2022 – Year end update

Dear Readers,

I wanted to start off by wishing you all a Merry Christmas and Happy Holidays! Hope you are spending some quality time with your family and friends, and looking forward to the upcoming year with new goals for your personal and professional lives.

I know several of us here in the US are having a rather difficult time due to the “bomb cyclone” winter freeze. If you are in one of these affected areas, my prayers are with you and your loved ones. I hope that you can come out of this safe and strong.

On my end, this has been a roller-coaster of a year. For a personal standpoint, this has been a rather difficult and challenging year. I have had to deal with family medical emergencies since the start of the year and continuing well into the later half of the year, which eventually led me to travel internationally on a very short notice. On the professional front, I went through a job switch for better growth prospects. So far, this has seemed to be a good career move, but these are still early days.

As an investor, I was lucky that I was not actively tracking the market, because several of my positions saw massive drops from the highs of 2021. Luckily for me, my investing strategy motivates me to look at this as a buying opportunity, so I decided to stay invested and keep adding to my positions. In hindsight, 2022 will be looked at as an ideal year for a dividend growth investor. So if you managed to get started during this year, kudos to you for taking this step!

I wanted to use this post to take a step back and revisit the goals that I had set for myself at the start of this year and see how I fared against each of them.

Goals for 2022 Revisited

Cover atleast 5 investing book through reviews

One of the goals that I set for myself is to read and review some good investing books during this year. I set out a number of 5, knowing very well that it was a stretch goal. How did I fare here? Well, I did not cover 5. I covered 3 instead. However, I am very happy with the 3 books that I did choose during this year. I started the year reading and reviewing Richer, Wiser, Happier by William Green. Quite honestly, this was a fantastic pick to start the year off with, because this has been one of the best investing books I have read that has been published in the last five years. I got the feeling that this was multiple value investing books rolled into one, purely because of the number of investing legends covered in this book and their investing gems. I have a twitter thread and a blog post covering this book, so please do take a look at those if you want more details.

Finished reading "Richer, Wiser, Happier". Condenses learnings from the most successful value investors of our times. Highly recommended read! Great job @williamgreen72 and many thanks for this!#investing #books
Sharing some of my notes below 👇

— Life With Dividends (@LifeWDividends) January 18, 2022

The second book was The Little Book of Valuation by Prof. Aswath Damodaran. One of my goals this year was to improve my valuation skills and I can’t think of a better person to learn these skills from other than Prof. Damodaran. While this book does not disappoint, I got a feeling that putting this subject under the “Little Book” umbrella did a huge disservice to this subject. Valuation is math and I felt the book undersold the math because it needed to be concise. But this is still a great book to get started with if you want to learn about Discounted Cash Flow and learn the concepts from first principles.

The third book was Philip Fischer’s Common Stocks and Uncommon Profits. Another very high quality book, and although it was written several decades back, it is surprising to see how some of the principles mentioned in this book continue to apply even today. I think this is one of those books which I will certainly re-read several times in the coming few years.

Given the high quality of the books I covered, I am not at all disappointed that I could only cover 3 books. But I did miss on this goal.

Write alteast one blog post per week

I missed on this goal big time. A switch in jobs does not help. Family medical issues did not help either. But a miss is a miss, so there goes another one.

Earn $3000+ in annual dividend income

I am happy that I was able to achieve this goal and quite comfortably in the end. And I am still expecting to receive sizeable dividends from TROW and LMT during the last few days of this year. This was a huge win for me in a year where plenty of other stuff was happening in my life.

Investing – 2022 Revisited

I am very happy with the progress with my portfolio and also the knowledge/skill-set additions to my investing repertoire. Like I mentioned earlier, I wanted to improve my valuation skills and I used the most of this year towards that pursuit. It is still a work-in-progress and I will certainly keep at it during the upcoming year as well.

I am also happy that I ventured into option trading during this year. My outlook on this investing style is mixed. While I can certainly see how I can use this strategy to supplement the income I receive through dividends, this certainly seems to add a lot of unwanted stress. I also have a tendency to keep looking at the current stock price on a day-to-day basis for positions on which I have written an option contract, and this is something that I largely consider as a waste of time. Like with everything, maybe it is something that I need to keep working on and improving.

I am super happy that I resisted the temptation of diving into cryptocurrency back in 2021, because at the time of writing this, almost all of these ventures have ended up being disastrous investments. I’ll be honest, it was not easy to resist the FOMO when every person around you (real life or social media) was talking about making easy money through their crypto investments. I did look into this, and even to this day, I cannot understand how one can value assets like these. I do not intend to sound cocky or get into a “I told you so” sermon for those of you who did end up losing money as a result of these investments. I completely understand your disappointment and feel sorry for this situation. But I do hope that you use this experience as a learning and never repeat it again in your investing journey.

Looking ahead at 2023

I honestly have no idea what to expect in 2023 as far as the stock market. There is all this talk about recession, but for all we know, this may never even happen. There is also talk about an immediate recovery from inflation. I am not sure about that either. I can certainly see how the Fed’s decisions to hike the interest rates will certainly help in keeping inflation in check and eventually reducing it, but I am not sure if this recovery is going to be “immediate”. These predictions are just random guesses and one should not give them more weight than they deserve.

2023 Blog and Portfolio Goals

As far as goals for my blog and my portfolio, I have the following three:

• Review 4 books on investing and business
• Have atleast 2 guests “on the blog”
• Complete atleast 5 deep-dives on my positions
• Earn $6000 in annual dividend income

The first goal is a no-brainer. I think reading and reviewing books has been very rewarding for me both as a person and as an investor. However, unlike last year where I had the number set to 5, I have dropped this number to 4 for this year, more like one book for quarter. I think this is an achievable number. We shall see 🙂

I have been very very lucky to interact with some really high-quality minds both through this blog as well as on Twitter. I have also had the privilege to be on as a guest on one of my favorite podcasts, Dividend Talk. I think these interactions are priceless as we get to hear from investors from within the dividend investing community and gain inspiration from their stories. I would like to carry forward and have atleast a few guests “on this blog”. I am not quite sure what this means at present: do I have them contribute to guest posts? do I interview them and post the transcript here? Do I post an audio version of the interview here via a podcast? These are details that I need to ponder over and work out. But I will make this happen.

One aspect of my blog that has suffered during this year is my deep-dive posts category on my blog. I intend to address this during this year, my covering atleast 5 of my positions through deep-dive posts. I already have my investment theses for all my positions, I just need to polish them up and present them as a meaningful blog post.

For the last goal, I would like to earn $6000 in annual dividend income. Based on my calculations and assumptions of my monthly contribution rate, I think this is slightly out of my projected annual dividend income (PADI) for end of next year. But that said, I would like to challenge myself and my portfolio to make this a fun experience. 🙂

2023 Misc Goals

In addition to these goals, I would also like to pay more attention to my health and overall fitness. There is no point in pursuing these investments and waiting for 20+ years, if I am not in good physical health to enjoy them. So this would mean going out for regular walks/runs and spend some time in daily meditations.

One of my hobbies that has taken a backseat over the last few years is that of nature photography. And I intend to get back to that sometime during the course of 2023. If feasible, I might end up posting some of my clicks on this blog as a part of some of my update-type posts. We shall see again 🙂

Wrapping up

Friends, 2022 has been a tough year for me, but I take it in my stride. Ups and downs are very much a part of everyone’s lives, especially for stock-market investors who are used to seeing ups and downs in the market. I am very much looking forward to 2023 as I stay strong during the accumulation phase of my dividend investing journey.

Once again, I wish you and your families a very Happy Holiday season. I am very thankful to all of you for your readership, your comments, your likes and your thoughts on this blog and I hope that I can continue adding value to your investing journeys through my content on this blog.

Cheers and see you all in 2023!

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Memo Thoughts – Something of Value

Dear Readers,

We are in the last month of what has been a roller-coaster of an year. There is no shortage of negativity in the news with what the whole FTX fiasco and its comparisons to another such famous (or rather infamous) scandal with Enron. You know that not all is well in the world when you have frequent news surrounding layoffs. Almost all of the Big-Tech names are in the process of laying off some of their workforce and looking to tighten their budgets, bracing themselves for the upcoming turbulent times.

There is so much uncertainty and it is hard to stay focused on your goals as a lowly retail investor. In times of uncertainty, I look for voices of reason to streamline my own thought process and not lose sight of the forest for the trees. And one such voice of reason is Howard Marks and his memos. So I wanted to end this year going back through his archived memos and picking a topic that seemed interesting.

So, I picked the memo: Something of Value. Arguably, in Howard Marks’ nearly 30+ writing career, THIS memo is regarded as his most read/ most famous.

Why this memo?

I want to talk a little bit of the significance of this memo and why I chose this memo from 2021 instead of a more recent memo.

We are at an interesting juncture as far as macro-economic conditions. For the large part of late 2020 and most of the year 2021, there was so much euphoria around early stage startups, EV companies, meme stocks, crytocurrency etc. that the aspect of looking at the fundamental intrinsic value of an investment opportunity had been thrown out of the window by a large portion of the investment community. Contrast that with the year 2022, where growth stocks have been crushed, and all ventures surrounding cryptocurrencies have declared bankruptcy and/or are involved in some or the other scandals. Indeed, social media influencers who were promoting these investment vehicles in order to make a quick side-buck in 2021, have since gone silent on these subjects and are suddenly talking about buy-and-hold investing and dividend growth investing now.

The background around the memo is rather interesting: it is supposed to be an outcome of a conversation between Howard and his son, Andrew Marks, also a fund manager, on the evolution of value investing over the last century and how it compares to growth investing. Howard Marks plays the part of discussing the fundamental tenets of value investing, while Andrew Marks is the more modern “growth investor”. I have always been intrigued by how the broader topic of “value vs growth investing” evokes such heated debates in the investment community. It is almost like as an investor you have to plead allegiance to one camp and even a mere mention of the merits of the other camp is considered blasphemous.

While the debate around which investing strategy is better is largely pointless, I think it is important that we understand the salient features behind each school of thought and understand how that will shape our mindsets as dividend growth investors.

Before we go much further ahead, it is important to define what we exactly mean by value investing and growth investing. We will then explore the relevance of both investing schools in today’s world and lastly explore where dividend growth investing fits into this picture.

What is value investing?

Let us hear from the value investing legend, Howard Marks on this topic.

Value investing… consists of quantifying what something is worth intrinsically, based primarily on its fundamental, cash flow-generating capabilities, and buying it if its price represents a meaningful discount from that value. Cash flows are estimated as far into the future as possible and discounted back to their present value using a discount rate made up of the prevailing risk-free rate (usually the yield on U.S. Treasurys) plus a premium to compensate for their uncertain nature. There are a lot of common valuation metrics, like the ratio of price to sales, or to earnings, but they’re largely subsumed by the discounted cash flow, or DCF, method.

Importantly, value investors recognize that the securities they buy are not just pieces of paper, but rather ownership stakes in (or, in the case of credit, claims on) actual businesses. These financial instruments have a fundamental worth, and it can be quite different from the price quoted in the market…

From a definition standpoint, there seems nothing overtly controversial about this description. At the heart of any successful investing strategy, the investor would need to determine the intrinsic or fair value of a business. And if the price offered by the market is at a substantial discount to that of the determined fair value, the intelligent investor would buy knowing very well that he/she is getting a good deal for the dollar spent.

One of the early proponents of value investing, the great Benjamin Graham, practiced and preached a low-valuation style of investing. This strategy, as stated by his disciple and arguably the most successful investor of all time, Warren Buffett, is known as the “cigar butt style” of investing. Howard Marks describes this as follows:

Graham’s style emphasized the search for pedestrian companies whose shares were selling at discounts from liquidation value based on the assets on their balance sheets, which Buffett likened to searching the street for used cigar butts that had one last puff left in them.  It is this style that Graham preached in his Columbia Business School classes and his books, Security Analysis and The Intelligent Investor, which are considered the bibles of value investing.  His investment style relied on fixed formulas to arrive at measures of statistical cheapness. 

There is a key distinction here from the original definition on value investing as stated earlier. Firstly, Graham’s definition solely looks at focusing on companies that are distressed and/or broken for one or more reasons and it talks about an opportunity for an investor to squeeze out every last bit of remaining cash flow out of this business by paying what is a cheap buying price. Secondly, Graham is also in favor of selling out of a business once it has been determined that the business is selling for far above its estimated intrinsic value. This second difference is something that we will discuss a little more later in the post, as it is related to a very important topic: whether one should sell out of a stock that is a winner.

On reading through Buffet’s journey as an investor, it is interesting to note how he first started out in Graham’s footsteps as a “cigar butt” value investor. However, after meeting Charlie Munger, he broadened his definition of “value investing” to instead look for “wonderful companies at fair prices”. This change in mindset and outlook translated into several of his winner bets such as Coca-Cola, See’s Candies, Washington Post, GEICO etc.

What about growth investing?

The growth investing brigade took off during the years of the “Nifty-Fifty stocks” (1960s). As Howard Marks puts it:

This group comprised the fifty companies believed to be the best and fastest-growing in America: companies that were considered so good that “nothing bad could happen to them” and “there was no price too high” for their shares.  Like the objects of most manias, the Nifty Fifty stocks showed phenomenal performance for years as the companies’ earnings grew and their valuations rose to nosebleed levels, before declining precipitously between 1972 and 1974.  Thanks to that crash, they showed negative holding-period returns for many years.  Their dismal performance cost me my job as director of equity research

That said, however, Howard also notes the following:

It’s worth noting, however, that the truly durable growth companies among the Nifty Fifty – about half of them – compiled respectable returns for 25 years, even when measured from their pre-crash highs, suggesting that very high valuations can be fundamentally justified in the long term for the rare breed of company

This is a fairly important point that most growth investors swear by. Their claim is that if they can pick a company that is a “rare winner”, the returns obtained from such a singular investment can easily outpace any gains made by value investors through their investing style.

There is some kernel of truth to this statement. If one were to observe Ben Graham’s investment record, most of his gains were from what is supposedly a “growth stock” called GEICO. Similarly, a large portion of the Warren’s Buffett’s gains are from his investment in Apple, another supposed “growth stock”.

But there is an important distinction in the value and growth schools of investing. The value investor relies heavily on data, he/she wants to look at the existing cash flows, use that to project all possible future cash flows and discount that back to the present value to determine the fair value of a business. The growth investor, on the other hand, typically does not have as much data to play with. He/she is mostly placing a bet on businesses that are currently at a nascent stage and is taking a huge leap of faith in the business model and the viability of it becoming profitable in the distant future.

Are these schools made up or is this distinction even relevant?

As I stated at the start of this post, the debate surrounding which investment strategy is better is largely pointless. In fact, Howard goes on to state that the investing strategies are not mutually exclusive.

Indeed, Buffett states the same point in one of the Berkshire Shareholder meetings:

I think I would agree. Let me give a simple example: Are dividend growth investors, value investors or growth investors? At some level, they are both. Clearly, they are focused on dividend GROWTH and there are popular dividend stocks such as MSFT and AAPL businesses that are still in that phase of their life-cycle where they are still in a rapid phase of growth. These are companies that are spending heavily on R&D and are investing in business segments that are still in their nascent stages. And yet at the same time, dividend growth investors also invest in companies such as PEP or Realty Income, businesses that have been around for a really long time, have stable predictable cash flows. In both cases, dividend growth investors will typically look to buy more heavily when the dividend yield is more favorable. And when is the yield more favorable? When the stock is trading at a reasonable value in comparison to its estimated fair value. That sounds a lot like the value investing definition that was stated previously.

The decision to sell out of winners

An important portion of the memo is around the topic of dealing with winners. As I stated previously in this post, owing to Ben Graham’s “Cigar butt” style of value investing, a lot of investors will sell out of a position when they deem it is overvalued.

Howard writes the following in his memo:

Much of value investing is based on the assumption of “reversion to the mean.”  In other words, “what goes up must come down” (and what comes down must go up).  Value investors often look for bargains among the things that have come down.  Their goal, of course, is to buy underpriced assets and capture the discounts.  But then, by definition, their potential gain is largely limited to the amount of the discount.  Once they’ve benefitted from the closing of the valuation gap, “the juice is out of the orange,” so they should sell and move on to the next situation. 

And this is where, Andrew, is his son, disagrees:

It’s important to understand the paramount importance of compounding, and how rare and special long-term compounders are.  This is antithetical to the “it’s up, so sell” mentality but, in my opinion, critical to long-term investment success.  As Charlie Munger says, “the first rule of compounding is to never interrupt it unnecessarily.”

In other words, if you have a compounding machine with the potential to do so for decades, you basically shouldn’t think about selling it (unless, of course, your thesis becomes less probable).  Compounding at high rates over an investment career is very hard, but doing it by finding something that doubles, then moving on to another thing that doubles, and so on and so on is, in my opinion, nearly impossible.  It requires that you develop correct insights about a large number of investment situations over a long period of time.  It also requires that you execute well on both the buy and the sell each time.  When you multiply together the probabilities of succeeding at a large number of challenging tasks, the probability of doing them all correctly becomes very low.  It’s much more feasible to have great insights about a small number of potentially huge winners, recognize how truly rare such insights and winners are, and not counteract them up by selling prematurely.

This is my perhaps one of my most important takeaways from this memo. And if you look back at this from the perspective of dividend growth investing, Andrew’s assertion to never sell your winners applies here as well. If you sell out of a stock too early thinking that it is overvalued, you have essentially cut the compounding tree at its root. As a dividend growth investor, you miss out on the potential to realize your true yield-on-cost as a result of such an action.

Summary

Howard ends this memo with what are truly some golden words:

The value investor of today should dig in with an open mind and a desire to deeply understand things, knowing that in the world we live in, there’s likely more to the story than what appears on the Bloomberg screen.  The search for value in low-priced securities that are worth much more should be just one of many important tools in a toolbox, not a hammer constantly in search of a nail…. The goal at the end of the day should be to figure out what all kinds of things are worth and buy them when they’re available for a lot less.

The key to understand here is that the fundamental tenets of value investing and the science of estimating the intrinsic value of a business are as relevant in the modern world as they were back in Ben Graham’s day. All intelligent investing needs to rely on this science in one way or the other. But there is also a fine balance and art in determining the quality of business, the effectiveness of its management, the overall quality of the business model and its relevance in the distant future. Successful investors will also need to ponder over these questions before buying a stake in any business.

My interview on Dividend Talk

I am elated to share that I was on the Dividend Talk podcast joining hosts Engineer My Freedom and European Dividend Growth Investor to discuss my journey thus far as a dividend growth investor. In my humble opinion, Dividend Talk is one of the few high-quality podcasts out there that focuses purely on dividend growth investing. And although the show title states that the discussion is with a “European flavor”, the hosts adequately cover both European and US stocks.

Both the hosts also maintain blogs (linked on their handles above and also in the Content-roll section on my blog). European Dividend Growth Investor also maintains a YouTube channel. Engineer My Freedom also writes for Sure Dividend.

It was a privilege to be a guest on this show. I am sharing a link to the podcast episode (Episode 125). Please also consider subscribing to the podcast and to the individual blogs/youtube channels for the hosts. These resources are helping me in my quest to be a better investor and I hope they will help you in a similar manner.

Monthly Income Report – November 2022

Dear Readers,

Hope all of you had a good Thanksgiving break with family and friends.

These last few weeks have been tough for me and my family. And this explains my silence on this blog. Firstly, I had to travel internationally during the early half of November due to a family medical emergency. Dropping everything on the floor, putting a pause on my daily life here and traveling at a moment’s notice is incredibly hard. But family comes first and this is life. And just when I thought things were looking better and I returned back to the States, I contracted the Flu on my return journey and could barely get out of bed for the remainder of November.

Things are now slowly getting back to some semblance of normalcy, just in time for a monthly income update. Hopefully, I should be able to pick up the pace of my posts on this space in the days to come.

So horrible month on the personal front, how did the month go in terms of dividend income earned? Let us find out.

Dividend Income Received

Sl. No.	Company / ETF (ticker)	Amount
1	Apple (AAPL)	$3.69
2	AbbVie (ABBV)	$20.55
3	Albertsons (ACI)	$2.54
4	Caterpillar (CAT)	$3.63
5	Clorox (CLX)	$52.89
6	Costco (COST)	$3.62
7	Procter & Gamble (PG)	$20.33
8	Texas Instruments (TXN)	$88.04
9	Verzion (VZ)	$38.16
10	Realty Income (O)	$24.33
11	JP Morgan Equity Premium Income ETF (JEPI)	$7.13
12	STAG Industrial (STAG)	$3.95
	Total	$268.86

So a total of 12 companies/ETFs combined to generate nearly $269 in terms of monthly dividend income. In addition to this, I was also able to earn $74.32 in option premium from a covered call contract I wrote at the start of the month. This brings the grand total to about $343.18 for the month of November. At the same time last year, I had earned roughly $109 in monthly income. So the YoY growth is still appreciable and indicative of the heavy investments I have been making in the portfolio during this period.

TXN, the “boring old calculator company”, was my highest dividend payer this month with an amount of $88.04. I really do not know what is “boring” about this company. Anybody who knows anything about the semiconductor industry will never use the word “boring” to describe it. In any case, in investing atleast, beauty lies in what is considered to be “boring”. Furthermore, TXN is just so much more than a “calculator” company. Not convinced? Please read my deep-dive post on the company to find out more.

As far as overall progress towards my year-end goal, I am still on track to breach the $3000 mark as far as yearly dividend income. December is slated to be a one of my higher paying dividend months, so I should be able to hit this goal comfortably and close the year out on a very high note.

Buys and Sells during this month

Trading activity on the portfolio was at an all-time low given all the stuff that was happening in my personal life. This was probably for the good anyway, as the market during this month seemed to be seeing several green days. This was probably one of the reasons why I was able to secure attractive premiums on the sole covered call contract that I wrote at the start of this month.

I will be looking for more buying opportunities in the last month of this year.

Summary

So the end of an eventful month. How did your month go? Do you hold positions in any one of my dividend payers for this month? Let me know in the comments below.

Until next time..