The Mission Statement is to build an income stream that is reliable, predictable and increasing. The goal is to generate $10K per month in dividends at age 65. In order to achieve that goal he needs to grow his income stream at an annual rate of return of 10%.
Year to year rate of return is of no concern. Year to year capital gains are also are of no concern. We will stay focused on growing the income by double digits and trust that in time, the market will catch up to us as opposed to us chasing the market.
Considered overweight or a full position:
*JNJ ….. 3.7%
LMT …… 3.6%
MCD ….. 3.6%
MO ……. 3.3%
*D ……. 3.1%
*KO ….. 3.0%
*PM ….. 3.0%
SYY …… 3.0%
*ADP … 2.7%
*VZ ….. 2.7%
*GIS …. 2.6%
*KMB … 2.5%
*KHC … 2.4%
*MMM .. 2.4%
*O ……. 2.3%
*PEP …. 2.3%
CVX ….. 2.2%
*SO ….. 2.2%
*T ……. 2.2%
*CL ….. 2.1%
Considered up to a 2/3 sized position:
*PG …… 2.0%
HCN …. 1.9%
DE …… 1.8%
GPC …. 1.7%
AMGN .. 1.6%
DG …… 1.6%
*VFC … 1.6%
HD …… 1.5%
ABT ….. 1.4%
CAT ….. 1.4%
DUK …. 1.4%
MKC …. 1.4%
NSC …. 1.4%
UL ……. 1.4%
UNP …. 1.4%
COST … 1.3%
LOW …. 1.3%
MA …… 1.3%
NKE ….. 1.3%
SBUX … 1.3%
Considered 1/2 sized positions:
V …….. 1.3%
*XOM … 1.2%
CBRL …. 1.1%
HRL ….. 1.1%
SWK …. 1.1%
BDX …. 1.0%
IBM ….. 1.0%
TGT ….. 1.0%
DEO ….. 0.9%
KMI ….. 0.8%
I am going to show my son how to manage his portfolio today for when I am no longer around to help him. He still doesn’t have a desire to follow the market like you folks and needs a plan simplistic enough that anyone could manage it. Here’s what I am going to tell him.
He currently owns 54 companies, 51 in the green 3 in the red. I’m going to tell him to look at the percentage of gains in a company and whoever are his top 6 or 7 companies, add to them. Never add to a company in red until it turns green.
Although many of you might be able to present situations when averaging down on a loser worked out, that’s because you follow the market, he doesn’t.
Many would say why not just do an index fund. I say why not just invest in the companies that have been performing so well they are your greatest gainers.
Is it perfect? … No. But it’s better than most of the advice others try to share for someone not willing to follow the market yet. Same advice will be given to the Missus.
>>> Since he doesn’t follow the market, might be a good idea to prioritize the smallest positions first. <<<
I agree with you and that’s what I am doing for him now. My priority with his account is to keep everything as equally weighted as I can and showed the Missus how to do the same thing for him when I’m gone. After we’re both gone, the plan is to build on his winners.
As you add to winners your cost basis rises and your percentage gains come down, so over time as long as he adds to the top 6 or 7 gainers, it should provide him with something he will be happy with and across a number of companies.
Who knows, after we’re gone he might become motivated to learn and when he decides to learn something he’s relentless. It just has to be something he has an interest in
>> with all the research investors put into a stock before they buy it, so when the company does not perform up to the investor’s research, they still feel that all that research will be fruitful even after the company proves that they won’t. Selling is the admission of being wrong about that research <<<
Actually, there is a lot of truth to that. One of the books I read on the psychology of the market clearly covered that concept, and as I read it I said to myself, they are talking about me. It took some time for me to change that psyche, but the change I did and it was a relief to get past that
I am going to advise my son this week on how to manage his portfolio. Keep in mind he has no interest in following the market … zero, niltch, nada.
How do you advise someone like this? It’s simple actually and maybe a concept people who do follow their investments should use.
I’m telling him to look at the companies he owns, currently, he owns 54 of them. Out of those he has a green to a red ratio of 50-4. I’m telling him to focus on the green. Whichever green company he owns that is the smallest in market value, add to it to bring it up in size with others. If a company is red, ignore it, no new money goes in until it turns green.
How’s that for research?
This does not need to be complicated, the average 7th-grade student can do this until they decide to be too smart and try to be the next Warren Buffett.
The cash has finally shown up in my son’s account, I have already placed the order to purchase NKE at the open tomorrow.
This account used to have $4K as a full position but because the portfolio value continues to grow, and most companies are already at that level, I had to raise the value of a full position in his taxable account to $6K. This move is in his taxable account
This new position will now be $4.5K so he’s working on things slowly but surely.
His next purchase in this account, at this time subject to change, are adding to either MA, V or HD.
Every position is in the green in this account so every purchase does increase the cost basis. However, I am not worried about cost basis, I’m more concerned with company performance
Author’s reply »
I have a Young Folk Portfolio I am working with that when we started, a full position was $1,000. After we built out his portfolio with the number of companies owned, we raised the value of a full position up to $2k, then we eventually had to raise to $3k, and then $4k. As time goes on, we continue to add $1k to each position, building them up over time.
He is at the point where we will now be raising the value of a full position to $5k and today I will be purchasing O in his portfolio, taking it up to a full position.
Author’s reply »
Pay attention here folks!
Buying stocks at the 3 worst times in the past 30 years still proved the best place to invest.
“These kinds of opportunities are opportunities,” Bespoke co-founder Paul Hickey says.
The pullback is a chance to buy stocks off the sale rack, he says.
History shows that even buying at three past market tops has proven profitable over time, he says.
“If you look back historically, at the top in 1987 since then the annualized returns in the S&P 500 have been 9.6 percent. If you go back to March of 2000, if you bought at the top, the annualized return since then is 5.7 percent. And if you bought at the top in October 2007, annualized returns are 7.5 percent,” he said.
The three tops he was referring to were right before the 1987 crash, the top of dot-com bubble before it burst in early 2000, and the high before the 2008 financial crisis.
“At the worst times to buy in the last 30 years, the stock market has been the best generator of wealth than any asset class,” he said. So imagine the gains if investors were to have bought on the way down after those events, he added.
Let the older folks try to show each other how smart they are, thinking they can outperform in the long term. You don’t have to overthink it. You don’t have to try and time the market or worry about a lot of the market activity that older folks worry about. You have decades ahead of you and time is on your side.
Stick with the plan of building out your portfolio until you reach the desired number of holdings you wish to own and once that’s done, start building up.
Nothing happening this week, this month or this year will have any great impact on your long term results other than you not doing anything.
Instead of chasing the dream, build it. Stay invested and continue your regularly scheduled buying plan, just like you do with your 401k.
Food for thought!
Author’s reply »
Last month, when the market was off to a good start and up for the month, my son’s portfolio, a Young Folk Portfolio, saw his cash flow inflows from dividends up 10% year over year.
This month, with some very hectic down days, and uncertainty still ahead, will see his cash flows from dividends up at least 10% year over year. They continue to grow!
It doesn’t matter if the market is up or down, the focus is on dividend cash flows and meeting that 10% objective. Those dividend cash flows allow him to buy even more shares that will create even more dividend cash flows, cash flows that someday will provide a very large monthly income benefit.
I do not focus on what the market is doing, I focus on what our companies are doing. It’s the companies that provide those dividend cash flows, not the market, and when the market drops and creates panic for others, the market is not taking our dividends away, those will continue to swarm into the account on a monthly basis.
Think about it.
Author’s reply »
I was watching Shark Tank a couple of nights ago and Mark Cuban offered a guy $1.25 million for his business and Dennis O’Leary asked, what are you doing? He is valuing his company at $1 million. Cuban said I am not going to allow $25K to stop me from owning a business that has the potential of making millions.
That isn’t the first time he’s said that. Cuban constantly says any good company is going to outgrow any valuation you assign to it today. The more I thought about it, the more sense it made to me. Valuations have kept more people out of companies they really wanted to own but thought the valuation was too high. And, as young folks, you can’t sit around and wait 4 or 5 years to get the right price based on some subjective valuation, you have a portfolio to build.
I recall a couple of articles written by one of the most well-respected value investors here in SA. He wrote articles several years ago about how IBM and TUP were great value buys at the time. Well, if one was looking for total return, something you young folks hope that shows up over time, back in December 2015 both IBM and TUP were considered undervalued. Total return for the last 3 years?
TUP down 26.4%
IBM down 3.3%
I bought IBM in my son’s portfolio back then and I can assure you the position is in the red.
Almost every company we own have been bought when others thought they were overvalued, but thinking long term, and thinking about what Cuban says about valuations, in that same time frame I purchased ADP, LMT and V. Total return for the last 3 years?
V up 76.1%
ADP up 70.4%
LMT up 42.7%
Good companies outgrow any valuation you set for it today.
Am I saying to avoid undervalued companies and only buy overvalued ones? … Ale no!
What I’m saying is that most of you are investing small amounts of money and will be doing so for many, many years. Don’t make today’s choice seem like it’s the most important one of your life. If you like a company, and you want that company, just buy it. If it’s a good company you’re going to be paying higher prices for it over the years anyway. Today’s price will seem like a bargain as long as you maintain a long term mindset.
Think about it.
Author’s reply »
Speaking of watch lists. I devised my son’s list during the Great Recession when everything around us was falling apart. Most of the people involved in dividend growth investing have made their list in a bull market where a rising tide lifts all boats.
Trust me when I say this. When you devise a list during a recession, it’s a different list than one might have 5 years into a bull market. During a recession you see what’s working and what isn’t, you see how important defense is. You see how companies sensitive to the economy get crushed. You see where the dividend cuts come from in bad times, and you devise your list accordingly.
I’ve been through 3 recessions myself and the first two nearly wiped me out because I wasn’t properly positioned for recessions. Me own a utility? Are you kidding me? That’s for old folks! Yeah, I paid a price for that arrogance and I was ready for the last recession. A utility is the first company I purchase in any new portfolio, young or old.
People laughed at me for having KO in a young folk portfolio (no growth!), they weren’t laughing during the last recession.
You always hear young folks should go for growth, you have time to make up for it. I found out the hard way I needed that time after nearly getting wiped out twice. That’s why 50% of my son’s portfolio is defensive. He can go for some growth but still needs to cover his backside. This is why I like a ratio of 50%-25%-25%
Defensive 50% … This includes consumer staples, utilities, and healthcare.
Cyclical 25% … This includes consumer discretionary, financial’s and REIT’s.
Sensitive 25% … This includes industrial’s, energy and technology.
So, if you follow this blueprint and you want to own some industrial’s when you are limited to 25% in the sector most sensitive to the economy, you’ll select the ones you are more comfortable with. You may only be able to own 3 or 4 unless you don’t want to own more than one energy and technology company so that you can own 5 or 6 industrial’s, you may have to keep your position sizing low, less than a full position because you don’t want too much exposure going into the next recession.
Most of the dividend cuts, suspended dividends and companies going bankrupt during the recession came from the sensitive and cyclical sectors, therefore I’m careful about how much exposure I have there.
Just some food for thought
Author’s reply »
I want to talk to young folks about companies that sell a product or service that people must or will use regardless of economic conditions.
One of the most basic things in life is people cooking at home, and anyone who cooks has a couple of pantry shelves stacked with spices. During recessionary times, people eat at home more often than they do during booming economic times as opposed to eating out, so I always want some companies that take advantage of that trend.
When I go the grocery store, the products offered by MKC take up at least 2/3’s of the spice shelf space, they actually own the spice market as far as I am concerned.
Since people must eat, people will continue to cook at home, and if not, the restaurants have to increase their spice purchases, so MKC is well covered as to who buys what and when.
Over the last 20 years, we have had two significant recessions where people lost around 50% of their portfolio value, and it happened twice, not once. And when you look at those long term events, it’s important to see how your companies performed not in price movement, but in revenues and dividend growth as well. That’s where the safety of the dividend comes into play.
As a young investor you should look to mix in a few blue chips with other companies so that you can get both growth and income, both now and down the road, but you also need a few companies that perform well during adverse times, and to do that it has to be a product that is in demand regardless of economic conditions..
Due to the resiliency of MKC and their business, they have fared rather well over the past 19 or 20 years compared to the market
If you go back to January 11, 2000 up through today, the S&P 500 with dividends reinvested has produced an annualized rate of growth of 4.95%. … MKC with dividends reinvested has shown an annualized rate of growth of 15.6%.
As a young investor, you still want some growth and you want some income so that you can use those dividends to buy more shares and grow your portfolio more, but in choosing companies, try to find a few that meet the criteria that a company like MKC has shown over the last couple of decades.
You have time on your side. Use it wisely!
Author’s reply »
If you young folks want a tool to try and determine what you need to do in order to achieve long term objectives, I used the following calculator.
In using the following calculator, where it says interest rate, use the number that you can reasonably expect the market to grow at over the time frame you have until retirement.
I would suggest you don’t use a number higher than an 8% compounded annual growth rate.
The market has only grown at a rate of 5.7% annualized over the last 20 years, and I am on record as stating I’m only expecting 6% annualized returns. If I get 8%, I’ll take it.
This will provide you with a portfolio value and then you simply multiply that by your current portfolio yield to get an income number at retirement age. My son’s current portfolio yields 3.2%.
Author’s reply »
I would like you young folks to have a better grasp of what it is I’m trying to do when I say I hope to equal weight positions. I don’t mean it literally, I mean it conceptually.
Not counting my son’s TSP, which is the Federal Government version of a 401K, his taxable and Roth accounts are $200K in value. He owns 50 companies. When I divide the 50 into the $200K I come up with $4K each. … That’s what I consider a full position.
Now, he does have companies worth more than that. MCD is $7.1K .. JNJ is $6.2K, etc.
A lot of his companies are at $4K, some above, some just below, but since a full position is $4K, I want each position to be at least $3K in value.
I do not need every position at $4K before I raise the value to $6K. I just need them in proximity, and a 3/4 sized position is close enough for me.
I will now raise the value of a full position to $6K and that means I can add to some of his companies that have been performing better than others. What I didn’t want, and don’t want going forward, is to have just a few large positions and a bunch of smaller ones.
Why you might ask?
When I look at his 50 companies, I don’t have a clue who is going to outperform in the next year or two, or who is going to lag behind. I want to be sure that whoever it is that does well, the position was properly sized to take advantage of the move.
And that’s why I continue to pound the table on building positions of size.
In establishing a new full value number of $6K, that doesn’t mean all companies currently will have to come up to $6K, but they all will come up to $5K and others to $4K at some point as I slowly build each position up.
Author’s reply »
Re: Dividend Growth:
Although you young people do not need dividends for income at your young age, dividends play a vital role in how your portfolio grows over the years. Think of it this way. … How much more quickly does your 401K grow when your employer matches what you contribute? Your employer may only match up to 5% max, but over the years that money adds up and without it, you won’t have as much value in your 401K if the company contributions were not included.
That’s how I view dividends in a young folk portfolio. Those dividends serve the same purpose as your employers cash contributions to your 401K. So it’s the monthly cash contributions from dividends that I track in every portfolio I manage, including the younger folks.
Each year my objective is to see the dividend cash flow increase by 10% minimum, regardless of market conditions. The year 2017 was disappointing to me as the dividend growth was only 9.3%. I missed my goal.
In missing that goal I went back to see where I went wrong, and it wasn’t too difficult to see where I went wrong. 2017 was the year of building low yield, high dividend growth and that meant buying companies like MA with a 0.7% yield, V with a 0.76% yield, ABT with a 1.8% yield, DG with a 1.0%, you get the picture.
Anyway, at the time I declared 2018 as the “year of the yield” where I focused more on companies with a 3% yield or better and a funny thing happened.
The higher yields obviously added more dividend cash flow growth, but those lower-yielding companies had some double-digit dividend growth to add as well.
This year my son’s portfolio saw 20.1% dividend cash flow growth. Double my objective!
Think of how delighted you would be if your employer increased their cash contribution to your 401K by 20%. … Mama Mia!
My son invests $500 per month in cash into his brokerage account, and now with his dividend cash flows, that he uses for reinvestment, he has an extra $600 per month to invest, and that number is going to continue to grow. That’s $1,100 per month being invested as opposed to $500 per month, and as we go along, that should make a profound difference in portfolio growth.
Imagine what happens when he has $1,000 per month in dividends, $2,000 per month in dividends, and that number continues to grow. Over the years those dividends become significant. I have an older folk portfolio now generating $150,000 per year in dividends. Think about it!
And people want to say dividends are irrelevant for young people? … Knucklehead analysis.
Nothing changes in 2019. Same objective; 10% dividend cash flow growth and I will continue to purchase something monthly as I build up each position in his portfolio. Since he already owns all he wants to own, it’s now a matter of building each position up in size. … 2018 is “The Year of The Build!”
Time, patience and discipline are the keys to success!
I am thankful to everyone who comments on Chowder’s Articles. I learned a lot over all these years and would like to summarize what I learned:
1) Choose DGI or capital appreciation. DGI is my choice.
2) choose about 30-40 companies, diversify, and build out and big positions over time.
3) Try to invest in equal amounts in all the stocks you want to own.
4) Always invest cash right away. Invest-able cash is the cash that is not required for at least 5-10 yrs. (10yrs is the best).
5) Choose 60-70% defensive companies and rest cyclical/technology companies.
6) Choose the companies that can thrive in the recession when building a portfolio; once you reach 30-40 companies limit start building bigger positions.
7) valuation is important when starting a position but its hard to find and evaluate. But the good thing is we will find at least 4-5 reasonable valued stocks (in a year) or sectors (like REITS/Utilities in late 2017/ early 2018) even in a bull market.
8) once you initiated positions and have invest-able cash; try building up positions.
a) in bull market condition – if the company beats EPS; Revenue and raised guidance – buy
b) in bear market condition – if the company beats revenue; miss EPS and market reaction good and guidance is reasonable or higher buy. otherwise, wait for other companies from your portfolio to release earnings and choose other companies to build
9) its hard to get our minds straight on price point; so try reading M* report; valueline report; brokerage report; fastgraphs and come to price point (average them).
10) be reasonable to pick a stock that won’t cut the dividend. So try companies with BBB+ rating.
11) Companies with low yield high growth (AAPL) will take 12+ years to beat the income produced by high yield low growth (T)
1) Your portfolio can cut down 50% at some point.
2) as soon as you buy a stock it may go down;
3) Hopefully, there will be no dividend cuts during bad times. Even there are dividend cuts or freezes, it may be only for 1 or 2 qtr at the most.
The good part is Dividend income will grow over the years. It takes about 10-12yrs to see actual good income. Patience is important.
Skills I still need to learn from you (or gain experience) is:
1) Evaluate a company. Hence I come to this blog every day.
2) How to invest big amounts for ex: 401k rollover especially like in the year 2017-2018?
3) when to sell?
Author’s reply »
This message is important for you young folks. Older more experienced investors, those who have large portfolios, and have met their objectives, or are on schedule to meet their objectives may disagree with I’m about to say but listen and think.
You are going to hear phrases like putting cash to work is a fallacy. Buying anything at any price isn’t putting cash to work. It’s being foolish.
First of all, they use the term … “any price.”
Who in the world suggests any price? … I don’t mind paying a premium to what some might consider fair value, but that doesn’t mean I’ll pay any price.
The way I see it, those who are already there can be picky. They can go to all cash if they wish and still be okay. You folks can’t. You don’t have scale, don’t have size, have a long way to go. You need to learn how ignore what others are doing, who are already satisfied with what they have and are only trying to enhance it.
You need to find something to invest in on a regular basis. The choices you make today will determine your performance decades from now. And keep in mind, even at age 65 you still have to plan for a couple of decades more.
Since you have so much time to go, any mistakes you make will be insignificant in the long run because you won’t be building on these losers, but the decisions you make today that turn out well will make an incredible difference in your financial safety in later years because you will be building on to your winners.
Focus on what you want to own, what you want to add to in your portfolio, and just do it, month after month after month, regardless of market conditions. I’ve been showing that in my son’s portfolio for the last 10 years. It’s a slow process because you may not have a lot of cash to work with, but a process that is necessary over the long term if you want to build a portfolio of size.
When construction workers are building anything, note how much time and effort goes into the foundation of the structure. Once that is in place, it’s nothing to slap up the rest of the structure. It’s the foundation that gets the most attention and takes the most time to build. It’s no different with building a portfolio. So build it, don’t sit on cash unless it’s going to work soon.
Think about it.
Author’s reply »
Well, the market is officially in a bear market, the S&P 500 has officially dropped over 20% in value from its most recent high.
Those of you who have been putting money into the market over the last several months are probably seeing red in those positions and also seeing your portfolio value dropping. It isn’t a very good feeling, I’m sure. You may have some butterflies fluttering around in your stomach, I know I have during the many market declines I have experienced over the last 30 years. But, I learned how to make those butterflies fly in formation.
As it is with most things in life, it’s our attitude that determines how we react in the face of adversity, and if we are determined not to be beat, there is always opportunity that can come out of chaos and it’s no different with investing.
The market dropped 57% in value during the Great Recession and now that was scary. However, having been through two recessions prior to that last one, I was determined not to panic as I had done in the past. I knew from experience that, that too would pass, and it was at that time when I learned to build high quality defensive positions.
In 2009 I was buying shares in KO, PG, CL, JNJ, quite a few utility companies, VZ and other companies I believed would survive and thrive when that recession was over.
In the midst of all that chaos, and it was chaos when you see half of your portfolio value wiped out, that the market eventually did turn and even after this recent correction, the market is still up 190% from January 1, 2009 until today. That’s the value of long term investing.
I never would have enjoyed these types of returns if I got out of the market or stopped investing in fray that was ongoing at the time. I realized that with prices falling as much as they did, I could purchase more shares per dollar than I could previously when prices were higher, and it’s those shares that will determine how much cash flow dividends you receive that can be invested further. It’s the number of shares you own when entering retirement that will determine the level of income you receive every month in your account. It’s those shares you need to focus on now, not what the market is doing. Build your share count.
You’ve got to continue to stay focused on the long game, ignore the short term noise because this too shall pass. What you don’t want to have pass is the opportunity to buy more shares when valuations are at the best level we’ve seen in a while.
Opportunity is calling. … Opportunity … grab it!
My Christmas gift to you!
Author’s reply »
As the new year approaches, this is a time where a lot of people reflect on where they’ve been and look ahead to where they want to go. I make it a practice to review the previous year’s goals, before establishing new ones, to make sure I haven’t wandered off the reservation in my investing process. A review of The Single Best Investment by Lowell Miller gets reviewed annually.
Long-term investing is for savers and builders, for people who understand (or who want to understand) that the forces of time, modest and reliable growth, and compounding are on their side. Investing isn’t some athletic event where agility and flashes of virtuosity are the secrets of success. Rather, investing really is investing, the methodical accumulation of capital through a sensible and disciplined plan which recognizes that “shares” are not little numbers that jump around on the computer screen every day. They represent a partnership interest in a real and going business.
Your plan, very simply, must recognize that you will
manage your investments by actually being an investor, a passive partner in a real and going business
A partnership in a real business! … And I want that partnership to be a long-term one. I want to build share count in each of our companies, and I only own the companies I am not only comfortable holding during corrections, but see corrections as an opportunity to buy more shares. It’s those shares that will provide your income in retirement.
Focus on building share count. If it’s not worth building, it’s not worth owning.
Think about it!
Author’s reply »
It can be very nerve wracking when you watch the market dropping day after day. One of the hardest lessons for me to learn was that … this to shall pass.
I had to learn to ignore watching my portfolio value and simply focus on building my share count.
To a young person, I think my best advice would be not to buy and sell, but to buy and build. The only way you can build is to ignore what the market is doing and continue adding to your positions on a regular basis.
Building as a young person sometimes is also frustrating because you don’t have a lot of cash to take advantage of opportunities, you have to get over this and just do the best you can with what you have.
My son can only buy a company every two months because I require $1K in cash to invest and he contributes $500 per month. His next purchase isn’t due for a couple of more weeks and I already know I am going to add to SWK as his next man up purchase.
I am not going to chase MSFT, GOOGL or any other high flying technology company that is down in value. I’m simply going to continue building his share count in the companies he already owns, as opposed to looking to buy new companies.
Stay focused, don’t allow the market or others to cause you angst. Stick with your plan.
Author’s reply »
Buying the dips.
This is one concept that took me years to figure out. Everyone wants a good price, everyone loves buying things on sale, people love to average down on their cost basis and it’s these things that are harmful to long term investors.
Too many people will see a company come out with a bad earnings report, they will provide weak guidance going forward, price drops 7% or 8% on the announcement and people love to gobble up those moves. … Rookies!
If a company is going to under-perform, doesn’t it make sense that price will continue to drop over time? How long is that under performance going to continue? Why would you want to throw more money at it?
The kind of drops you want to buy are when companies like HD come out with a great earnings report, say they expect to do better, and then the price drops as the traders move in and lock in profits. Unless the entire market is going to take a hit, that’s the kind of price weakness you want to jump on. That’s buying the dip on companies displaying strength as opposed to weakness. It’s what Cramer refers to as accidental high yielders.
You will see how effective this strategy is if you track it over time. There’s a difference between buying a dip and buying a falling knife. A company’s performance level, or lack thereof will be the clue.
Author’s reply »
For you young folks, just to provide a little color to how I have my son’s portfolio set up, his Roth has 19 positions, the portfolio yield is 3.51%. His taxable account has 31 positions, and this is where his growth companies are, but that account has a yield of 2.92%.
Although he holds positions like MA, V, ABT, DE, DG, NKE, and SWK, all with less than 2% yields, his portfolio yield comes from position sizing. This is an aspect of investing that too many people ignore or don’t understand.
I can generate dividend growth while still purchasing low yielding companies by how I size the positions.
Think about it!
Author’s reply »
One of the things young folks need to keep in mind is to allow your winners to run. You may see other people taking profits and moving money elsewhere, but that’s because they are at a different point in their investing careers. The reason you build positions of size is so that when you get close to the Golden Years you have a source where you can lock in profits and turn it into income.
Let me provide an example. My son has 200% returns in ADP and LMT. He has 100% returns in JNJ, MCD, MO and SWK. Some people would sell half of their position and lock in their initial investment and say they are now playing with house money. It’s not house money, it’s your money, and when you have several decades of investing ahead of you, why in the world would you want to sell off your best performers. You’ll only end up buying them back several years from now.
Ignore the older folks who are selling and moving their portfolio around. Let your winners run, continue to build them as you go, and you won’t have to adjust anything heading into your Golden Years. A lot of older folks got started late and that’s why they are still dealing with the emotional ups and downs of the market.
Stay the course!
Author’s reply »
You young folks are going to be bombarded with articles and comments telling you dividend investing is dead. For some people it might be, it depends on what their objectives were to begin with.
A lot of people who invest in dividend companies are still trying to chase market performance, and from where I sit, that’s not what dividend companies are usually bought to do. I invest in companies that create income, or cash flows to be invested if one doesn’t need the income.
So in other words, if you are a young person and are receiving $400 or $500 per month in dividends, those dividends when added to your monthly contributions are going to help you build your portfolio more quickly with regard to share count and more cash flows for investing. That’s not dead! That’s ongoing and has been for over a century.
People will want to convince you that you are losing money when prices drop. You’re losing money if you sell and lock that loss in, but if you’re not selling, or had no desire to sell because you are looking long term, as you should be, then all you have is a draw down, not a loss, and most draw downs are temporary in nature. You are supposed to use those draw downs to add more shares, not sell and lock in a loss. When prices drop, yields rise, and you are able to purchase more shares for the same amount of money you invest every month. More shares will equal more dividends collected to help your portfolio grow even faster.
Short term people never seem to grasp this concept. Ignore them, stick with your plan, anything happening today in the market will long be forgotten down the road and the woe is me folks will have to create something else to worry about. The only thing I worry about is generating more dividends to use to help generate even more dividends.
Think about it!
Author’s reply »
Re: Dead Money …
I want to talk to you folks about a concept called “dead money.” If you read enough comments, or listen to enough CNBC, you’ll hear people talking about avoiding companies that are dead money.
Dead money is a common term used on Wall Street to describe money that does not earn a return for an investor. It could be money stashed in a mattress, non-interest yielding checking account or a security that does not yield returns. Any money or investment that does not grow or yield gains for the investor is usually referred to as “dead money”.
When an investor invests in securities, the expectation is that the security or investment will yield some profitable returns. When an investment is not expected to yield any returns for the investor, the investment is referred to as a ‘dead money investment’. Examples of dead money investments are shares or stocks of companies that are not expected to improve or appreciate past their current price. Like everything else, what an investment a trader or investor considers dead money might be considered profitable by another trader or investor depending on whether they want the stock to go up or down.
If the share price doesn’t appreciate much over a certain time frame, a lot of people use 5 years, they consider it a bad investment. I don’t know why some people use 5 years, especially since we actually had a 10 year period back in 2000 that was considered dead money for 10 years. It is referred to as the “Lost Decade.” The S&P 500 was at the same place on both ends of that 10 year period. I don’t know how folks managed their portfolios when they had 10 years of dead money, but those using 5 year time frames must have lost their minds, and perhaps money too.
I want you to think about this. Forget about dead money, forget about worrying how much your positions are up or down. You are in a building phase where you are investing small amounts of money at a time, and you should actually like the idea that price isn’t getting away from you as you continue to add more shares in the years to come. I’m not saying you should ignore nice cap gains, but those gains are on small positions and make it tougher to build share count, so I’m saying don’t make price appreciation your major focus.
The goal in the young folk portfolios I work with is to buy small amounts in the companies we wish to own, and once we hit the number of companies we had in mind, we started building each of them up. I do not get concerned with price action, I get concerned with building up positions of size that I hope will be held in each portfolio for decades, so today’s price action will mean nothing in the long run.
Leave the “dead money” concept to the traders, you are investing for the long term which requires a different frame of mind.
Author’s reply »
A word about losses! … I often see people who lose confidence in a company, are showing a loss on that position, and refuse to sell until they can get even. This is not only a rookie mistake, it’s crazy thinking.
You should hear the excuses. The position is so small now I don’t see any sense in selling. I’m afraid the minute I sell the company will come out with something new and skyrocket. It’s in a Roth and I can’t write the loss off. It’s one excuse after another to prevent them from having to admit they made a mistake.
Folks, you are going to make mistakes and if you ever want to invest on a more professional level, then you must learn to take a little pain and do what’s right.
Case in point. My son used to own a position in GILD. GILD lost its pricing power and with it the stock price started to tank. On 5/20/16 the position was down 21.8% and I decided to cut my losses and invest the cash elsewhere. I wasn’t going to hang on and try to make it back. We keep hearing there are better investments elsewhere and that’s what I decided to do.
GILD was in a Roth yet I still took the loss and moved the cash into CAT.
Since 5/20/16, GILD has dropped another 14% on top of the 21% loss I took with GILD. CAT is up 132.9% since I moved the cash over.
I didn’t allow the excuses others have for hanging on, I knew I made a mistake in my timing of owning GILD, lost confidence in them as an investment, admitted my mistake and found something better which more than made up for the loss I took. That’s how experienced investors manage a portfolio.
If you don’t have confidence in a company, get rid of it and buy one you do have confidence in. Don’t allow your mistakes to undermine your progress.
Author’s reply »
I know it is frustrating for some people to look at their portfolio and feel some angst and question what it is they are doing when they see a company like D correct 25%, T correct 20%, or KHC down 35%. Keep this is mind, during 2008-2009 the entire S&P 500 was down 57% and with it everyone’s equity portfolio value took big hits. Back then the 401K became a 201K and that’s all that was discussed on the business news channels. … This correction is nothing. Some sectors are getting hit harder than others but when we came out of the Great Recession, companies and portfolio values went on to set new highs. Those who continued to buy when the market was falling came out a little better in the following years due to the fact that they continued to build share count.
There have been many corrections over the years, some worse than others, but the market always rebounds at some point and as long as you focus on adding to quality companies, this correction won’t even show up as a blip on the radar years from now. You have plenty of time to overcome any short term adversity we currently face.
Stay focused, ignore the noise, follow the process.
Author’s reply »
I am very pleased with the dividend cash flow growth the young folk portfolio is showing for 2018. The first 4 months of 2018 is showing 16.1% dividend growth over the first 4 months of 2017. … The objective every year is to show at least 10% growth.
The reason I am impressed with this year’s dividend growth is because most of it is coming from the companies themselves raising the dividend and in us reinvesting the dividends, very little is coming from new cash.
Why is dividend growth so important for a young folk portfolio? … Because those dividends represent cash that is being reinvested. With the market down to flat for the year, and with a lot of the companies we own actually seeing a retreat in share prices, those dividends are able to purchase more shares for the same dollar amount than they did last year. This increase in share count increases the amount of dividend cash flows.
With the market under-performing, I’m looking at a 16% pay raise. … How bout that!
Author’s reply »
There was an article in this weekend’s Wall Street Journal saying investors have to rethink their investment process. Those who suggest you go for growth say you need at least 6 times your annual earnings and then withdraw just 4% per year. That method has proven to be unreliable and the new withdrawal rate is 3% but forcing yourself to take a pay cut during down years.
And that sounds like a plan?
With dividends I can form a relatively safe portfolio generating 3% yields and that income flow can increase annually as opposed to taking a pay cut, and you don’t have to sell any assets like you do with MPT Theory or other growth strategies. You still have that option but it is not a requirement.
Then you have to pray to the stock gods that the growth you seek materializes. What if it doesn’t? What if another recession hits at the time you are ready to retire? I’ve seen how that plays out back in 2008. People were up the creek without a paddle.
A person may not generate as much dividend income as they would like due to starting late, but that doesn’t mean you can’t do the best you can with what you have and at least be able to count on it being there and growing. Half of something is better than all of nothing.
Author’s reply »
I read a comment yesterday that pretty much wraps up my investing philosophy. Anything we do in life, if we wish to be successful over the long term requires discipline. John Henry, current owner of the Boston Red Sox made a lot of his money as a trader and he had this to say about discipline.
“Well, you create discipline by having a strategy you really believe in. If you really believe in your strategy, that brings about discipline. If you don’t believe in it, in other words, if you haven’t done your homework properly, and haven’t made assumptions that you can really live with when you’re faced with difficult periods, then it won’t work. It really doesn’t take much discipline, if you have tremendous confidence in what you’re doing.”
I know from studying the markets over the years, and from personal experience, that buying high quality companies, reinvesting the dividends, and buying more as you go along is a successful way of securing financial security in retirement.
I am not suggesting that dividend growth investing is the only way because it isn’t. It is the easiest way though for a young person to start while they they don’t have a lot of cash to invest.
Nobody will step up and say that dollar cost averaging over several decades won’t work or prevent you from succeeding … nobody will say that. So, why are some so afraid of applying it? … They haven’t studied the market, they haven’t done their homework, that’s why.
Many times the most simplest of strategies is the best strategy and that’s what I continue to try and impress upon you younger folks. Most of us older folks wish we could go back and start over doing exactly what it is today I suggest to you to follow. I hope you are paying attention and following through as opposed to listening to the whining of the older folks who have come up short. … Ha!
Author’s reply »
I am posting this here because you young folks are most affected.
You are going to hear a lot about Warren Buffett in the coming days and his latest shareholder advice. You are going to hear all about how important valuations are and how Buffett has a ton of money to put to use but can’t find anything cheap enough.
You are going to have to ignore it. … You are not Warren Buffett and you can’t invest like Warren Buffett.
When Buffett gets his price he doesn’t ease into a position, he buys the company outright. Most people who wait for their price don’t go all in either, they ease into a position and then they don’t add to it because they don’t want to pay more for any shares over and above their initial price, they won’t average up on their cost basis. … Stupid is a stupid does!
The best course of action, for those wishing to invest in equities, is to stick with the leaders of each industry, build your portfolio out first as to the number of companies you wish to own and then start building them up one company at a time, taking turns on who looks like the next best potential prospect going forward.
You probably are not in a position to sit and wait and then buy in size when the time comes, so stop pretending you are that person. You have decades of investing ahead of you, compounding is your ally, but only if you take advantage of it. Be smart. Get going!
Author’s reply »
Young investors, listen up. We are in a market stage where there is a lot of volatility, it can be distressing to sit and watch the market take 200, 400 and 1,000 point drops over short periods of time. It’s all noise. Market reactions have nothing to do with company performance and their ability to earn a profit, and it’s those profits that I want the companies we own to share with us.
When you see quality companies miss by a few cents on a quarterly earnings report, and then see that company drop 10% on the news, if you have cash available, most of the time that’s a buying opportunity.
When the market has had a run like this current market has, people have a tendency to overreact to everything. If they don’t have something to worry about, they will invent something. You have to ignore that noise and stay the course.
I used to have to tape a post-it note to the monitor with the mantra … This too shall pass!
My son’s next scheduled purchase is late next week, and I don’t care what the market is doing, I will be adding to his next man up.
The events we are experiencing now will be long forgotten years from now, but what won’t be forgotten are those shares we plan on adding next week. I’ll let others moan and groan about portfolio values dropping, I’ll let others whine and cry about about short term earnings reports, I’ll ignore their fears and insecurities and stick with the process. The process calls for me to build positions of size in quality companies for the long term and in order to do that, I need to keep adding shares, so adding shares I will do, and so should you.
Author’s reply »
I want you young folks to stop and think, you need to find a way to separate yourself from how too many older folks think. Older folks don’t have the time you do for your decisions to play out, thus they must manage their positions differently.
I was asked above about buying a couple of positions at higher prices in new portfolios set up about a year ago, and some of those positions have seen their price decline in the 20% range, but by the same token, other positions purchased at that time are up 20% or more.
In hindsight one can say you could have gotten a better price for D or MO, but in real time, how do you determine who will do well and who won’t? … You can’t do it with accuracy or any amount of consistency. … That’s the whole purpose behind building your portfolio out in the number of companies you own first, to get some diversity, and then a year or two later, you get to see who is doing well, who isn’t, and you are in a position to build on to the companies you have confidence in. Not all of the companies down in price should be ignored, you have to look at their performance and determine if the price drop is from market sentiment or under-performance of the company.
I always find it interesting how so many people focus on the companies in the red and I like to focus on the companies in the green. I prefer to build on strength, but if a company like D is down in price, I’m still confident enough to add to it where I’m not confident enough to add to MO. So, you have to make decisions based on your research. What are you comfortable with, what are you not. You then add to your comfort positions. Easy peasy.
Some companies may take several years to hit new highs again, but so what. You have time. We older folks may only have a few years to rebound, you younger folks have decades.
You aren’t investing large enough amounts to worry about short term price movement. You don’t need the income to live off of. All you need to do is keep building share count in the companies you have confidence in, and then put off investing into those you lack confidence in until they show improvement. This isn’t that difficult, what is difficult is controlling your emotions, and the best way to manage them is to have a plan and stick with it, like I do with my “next man up” concept. I explained that in another blog for those of you unfamiliar with it.
Author’s reply »
In my earlier investing days, market conditions that we are currently experiencing caused me a lot of uncertainty. The market being up big one day, down another day, and companies announcing better than expected results seeing prices drop immediately would undermine my confidence in how I was investing. As time moved on and I gained experience, I learned to focus on simply building monthly cash flows from dividends. It’s those dividends, like your company match in your 401K, that will be used for further investment.
When I see profits from unrealized gains diminishing, I don’t focus on share price, I focus on the quality of the company and try to determine if the drop in prices are temporary or the beginning of something permanent. I think a lot of what we are seeing is temporary, so I continue to focus on building share count which creates more dividend cash flows for reinvestment.
With this in mind, this week I have added to GPC with its 3.3% yield, KHC with its 4.2% yield, KMI with its 3.0% yield and 60% increase in the dividend, and UL with its 3.3% yield and 8% increase in the dividend.
By focusing on companies with yields north of 3%, I expect to build a double digit gain in dividend cash flows year over year for reinvestment.
There is a great deal more peace of mind in knowing that as prices fall, the cash flows from dividends are rising and its those dividends that people will be living off of in retirement. So, I continue to focus on building share count to build dividend cash flows to buy more shares.
Author’s reply »
You young folks should be experiencing the effects of long term investing. Prices and dividend cash flow growth don’t always go in the same direction, we now see how share prices are falling, but your dividend cash flows should at least be steady, and most certainly increasing, I know my son’s portfolio continues to see his dividend cash flows growing quarter over quarter, and I can assure you, share price increase isn’t achieving that goal. … Ha!
Where many people will be freaking out over falling prices, this price action is agnostic to me other than I’m able to pick up shares for the same dollar investment than before when prices were higher, and more shares means I’m increasing the dividend cash flows that will be hitting the account month after month after month.
You need to learn to ignore price action other than allowing you to purchase more shares at more reasonable valuations. My focus has been, and will continue to be on the dividend cash flows and the growth of those cash flows. You do that by accumulating shares.
While the market is down year to date, and looking to go lower, my son established a new dividend cash flow record for March and his dividend cash flow growth, first quarter of 2018 over first quarter of 2017, is up 14%.
Dividend reinvesting now has him picking up shares in every company he owns at lower prices. His monthly cash contributions will be picking up more shares at lower prices as well, so I expect to see a very good dividend growth performance this year because yields are rising. Take advantage of them, you have a long way to go and this current market condition too shall pass and be forgotten years from now, so no need to be anxious about it. Continue investing according to your plan. I know I will be, nothing changes.
Author’s reply »
I love working with young people if they are smart and willing to learn, young enough do not have the fears of the older folks unless they decide to adopt them, and if you do, don’t whine to me. … Ha!
There is a lot of talk about valuations and how long this bull market has run, but one of the best pieces of advice I think I have ever received is this …
Bull markets don’t die of old age, they die of fright … and most of that fear comes in the form of recessions.
This is why companies that are recession resistant are the foundation of our portfolios. Consumer Staples, Utilities and some healthcare are where we start, what we build, and what we will always continue to add to as the years go by.
We don’t have any sign of a near term recession from what I see. I don’t see anything impeding global economic expansion nor impede near term corporate profits. We haven’t even seen the first quarter of earnings in the new year from tax reform.
We will continue to hear the worry warts whine about their short term concerns and if there was nothing to worry about in the near term, they would create something.
Ignore the noise! … Continue to grow your portfolio the same way you do your 401k. … I don’t hear anyone complaining about how we should hold back on 401k investments, so why hold back on your overall portfolio investments?
Buy quality, be patient, ignore the short term noise and continue to add to your portfolio on a regular basis. … You’ve got to think long term and that means shelving your short term fears. Get over them!
Author’s reply »
Young people, we older folks all probably have have companies we wish we bought 10 or 15 years ago and didn’t, and we all probably have companies we wish we didn’t sell a number of years ago when we allowed the market, critics, or valuations to scare us out of those positions.
Many people continue to talk about the concept of waiting to pick up one extra share and for what? Are you willing to miss out on a good investment for one extra share? They don’t talk about the many buys they missed waiting for that one share or how they ended up buying anyway and got two or three less shares.
People will try to beat you over the head about valuations, and for a lot of you, valuations should not be a primary concern because you are investing smaller amounts of money. There’s a difference between putting $1k to work as opposed to $50k. There’s a difference between buying at one price and looking to sell at another and investing. Buy low and sell high is speculating. Speculating requires you to get a cheap price. Investing allows you to buy at many price points over the years and today’s price won’t even be a blip on the radar 20 years from now.
You young investors with your smaller investment amounts are not speculating, you are investing. What seems expensive today will seem minuscule in the grand scheme of things 15 to 20 years from now. It won’t be what you paid that you will regret at that point in time, it will be what you didn’t buy and wish you did.
Own what you want to own and build your positions over time. Time is the ally of the young, foe of the old. Know where you are in your investment time frame and invest accordingly. Most of what is going on today and commented on today doesn’t pertain to you, you have a ways to go in the accumulation phase, so accumulate.
Author’s reply »
I want you young people to learn not to allow others to dissuade you from buying, holding and building companies of quality. I don’t want you to adopt their insecurities, fears and concerns, you’ll have enough of your own that you will need to manage.
It was just over a year ago when we had a huge debate about MCD. The general consensus was that MCD was no longer a growth company, MCD would lose the millennial’s, people were more conscious of eating healthy food, blah, blah, blah.
This debate was going on at a time when MCD was around $106-$110 and today it’s at $176. Today MCD beat on earnings and revenue expectations, have shown increased traffic (does that sound like losing customers to you) and they announced they will open another 1000 stores worldwide.
Don’t allow others to convince you that American buying habits have priority when dealing with international companies as the US represents less than 10% of the world’s population.
Think about it.
Author’s reply »
I want you young folks to understand this concept I am about to explain. On many occasions I have talked about investing smaller amounts of cash and build out the number of companies you want to own. Once to have built your portfolio out, you should have quite a few profitable companies but you didn’t know who would be profitable and who wouldn’t initially. You hoped they all would be.
Anyway, the concept that is important to you, since you have so much time for your assets to grow, you need to understand and utilize the concept of averaging up on your cost basis.
I had a full position in MMM and most people are afraid to build a position up too much in size and I suppose it’s because they are afraid of a price correction. I like to buy companies that beat on their earnings and revenue growth numbers and raise guidance going forward. I want more of a company outperforming not less.
I don’t think anyone would disagree that MMM is richly valued and they allow that to prevent them from adding more shares. Not me! I added to MMM today, it’s now an overweight position, and the new cost basis is only $165. The company is trading at $250 as I type.
If MMM were to drop to $165 everyone would be saying, back up the truck. They would be buying larger amounts. So, I already own larger amounts, will continue to add more shares and still have the cost basis well below the current market price.
You’d be surprised how many people don’t grasp that concept.
Oh by the way, MMM announced a 16% dividend increase and I’ll also be getting that income growth on an even larger position now. I want more of a good thing, not limit myself or avoid it. … Heh, heh.
Think about it.
Today I want to talk to you about “knucklehead analysis.” There’s some crazy stuff out there folks and you have to be able to filter the noise and stay focused on your objectives.
There is this concept that young people are too young for dividend investing. These same folks might even tell you to invest in an S&P 500 Index Fund and what they may not realize is that 70% of those companies pay a dividend.
A younger person was talking about their dividend growth and here was a response:
>>> Thanks Eric, to each his own for sure. But wondering why you’d worry about income that you won’t need to spend, perhaps, for decades. <<<
Now think about that for a minute. Why are you worried about dividends that you won’t need to spend for decades? … Excuse me but why should I be worried about capital gains either that won’t be spent for decades?
I say why worry at all! I say manage those dividends to your advantage, which this person who provided the knucklehead analysis obviously doesn’t get.
My son has plenty of capital gains but all they are doing is sitting there and looking pretty. He won’t be spending them for decades, so why should he worry about capital gains?
He also has a respectable amount of dividends coming in too but those dividends aren’t income, they are cash payments that are used to invest and help his portfolio grow.
Think about your 401k matches, those are funds coming from another source, used to invest and grow your portfolio. That’s what dividends are! They are cash payments from other sources to help you invest even more back into your portfolio, and the best part of it is, you do not have to sell something in order to generate cash which is what you have to do if you realize capital gains.
People can come up with any ole crap they wish, but when all is said and done, there are only 3 things that truly matter.
- How much do you need?
2. When do you need it?
3. And most important, how sure are you that it will be there when the time comes?
Dividends are what help to insure those needs are met.
Author’s reply »
As I look forward to 2018, we may see the market adjust to anticipated interest rate hikes, and if that were to occur, we might see the market correct. I have no idea how far the market drops, but in the event it does, it changes nothing as to how I manage the young folk portfolios.
If prices drop I’ll be getting better yields which is important, and that will help to generate even more dividend cash flows to invest down the road, but what I like about the young folk portfolio management (small investments protect against large losses) is that they don’t have a lot of cash to invest at once and a lot of them are investing in $1,000 or $500 lots. When investing small, you have to remember that there are going to be many more small purchases made over time, so don’t make today’s decision as though it’s the most important investment decision of your lifetime.
I am going to stick with the process, my son’s first purchase in 2018 isn’t due until mid-January and that investment will be adding to his position in O.
It won’t matter to me whether the market is up or down, what the valuation will be at the time (on a small amount of money it doesn’t matter), I will simply stick with the plan. The plan calls for investing cash as soon as $1,000 accumulates, and when it accumulates, it’s going to work somewhere.
I am going to continue focusing on building share count in the young folks portfolio so that I can insure double digit dividend cash flows again in 2018.
Author’s reply »
One of the fears of young investors is the fear of losing money, not knowing how to manage positions they thought would rise but instead went into the red.
This comment is for you.
Although people say they are investing for dividend growth, a lot of these same folks worry far too much about price action, and that’s okay if you are one of those people, I’ve been there, I’ve done that, and I finally learned a way to manage those positions over the years.
I have been talking about young and new investors to build out their positions in small amounts and then after achieving the number of companies you wish to own, to build your winners up in size. I usually buy in 1/4 lots. I know what I determine a full position to be and I work with 1/4 lots.
When I open a position with a 1/4 sized position, let’s use TGT for this example, I then watch and see which way the position goes before adding more. When my son’s position in TGT started to show a loss, I averaged down one time, and one time only, he then had a 1/2 sized position.
I will not throw good money after bad so I will not continue to average down and show the market that my ego is more important than what the market is telling me. TGT doesn’t get added to until it becomes a profitable position.
Again, this concept is for those of you who don’t like seeing red in your portfolio and I don’t want you to compound that red out of spite or opinion. Let the market tell you when to add more or decide to sell altogether. Limit your loss exposure!
My son’s position in TGT did eventually turn profitable, and because it is profitable, I added a few more shares. All of this comes under the concept of building your winners up in size as opposed to buying more of your losers.
I don’t know if TGT will hold these levels, but I don’t know that any company we own will hold their current levels. What I do know is that when I look at my son’s taxable account, where TGT resides, and so does 2/3’s of his holdings, everything is green, and for those who don’t like to see red, I have been providing real time examples on how to manage those positions. TGT was just one more example that was done in real time.
When we talk about valuations, I have a tendency to ignore them when building positions up in size. I have seen too many portfolios where peoples best performers were small in size and they didn’t take advantage of the company’s out-performance. Ask them why and they say the company was always overvalued.
No it wasn’t! It was selling at a premium, a premium that was justified due to the company’s performance. If the company were overvalued, the price would have declined. If you want quality, often times you have to pay for it unless we are in a recession, and we aren’t in a recession.
People have to consider the condition of the market.
I added to BDX in my son’s portfolio today. If I look at the current valuation, I would apply a 20% premium to fair value. It ain’t cheap! It is a quality company and it is one of my favorite medical supply companies, so I certainly want to build it up in size.
I added another 1/4 sized position to BDX taking it up to a 3/4 sized position, and in doing so, I also increased the cost basis. The new cost basis is $174.58 and that’s well below the current $219.94 price it trades for as I type. Even though I paid a premium for BDX, I still have a margin of safety for those of you who are concerned about those things. To me, I increased the dividend cash flows BDX provides and the new shares will benefit from the last dividend increase as well.
I still plan on adding to his TGT shares right after Christmas. That’s a different account and I am waiting on the cash to hit it. The market obviously knows I am interested as it keeps running the price up. Sheesh!