to allow disciplined thought and strategic planning on the investment front. Most investors, professional or amateur (I am never sure where the line is drawn), form decisions based upon news of the day, emotion, and the views of others. This crowd is action-oriented, wrongly believing that the more action in a given portfolio, the better odds for satisfactory performance. In fact, it’s exactly the opposite. I decided to take the news of the day off the table, to pay no attention to day-to-day market action, and to not seek out the opinion of others, but rather rely on my own thought process. This approach, of course, mandates extensive reading on a broad array of subjects. Enter inference reading as the heart of my decision-making process. The final leg involved putting all the information gathered from my reading and study into a workable format, or playing field.

When it comes to your investments, you must develop a plan that is more than just reliance on rising stock prices. Share prices can remain depressed for agonizingly long periods of time. A decade or more of no return with a regular retirement draw, can quickly decimate a life-time worth of savings.  Regular dividend payments offer a refreshing stream of income to help you navigate long dry spells in the stock market.  If you haven’t yet been convinced of the power of dividends, read what I wrote back in April of 1992 below:

Dividends Are Key to Your Stock Investing Success

Now what about individual stocks? Here, again, what you don’t do can be the key to your success. Don’t succumb to sales pressure. Don’t buy new issues (IPOs). Don’t buy secondaries. Don’t buy junk. When you are pressured to speculate and trade, resist.

Remember what I’ve so often told you—that the surest way to win in equities over time is by concentrating on dividends. Over many cycles, the Dow has provided a 9% total return (no commissions or taxes here) including capital appreciation and dividend yield. Dividend yield has accounted for a full 50% of total return. If you can choose between a stock with a 5% yield and one with a 0% yield, it’s clear that one of these selections gets you out of the starting blocks with a decided advantage.

The Dow Fell for 16 Years

If you still are not convinced of the value of my dividend approach, take careful note of the following: In 1965 the Dow closed the year at 969.26. In 1981, 16 years later, the Dow closed at 875.00. The Dow lost 10% over a period that for most Americans equates to half a working lifetime or all of a retirement. Without dividends, the game was over.

Invest based on what you do know rather than on what you are guessing about the future. None of us knows what the future holds. I can give you guidelines, and I can help you construct a portfolio that will absolutely make you a winner regardless of what happens, but I cannot tell you what the headlines will be in tomorrow’s newspaper. Bet on the cards you hold, not on drawing to an inside straight.

The adage “defense wins championships,” is perhaps as true in investing and personal security as it is in football. In April of 2012 I explained to readers that investors who understand two critical points about their investment strategy will be better prepared to defend their capital. I wrote:

What’s your competitive advantage? It does not matter what your endeavor, if you do not have a competitive advantage, you must expect, at best, a mediocre outcome. A surgeon who performs a given operation many times a week will always enjoy a competitive advantage over a surgeon who performs that same procedure once per year. A patient who thoroughly understands the concept of “number needed to treat” (NNT) is dramatically more informed than the patient who does not. A homeowner greeting a home invader with a 12-gauge semi-automatic shotgun loaded with low recoil 00 buck has a huge leg up on the homeowner nervously fingering a handgun, regardless of the caliber. A good survival rule of thumb is that the only reason for a handgun is to fight your way back to your shotgun. An investor able to defeat inertia, while at the same time able to be a master of patience and the profound power of compound interest, will always end the day in the investors hall of fame. This investor understands that (1) inactivity is most often his best friend, and (2) not losing money is vastly more important than how much one makes.

Even after the recent correction there are a lot of overpriced, overhyped stocks in the market, but you can still chart your way to success. Here are nine rules you can use to guide your way. I first listed these back in August of 1996, but they work just as well today as they did then.

Investment success hinges on a handful of time-tested principles:

1. As Albert Einstein pointed out, compound interest is the greatest mathematical discovery of all time. I write every issue with a compound interest table at hand.
2. Investment results are inversely proportional over time to trading activity.
3. Market timing is a bankrupt strategy whose time has never come.
4. Sales charges and high expenses are the toxic waste of the mutual fund industry and will kill long-term performance if not shunned.
5. Dividends and dividend growth are the dominant considerations for long-term conservative investors.
6. Past performance in the mutual fund industry has virtually no correlation to future results and often is a devastatingly contrary indicator.
7. Stocks will outperform bonds and cash long term and belong as a cornerstone in every investor’s portfolio.
8. Since the mid-1920s, the long-term total return on stocks has been about 10% (dividends and cap appreciation). Plot to target a potential 10% consistent long-term total return with as little risk as possible.
9. Diversify, diversify, diversify. None of us has tomorrow’s newspaper. Set yourself up to win in any investment environment.