I wanted to take a step back from the dividend portfolio updates and talk about a subject that has been on my mind lately. Investing is such a diverse topic with various facets that sometimes it is easy to muddle things up and ultimately lose focus. While I was beginning my investing journey, I found it overwhelming and confusing to listen to so many “experts”. It was difficult to understand and chalk out what was the right path forward that would meet my goals. I would like to share my thoughts on this subject to aid some new investors who can hopefully learn from my experience. I’ll try divide these into individual sections and cover them one at a time.
This is such a hotly debated topic in the investment community. There are various strategies available to the individual investor: growth investing, value investing, dividend investing, index fund investing etc. And while there is no right or wrong approach with each of these, it is amazing how passionate some folks get when discussing this subject. Eventually, this discussion starts tending towards “the approach that I have chosen is the best and all other approaches suck!”. Ultimately, this leads into a mindless debate with no desirable outcome for anyone involved.
I can illustrate this with several examples with regards to dividend growth investing. For instance, the inter-web is full of discussions regarding the dividend irrelevance theory. I have also heard several other arguments against this strategy. Some of these revolve around subjects such as: taxes incurred on the dividend income OR how there is very limited stock price appreciation on some stocks that get touted as great dividend growth stocks (think PepsiCo (ticker: PEP) or Johnson & Johnson (ticker: JNJ). Often times, this discussion starts to get into ridiculous territory with comments like “dividend growth investing is so boring and not sexy at all”, whatever that is supposed to mean.
It is important to understand that there are multiple approaches to investing and your approach is unique to YOU. And since it works for you, that is all that matters in the end.
It is also important to highlight that your approach could be a unique mix of different styles of investing. Just because you are invested in dividend stocks does not mean you cannot invest in growth stocks. You can do both! In fact, when I own companies like Microsoft (ticker: MSFT) and Apple (ticker: AAPL), I can justify that I am owning both dividend AND growth stocks. It is called dividend growth investing, after all, for the same reason.
Similarly, just because you are invested in individual stocks does not mean you cannot invest in ETFs. You can do both here as well! You are just using your unique strategy to achieve your financial goals and you must avoid getting into the business of championing the strategy itself. The strategy is just the means to achieve the goal, it is NOT the goal itself.
This is a subject that has come up so often in my education as an investor. In general, sin stocks refer to companies whose central business can be considered to immoral or unethical. The tobacco stocks such as British American Tobacco (ticker: BTI), Altria (ticker: MO) or Phillip Morris (ticker: PM) often get cited in this bucket. Other companies that are lumped together in the same category are the “Big Oil” companies such as Exxon Mobil (ticker: XOM), Chevron (ticker: CVX) etc. The rationale being that these companies are causing harm to our natural environment and therefore “bad“. The next category of companies are those that are involved in producing weapons, which then subsequently are used in wars by defense forces. Some examples are Lockheed Martin (ticker: LMT), Raytheon (ticker: RTX) etc.
In my opinion, the moment you start mixing ethics with your investments, you are going down a slippery slope. Every single company, irrespective of how great it is or has been in its past history, would have been involved in some questionable business practices throughout its history. In one of my earlier posts where I discussed JNJ in fair detail, I mentioned how even a great company like JNJ has been involved in some litigations. One could argue that snack food and beverage companies such as Coco-Cola (ticker: KO) and PEP are “evil” because some of their products are bad for their consumer’s health. There are several other examples in other industries: Microsoft, Apple, Facebook, Google, Amazon etc. have all been in the dock at one point or another for anti-trust hearings and alleged business practices that attempted to thwart any competition. At the time of writing this, Facebook is in the news for wrong reasons where a whistleblower has indicated how Facebook and Instagram have deliberately ignored research data that shows how their platforms have a negative impact on the mental psyche of their users. To be honest, this news is not surprising to me, and one of the reasons why I dropped off from Facebook a few years ago. Looking back, it was a fantastic decision!
Every company at some point in its lifetime has had some such negative news. Even with a boring and predictable business like that of Waste Management (ticker: WM), we have seen instances of fraud.
So, where does one draw a line? Is this such a black-and-white classification after all or are there several shades of gray here? It is hard compass to judge any company on.
For this reason, my metrics when choosing a business are pretty straightforward: does it make long-term sense for me to invest in this business AND is it a business that I can understand and reason about logically. If the answer to both those questions is yes, I then proceed forward with further analysis. Most of my analysis is tended towards looking for reasons to NOT want the own the stock. This way I play devil’s advocate against myself with a hope that doing so will keep my biases at bay.
I also support my analysis in a quantitative fashion with valuation techniques such as discounted cash-flow and dividend discount model, padded with a margin of safety. The margin of safety here is critical, since there is risk associated with every business, the risk being that I could potentially lose 100% of my invested capital.
Once I am happy with my analysis, I initiate a position and then consistently dollar-cost average into that position. This further attempts to keep emotions out of the decision of buying.
Investing for other motives
During the whole GameStop fiasco earlier in the year, I was carefully waiting and watching on the sidelines as that whole episode was playing out. While reading about the news on various platforms, I was coming across comments where some people were investing “to teach the big guys a lesson” and “standing up for the small time investor”. While I can understand the enthusiasm and the thrill, using your (or someone else’s) hard earned money to “make a statement” OR “be a part of a public movement” is a recipe for disaster. In general, if there such a mass hysteria going around, it is always better to take a step back and really contemplate if the investment decision you are about to execute really makes sense to you and is in your long-term interests.
We have had so many examples of such events from the past. Tulip mania comes to mind readily. Here is another excerpt from The Intelligent Investor, arguably the best book on investing ever written.
And while we are on the subject, beware of those who are instigating you or asking you to invest in a stock because they think it is the right thing to do. Such people are two-faced liars and are only looking out for their interests.
So there you go. I think some of that post might sound like a incoherent rant to some folks and some others might take this as useful advice. In any case, my central goal is to motivate you to do your own research and think about what your strategy is before investing a dime in the market. If I have forced you to think about this subject, I would count that as objective achieved.
Thank you for reading thus far.
PS: You can find me on Twitter @LifeWDividends
Disclosure: Long JNJ, MSFT, AAPL, WM, PEP, XOM, LMT. No positions in Facebook, Google, Amazon or Coca-Cola, MO, PM, BTI, CVX, RTX