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.

 

The new year is here, and America’s stock markets are weathering some turmoil after ending 2018 mired in volatility. There are some concerns about the future earnings potential of companies currently making up big parts of the major stock indexes. Apple’s current trouble is just the most recent example.

Back in September of 2012, I reminded readers of one simple fact that can help them through hard times in the markets. I wrote “In the majority of cases, the price of common stocks has been influenced more markedly by the dividend rate than by the reported earnings.” I continued:

Dividends Then and Now Are the Answer

While at Babson College, I studied Ben Graham’s Security Analysis. I still return to it regularly. In Chapter 35, Ben Graham writes, “For the vast majority of common stocks, the dividend record and prospects have always been the most important factor controlling investment quality and value…. In the majority of cases, the price of common stocks has been influenced more markedly by the dividend rate than by the reported earnings. In other words, distributed earnings have had a greater weight in determining market prices than have retained and reinvested earnings.” Graham concludes with, “Since the market value in most cases has depended primarily upon the dividend rate, the latter could be held responsible for nearly all the gains ultimately realized by investors.”

Always Keep It Simple Made sense to me in the sixties and continues to make sense to me today. In fact, I attribute most of the success I have had in the investment industry to what I learned from Ben Graham nearly five decades ago. To keep track of dividends today, I rely on the same S&P Stock Guide [Ed. note: the S&P Stock Guide is no longer published.] that I relied upon when I began in business. Keep it simple and good things happen every time.

In 2019, Keep it Simple, and remain focused on your dividends.

That’s my investment creed. I don’t mind when markets are down as long as I’m still getting paid. Regular dividends and interest are succor to any investor when capital appreciation is wiped out at the whim of the markets.

In January of 2012, I explained my investment creed, writing:

So the investment environment today is cloudy and laced with sinkholes and other entrapments. Your mandate is armadillo-like self-protection both on the portfolio front and the personal security front. I invest a substantial portion of my personal wealth in liquid portfolio assets I can jockey around at a moment’s notice. I have, what are for me, huge positions in blue-chip stocks, fixed income, gold, and foreign currencies. I will continue to add to these positions. I care about asset protection and purchasing power protection—period. If some pleasing capital appreciation comes my way, great, but I do not invest with price appreciation as anything but an afterthought. Give me my interest and dividends and protect my capital and leave me alone. That’s my investment creed.

Make “Give Me Cash” your New Year’s resolution. Set your portfolio on course for dividends and interest payments you can use to fund your retirement, or to unlock the power of compounding through reinvestment.

Happy New Year!

Can You Afford a 50% Loss? That’s the question I asked readers in March 2014. I wrote:

Can You Afford a 50% Loss?

It’s impossible to have it all ways. In order to craft an investment portfolio that can act as an all-weather armadillo, you must be willing to forgo potentially substantial upside rewards to balance against the horror of a downside wipeout. If you are retired or saving for retirement in the not-too-distant future, you can easily get a knot in your stomach when you look at the basic math of downside portfolio protection. By example, when you lose 50% on an investment, you must make 100% the next trip to the plate just to get back even. And that’s without considering the negative drag of expenses and taxes on your gain, as well as the fact that you have not earned enough net-net to make my mandated 1% quarterly draw. I cannot impress upon you enough how ugly things can get—and fast. For a big percentage of investors, the mindset to take a deliberate and laser-focused armadillo-like approach is never achieved. For this unfortunate crowd, the ticking time bomb has already been set. What awaits is the explosion and ensuing financial carnage for the sad family.

The tragedy of big losses in an investment portfolio is felt most by those with the least time to recover. That includes retirees and those about to retire. You don’t have the luxury of a steady paycheck to rebuild savings, or the time to wait for markets to recover. Your livelihood in retirement is your portfolio. You can see the pickle investment losers find themselves in on my chart of the arithmetic of portfolio losses below. Each light blue loss has a corresponding dark blue gain that must be generated in order to simply get a portfolio back to even. If you’re entering retirement soon, or you’re already enjoying life after work, it’s no longer the time to take chances. Invest with prudence.

Back in May of 2002 I warned readers of the dangers of market timing, and of investing too much of their portfolio in equities. I wrote:

Your Focus: Dividends & Interest

In this issue, I re-emphasize why I think conservative investors must focus laser-like on fixed-income interest and dividends from common stocks. No matter what hype you read in the media or hear from brokers, stocks in general are not cheap—far from it. When all you get from the average big company stock is a 1.5% yield and you pay nearly 30 times earnings in the process, you are not looking at bargains. As you know, I do not invest for my own account on where I think the market is going, nor do I advise market prognostication for you. If Warren Buffett or Charlie Munger or Martin Whitman or Mike Holland or Jack Bogle don’t do it, and Ben Graham never did it, I sure as heck am not advising market timing for you.

Counterbalancing Is King

Instead, I invest a minimum 30% in fixed-income securities and the balance (70%) primarily in value-oriented equity securities. And I emphasize dividends. That is the exact strategy I insist you adopt if you want to retire in comfort. If, instead, you and your spouse are comfortable with gut-wrenching volatility, sweat-soaked sheets, and the raw nerves and foul disposition that come with sleep deprivation, just take a pass on my value-based diversification strategy.

A substantial counterbalancing fixed income position is still right for investors today. Diversification among asset classes is one of the most consistently effective ways to minimize losses in a market downturn. If you are unsure about the diversification in your portfolio, evaluate your holdings today and make the necessary adjustments.