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The opinions in this document are for informational and educational purposes
only and should not be construed as a recommendation to buy or sell the stock/s
mentioned. Past performance of the company/s discussed may not continue and the
company/s may not achieve any projected earnings or dividend growth. The
information in this document is believed to be accurate, but under no
circumstances should a person act upon the information contained within. I do
not recommend that anyone act upon any investment information without first
consulting an investment advisor as to the suitability of such investments for
their specific situation.
I am not a financial professional and don’t pretend to be one in
any manner. I am recommending
nothing in this document, just detailing my experiences and opinions.
I definitely recommend that any reader does his own research and form his
own judgements as I am not recommending that any of my investment decisions or
philosophies be followed in any way just because I state them in this document.
retired after 32 years in computer systems development in 1991. I had been one
of the architects of the OS/360 at IBM as well as a stint from 1980 to 1986 as
the CEO and then five years as CTO of a silicon valley software company. The
company was acquired in 1997 by the BMC Corporation of Sugarland, Texas so I
ended up with some BMC stock. In March of 2013, I learned that a leveraged
buyout (taking the company private) of BMC was being pursued. The
buyout ultimately concluded in September 2013 at which time I received a
substantial check. This prospect led me to pursue the creation of a Dividend
paying portfolio with the cash from the buyout.
To do this required that I either submit to the lure of ETFs or Mutual
Funds, or learn to construct and manage my own portfolio.
Being retired and very computer capable led me to pursue the latter
document traces my career and investment history up to the buyout in Pages three
to seven in which I established:
An ongoing interest in computer industry technology that remains
to this day and gives me a unique insight into the tech momentum that is
changing how we live, work, and play.
That while I was lucky with computer investments and the surge in
California real estate, that superficial analysis was not enough to prosper in
other investment areas.
That the web had opened up access to tools and information that
professional investors of days past could only dream of.
No longer did one have to sit in a smoke filled room watching a ticker go
by, or bury one self in quarterly and annual reports in order to have any
understanding of a companies financial status.
eight to twenty-one document the expansion in my knowledge required to produce
both the portfolio and software required for analysis and tracking of the
portfolio. In particular I
Value investing as the basis and Benjamin Graham as the guru for
That I could successfully create a comprehensive analysis,
modeling, selection, and tracking tool for current and historical data using
Excel and VBA. And that this tool could be driven by real time access to key
metrics (over 50) for the universe of large cap dividend paying stocks (180+).
A buy and hold strategy for quality large cap (over $10B)
companies with excellent share the wealth policies.
Large caps have a better chance of surviving mistakes or bad economies. I
can live off the dividends I am generating so I have no need to sell any stock
to pay the bills. So why obsess over
down markets if I have no intention of selling?
That because of my understanding of computer technology, I would
also focus also on quality large cap computer technology companies with enormous
stock piles of cash and are emerging as dividend aristocrats “wannabes” –
Microsoft, Intel, Apple, Cisco.
The resultant 28 stock portfolio
commitment to Microsoft, Apple, Intel, GE, Cisco, AT&T, Verizon and
then many of the usual dividend aristocrats.
Examples are – Coca Cola, Mcdonalds, Pepsico, Altria, Pfizer, Chevron,
Conoco Phillips, and the big five Canadian banks.
I look for undervalued companies or sectors, in particular under
appreciated companies. For example, what “Mr. Market” perceives as obsolete
20th century computer companies such as Microsoft and Intel.
That Free Cash flow and strong balance sheets are the key for me.
That metrics such as Enterprise Value, Free Cash Flow, and EBITDA
are preferable to EPS because of less susceptibility to accounting machinations.
That predicting the future is very difficult, so I like companies
that have a long term demonstrated history of success.
I buy in to the idea that one should focus on one’s potential
winners and that much diversification is less important, which I know flies in
the face of conventional wisdom.
I avoid areas I don’t understand or completely trust such as
MLPs, REITs, and foreign stocks and exchanges (except for the Canadian banks).
I avoid momentum stocks, or timing the market, or buying and
selling based on some near term perceived event. In particular, I try to
recognize and avoid the effect of “Mr. Market”.
I avoid debt, leverage and margin activity.
I have a safety net in terms of cash and gold coins in case the
entire system fails.
In this market I believe that the only place for bonds is to
secure capital, assuming that you need to sell capital to pay your bills –
which I don’t.
That any potential investor that does not have the inclination to
do stock market research at some disciplined level should probably just buy into
a set of ETFs that focus on markets of interest rather than trying to select
stocks in those markets himself.
In conclusion, let me be clear about what I am doing with my portfolio.
There have been comments by many analysts including (to some degree,
Buffett and Graham) that the amount of effort involved in performing security
analysis is not worth the effort for the investing public and should be left to
the professionals. Where is the line drawn?
Just as we have “pro-sumer” camera buffs, why not “pro-sumer”
If all I was doing was
selecting large cap dividend stocks from the S&P 500, I would tend to agree.
Why bother, just acquire an ETF. How
could I tell if P&G or J&J should be weighted one way or the other?
Pepsi or Coca Cola? Chevron,
Exxon, Oxy, Conoco Phillips, etc. I
would agree that I really can’t expect to do better than the “experts” in
this space. The opportunities get
even worse if I stray away from large caps.
Yes, the Efficient Market Theory (EMT) works for this space. All
is known by all. I would be
investing in the future of America, not specifically the future of J&J, or
My top selections by value are MSFT, AAPL, INTC, T, GSK, GE, VZ, LMT, MO,
CSCO, and CTL. You will note that
these eleven at the time of purchase were somewhat out of favor stocks, for one
reason or another, primarily computer and communications tech.
They are 40% of the stocks in the portfolio but 75% by cost.
Today these 40% are now 85% of current value of the portfolio.
That leaves just 15% for my dabble in the “mainstream” S&P500
space. My “mainstream” set of companies were at the time of acquisition
companies with greater “intrinsic value”
and a greater future (in my opinion) than the market was giving them
credit for. This is what I am
betting on, because of my experience in the tech world.
In other words, I am trying to implement Value investing by taking
advantage of my insights into the most wide reaching tsunami of the investing
world – the impact of modern technology on how we work, live, and play.
I do not believe that the EMT yet, applies to this space.
Remember, now I am not recommending that anyone
purchase any of the stocks in my portfolio.
I am just detailing, how and why I built my portfolio.
Stock selection is clearly a function of financial circumstances, age,
patience, risk aversion, available time, and expertise – both financial and
industry. As Frank Sinatra said –
“I did it my way!”. You must do
it “your way!” The easy
way is the purchase of ETFs. The
more interesting and potentially rewarding way is to do it yourself.
If you are so inclined and capable.
The virgin is the one on the left.
My personal bodyguard.
portfolio is blessed by the Tuileries virgin, and if that doesn’t work,
protected by my bodyguard!
Early Investment History
Activity in Retirement
Microsoft et al
Bain led leveraged buyout
Investment Activity in Retirement
What to do with the big
Selection research and
the creation of the Portfolio and DEDARS.
On Value Investing:
On Large Cap Dividend
On Portfolio selection
criteria for a Large Cap Dividend portfolio:
On Corporate commitment
to share profits:
On corporate capability
to share profits:
On how dividends grow in your
On over-valued companies:
On Free Cash Flow:
On ETFs and Mutual Funds:
On where and why bonds fit in your
On “Mr. Market”:
On Avoiding investing
that you don’t understand:
On Finding the next
On trying to predict the
On On-Cost Yield:
On Debt, leverage, and
On a Safety Net:
On Timing of Stock Market
On Reading Material:
On Internet Financial Services:
On Cable Financial Channels:
is the story of my various forays into the world of investment over the last six
decades. I am not, by any
stretch a financial professional, but I have dabbled from time to time in this
world. The story starts in
1959 when I graduated from the University of Maryland with a B.S. in Electrical
Engineering. I went to work
for Philco in their newly formed Digital Computing Development division.
This isn’t in itself important, other than to establish that I started
my career in Digital Computing system development over 65 years ago, and have
maintained an involvement in various forms ever since.
This also isn’t particularly important, other than to indicate that I
have a level of expertise with digital technology that most of your average
investors do not possess. This is important to note because it affords me a
level of understanding in this area that has been the backbone of most of my
investment decisions. And yes, there
was a Digital computing industry more than 20 years before the formation of
was hired by the IBM corporation in 1963 in their Poughkeepsie Software
development lab where I joined the OS/360 Operating System development Group of
about 30 programmers. Within two
years this monumental project had grown to over 1200 people.
This project enabled IBM to grow from a $6B per year revenue stream to
almost $90B per year by the late 1980s.
my opinion there have been three game changing events in the history of digital
The introduction of the System/360 product line of compatible
computers on April 7, 1964, ushering in an era of compatibility, scalability,
and performance hitherto unavailable.
The introduction of Windows based PCs May 22, 1990, ushering in an
era of compatible desktop computing power that changed the world.
The Introduction of the World Wide Web on 6 August 1991, by Tim
Berners-Lee thus initiating the onslaught of digital mobility that we have today
– and you ain’t seen nothing yet!
fortunate enough to be part of the development of the architecture of the
System/360 and as a result I made the first major investment decision of my life
– I decided to focus the rest of my career on specifically the System/360
marketplace, thus building on that investment in the System/360 that I
experienced from 1963 to 1967 at IBM. It
was the best investment decision I ever made.
ultimately was hired in 1980 to be CEO of a very well known software company (at
least within the industry at the time) in Silicon Valley.
The company was basically bankrupt after 13 years of existence; but we
got turned around and went public in February 1984 – the second software
product company to ever do that. Part of my deal were stock options and some
restricted stock I had purchased from the previous CEO.
In 1986 I stepped down to become the Chief Technical Officer and
ultimately retired at age 54 in 1991.
1959 through 1991, I had a smattering of investment activity as follows:
A stock purchase program at IBM.
Five percent of my salary went toward the purchase of IBM stock at a
strike price of 15% less than the market price at the time I started saving or
when I accumulated enough to purchase. IBM
stock was selling in the $500 range and I think that I had maybe six shares when
I left IBM in 1967. I sold them to my father.
I made about $3,500 in 1968 off some stock in the company I was
employed by at the time. I decided to invest in “solid” companies and
CDC because they had just settled a lawsuit with IBM and acquired
some interesting technology as a result.
Teleprompter because I
saw a big future in Cable television.
Boeing because the 747 was about to be delivered and they had the
All three investments failed – in particular, Teleprompter’s president
went to jail for bribing local officials to get franchises and Boeing lost the
SST contract as Seattle famously established the famous billboard asking “the
last person to leave to turn out the lights!”
The lesson learned was that one couldn’t just casually invest in the
market – even with the best of ideas.
The small company I was with went bankrupt in the recession of
1971, and I decided to go to work for a “solid” company (there is that word
again). I was recruited to Hughes
Aircraft by the Ex Director of all Programming Systems at IBM (about seven
levels above me at IBM), but who knew me well. He also was the reason I was
hired to run the bankrupt software company I mentioned above.
For the next five years, all thought of investment was never on my
radar screen. In 1975, however, I rented our house in Huntington Beach to a kid
who worked for me at a rent that covered my mortgage, and bought another house
on a hill overlooking the ocean. These
investments worked out very well because California real estate took off in
1975, and we sold both houses in 1978 when I changed jobs at more than twice
their value in 1975. A great
investment, but not because I expected or planned for it, just lucky.
Changed jobs a couple of times in California between 1978 and
1980, both times making excessive capital gains on the houses we sold. And
inherited some cash in 1989 that allowed me to pay off my mortgage. We have been
mortgage free ever since.
In the late 1970s, I invested in a partnership that purchased
model homes from developers and then rented them back as the developer populated
the rest of the tract. At the end of this development process,
we sold the model homes. The homes had never been lived in and had been
maintained as you would expect with model homes. Easy to sell and good profits.
We were riding the back of the California real estate boom. Never
considered that it could just as well have turned South as well.
When Ronald Reagan was elected in 1980 and talked of a huge
defense buildup – 600 ship Navy and all that – I decided to buy a “Call”
on some defense stocks at about the time of his inauguration. I remember
celebrating with Audrey walking down the Champs-Élysées
in Paris when I realized we had just made $5,000 in a matter of a few
weeks! First and only “Calls” I
have ever purchased.
In 1980 I read Howard Ruff’s book – “The crash of 79” in
which he advised people to buy Gold coins, junk silver coins, and a farm to grow
your own food. He also said that you
should buy a shotgun to protect yourself from all the broken people who would
come after your assets! The junk silver took up too much space, and the idea of
a farm and a shotgun were out of the question; but I did start to buy Gold coins
at $500 per ounce, which I supplemented a few years ago at $900 per ounce.
They are not an investment, but an insurance policy forming a safety net
if the fiat money system fails completely as it almost did in 2008.
Other than two investments in tech companies, that were profitable
for me by the way, I had no real activity in the market in the from 1971 to
1991. I had some net worth because of the job changing and resultant housing
capital gains by 1980 and of course the stock options became very valuable after
my turnaround company went public.
line of this period was that I made some money but not because I understood
anything about investment analysis. I got lucky at the beginning of and riding
the California real estate boom, but not because I had any idea it was coming.
I got lucky because of the thought that Reagan’s defense buildup might
be good for the defense industry – but not because of any real analysis.
And any success I had in the market was because I saw some tech
opportunities as part of my job in the tech industry.
Again, not because of any
real investment analysis. My
failures occurred when I tried to invest in “solid” mainstream bellwether
companies – CDC, Teleprompter, and Boeing – again no real investment
In 1993, we established a relationship with a team at Dean Witter
(ultimately acquired by Morgan Stanley) to help us get our affairs in order by
creating wills, durable powers of attorney, an insurance trust, a charitable
trust Which I managed) seeded with a bunch of stock in my company (avoiding
significant capital gains taxes) paying 12% per year, and a living trust.
The Charitable trust sold the seed stock (no capital gains) and bought
several of Morgan Stanley Mutual funds.
The roaring nineties were
good enough such that we would take out 12% in January of each year and by the
next year the principle would be back to where we had started.
This of course all changed eight years later with the Dotcom bust.
In 1997, we moved to Seattle to a wonderful 2200 sq. foot top floor condo
with a 700 square foot terrace with unobstructed views of the central
waterfront, Elliott bay, the Olympics, and the sunsets. And with this move, the
physical odyssey that has taken me from Washington D.C to Philadelphia back to
Washington D.C back to Philadelphia to Bergen County N.J outside NYC, to
Poughkeepsie N.Y back to Washington D.C. to New York City back to Washington
D.C. to Huntington Beach Ca to Saratoga Ca to Pacific Palisades Ca to Woodside
Ca has finally come to its final location on the Seattle central waterfront.
Thus my real retirement has followed as we have been on vacation for 17
years in downtown Seattle and we love it!
By the way, I have maintained my technical bent in retirement as I
consider myself a “lab rat”. I
have been through every release of DOS and Windows since 1991. At the time of
this writing we have eight computers, eight DirecTV satellite receivers, six
tablets, five WIFI only and two
cell/WIFI smartphones, eight TVs,
and our own Satellite dish out on the terrace of our condo.
All these devices are active and utilized for one reason or another.
My Computer network currently has 47 IP addresses on it.
I think that it is important that you keep your little gray cells active
for about 20 hours per week in retirement and this is how I do it.
Microsoft et al
When I retired in 1991, I though that we were OK, but
it definitely was marginal, and I also was kind of naïve about it all. I did
realize that My net worth was tied up primarily in the house and the stock I
still had in my company. In 1994, I
decided to diversify, but where? A
Goldman Sachs analyst named Rick Sherlund who supposedly had a private line into
Microsoft issued a negative statement about the company that I just didn’t
understand. I called my broker and told him to by $100,000 worth of MSFT. The
stock went down and my broker asked what I wanted to do. I said buy $100,000
more. It happened again and I bought $100,000 more. It went down again, and my
response this time was maybe Sherlund knows something I don’t so let’s stop.
A month later Sherlund issued a positive statement and the rest is
history. Did he do all this to drive
the stock down for his best customers to buy in cheap? Just a thought. Sherlund
is still around but now at Nomura, and still considered a Microsoft Guru.
Anyway, I now had a significant investment at about $4 per share
(currently $49), adjusted for all the splits since 1994.
This investment definitely put my retirement over the top.
Again, though, not because of any real financial analysis but more
because I had a feel for the industry that I had been in for 32 years.
In 1999, I invested in a small telecom startup that had installed
broadband Internet access capability in our condo development. At the time it
was a dial up Internet world. The investment was significant, but if I lost it
all it would not effect our life style. Kind of like the attitude one should
take to las Vegas. If however, they
got public, it would have a significant effect on our life style.
Unfortunately telecom companies introduced DSL, and cable companies
introduced cable modems, and my startup opportunity went bankrupt.
I didn’t pay any Federal income taxes for three years! This was the
purest form of speculation, and I knew it at the time, so I had no real lasting
As the decade and the century ended, Y2K reared its head.
I decided that while I knew that we were not going to have planes falling
out of the sky, etc.; corporations were going to have to divert significant
resources to fix or replace legacy software applications that in some cases went
back decades. I didn’t think that they would be purchasing as much stuff as in
the past, so I decided to sell half of the Microsoft – I kept the rest to this
day. It was worth about twelve times what I paid for it at the time I sold.
By the way, I think that my ideas of the impact of Y2K started the ball
rolling towards the DotCom bust of 2001. You won’t hear that anywhere else,
but I really believe that Y2K played a part in that ultimate crash.
Since I wanted to feel rich, not just have a good balance sheet, I
put the money into seven sets of 4% zero coupon bonds laddered to mature
one set per year for the next seven years. In
other words, in addition to the charitable trust income stream that just about
paid our normal operational bills, we now had a significant second “income
stream” channel. The seven years
end date was tied to a point at which some Social Security income would be
coming in – for what that is worth. By this time the Microsoft stock was
producing a dividend as well. By 2007, I had a lot of cash that had built up. I
had this idea that baby boomers starting to retire in 2008 would severely impact
the debt burden of the federal government and that interest rates would surely
go up on their debt. So I just rolled the cash over in short term T-Bills
waiting for this to happen – which it never did, to this day.
This brings the Microsoft story full circle.
The Microsoft stock crashed in 2000 along with all the others and never
recovered even though the company has continued to grow and prosper. The result
is that the PE had come down from 60 to 10.
By the way, if I knew back then what I know today, a PE of 60 would have
forced me to sell it all, probably long before it ever got to 60! I decided late
in 2011 to re-enter the market with the cash that had built up. I repurchased
the equivalent shares of Microsoft for $25 that I had sold in 1999 at an
equivalent $45. The reasons were
three fold. I though the company was significantly undervalued, that their
strategy going forward was good, and that the then prevailing 3% dividend yield
put a floor under the stock since the Fed was committed to much lower interest
rates on long bonds for at least a couple of years. So
far this has been a very profitable decision.
the late 1990s, the company I ran was acquired by BMC corporation in Sugarland,
Texas and I ended up with some BMC stock as a result.
The stock was up and down for years, suffering in the Dotcom bust as
others did, and like Microsoft never completely returning to the Halcyon days of
the late 90s. In Feb. 2013, a team
led by Bain (Romney’s company) initiated a leveraged buyout to take BMC
private. The process would take
months, so I had plenty of time to figure out exactly what I wanted to do with
the big check I would receive. This would bring everything since 1980 to a
conclusion and launch me on the first real investment analysis of my life.
What to do with
the big check?
March of 2013, after learning of the leveraged buyout of BMC, I needed to decide
what to with the big check I would ultimately receive in the following
September. After deciding that a
portfolio of “solid” (there is that word again!) dividend paying companies
was the desired approach, I contacted my long time financial management team at
Morgan Stanley for research. I
received a research paper listing about 40 companies, e.g. – AT&T, Philip
Morris, Pfizer, GE, J&J, Chevron, P&G, Coca-Cola, Pepsico, Walmart,
Exxon, 3M, Deere, Target, etc. I
looked at the list and had several questions:
I concluded that I didn’t want 40, but how to pare down the
list? Let Morgan Stanley do
Or, how to do it myself?
Why not just buy into a Mutual fund that surely would have a
How about an ETF?
What about those high Morgan Stanley fees?
concluded that I should do it myself, for several reasons:
I had the time, being retired, and I had an advantage in that I am
very computer literate. And this time, I wouldn’t just guess, I would work the
Morgan Stanley would probably just point me at their own Mutual
Funds, or if they put together a customized portfolio the fees would be very
I am not interested in reading annual reports, but the Internet
should have tools that would obviate the need to read annual reports, etc.
Boy, was I right on that one!
Mutual fund fees would take 20 to 30% of the dividend yield, and
ETFs had lower fees, but not actively managed and just another
form of the Morgan Stanley list.
I could avoid major fees by doing it myself and transferring to a
result, I opened an account at Schwab, primarily because it was the first name
that popped into my mind. It turned
out they are conveniently located in Seattle (as are all the discount brokers by
the way), and they are bigger than the next several brokers combined.
I met with them, and because of the size of my account, they waived all
transaction fees through October and allowed me access to their proprietary
trading platform – which I had absolutely no interest in!
After October the fee was $8.95 per transaction, no matter the size.
By that time I had established my portfolio of 28 stocks and incurred
zero fees! Along the way, I also
decided to make a change in my IRA, which was still at Morgan Stanley and
populated with their mutual funds. I
sold some funds at no fee, but incurred a $1400 fee when I put the cash into GE!
That was it for me and I then proceeded to sell all the funds and then
transferred my IRA to Schwab where I added to my overall portfolio at zero fees!
talked to my Morgan Stanley rep, who is a good personal friend after all these
years, about all this. She understood but obviously was sad about it.
We agreed that it had been a good twenty years.
Basically, they are in the wealth management business, which I utilized
in 1993 when setting everything up as noted above. But at this point I was
embarked on a new strategy with the dividend portfolio and I did not need the
assistance of a wealth management team. At this point they still have the
charitable trust. But I will move it one day also.
research and the creation of the Portfolio and DEDARS.
found a website maintained by David Fish at http://dripinvesting.org/tools/tools.asp
. He has an Excel spreadsheet that lists companies that have raised their
dividend consecutive years as Dividend Champions(25 years), Challengers(10
years), and Contenders(5 years). It
was a great place to start.
was a novice Excel user (restaurant lists, etc.), I decided to try and find an
Excel spreadsheet for sale that would allow me to select and track the
portfolio. I found nothing that was
of help. What I found were services
that provided a web based interface to their on line services.
This was not what I wanted, I wanted to be able to grow the spreadsheet
myself, on my system, as I grew in knowledge of the process.
I then tried to start with a sample spreadsheet from Microsoft, but that
I started in
on my own spreadsheet. I had found a
service called yCharts which provided Excel plug in macros that would feed data
from their database to your spreadsheet at home on demand.
What you did with the data was your business. They had over 4000 metrics
for thousands of stocks going back at least 25 years. The service cost $1900 per
year, and I signed up and never looked back.
I love it.
Over time, I
had a reasonable set of metrics that I could see every day.
But Excel is very cryptic and limited as to what it can do. I discovered
that Microsoft’s Visual Basic is tightly woven into Excel (and the rest of
Office), and being a programmer at heart dove in to the process of enhancing my
Excel spreadsheet to make it more user friendly.
The result is a system that needed a name – “Dividend Equities Data
Retrieval System”. And of course being a programmer, it needed an acronym –
and so “DEDARS was born. And
believe it or not, the full name came first, and conveniently the acronym was a
natural. The spreadsheet at
this time only accessed the current set of data and no history. But besides the
spreadsheet itself, initially I added code to assist in the selection of stocks
for the portfolio:
capability to add and remove stocks via a user friendly dialog.
a rudimental screening process based on a set of metrics. For
example, give me all the stocks with a market cap greater than $10B, a payout
ratio less than 50%, and a yield greater than 4%.
To look at subsets of data, by sector, or specific chosen set of
A Model that generated recommendations.
By May, I was
ready for a “Beta” test of my thinking and my spreadsheet.
The big check was still almost six months away, but I had some cash
available to play with. So I selected – Conoco Phillips, AT&T, Intel,
Verizon, Lockheed, Nustar Energy, Boardwalk Pipeline, and Kinder Morgan, and
Diebold. The first
five I still have, in some cases augmented by additional purchases, and the last
four are gone. I quickly decided
that I wanted no part of MLPs because they complicate the tax process (I was
sure right on that one!), having already rejected the idea of REITs for similar
reasons. I have this
philosophy that I want to avoid entanglements that I don’t understand, but
more on philosophy later.
clear that I needed to add capability to do the following major tasks:
Enter and track my purchases.
Automate updates from Schwab into the spreadsheet –
Management summaries of returns from the portfolio.
Hotlinks to online data, e.g. – David Fish, Seeking Alpha,
Reuters, yCharts, Morningstar, Yahoo Finance, Fast Graphs, etc.
the next several weeks implementing these capabilities via VBA and was very
successful. In particular, I now have an online process that is very simple and
eliminates much of the manual labor to download and incorporate Schwab
transactions into the spreadsheet.
point I had implemented an estimated 2,000 lines of VBA code.
September, I received the check and purchased my selected stocks.
There were changes along the way. Stocks that were in and then out
included – Leggett&Platt, NTT Docomo(Japan), Laclade, CA, Hasbro, Thomson
Reuters, Philip Morris, and Con Ed. Not
that there is anything wrong with these stocks, just that my strategy and
choices evolved as my knowledge of what was important to me grew.
a list of the current portfolio members from DEDARS:
that I had the portfolio, I started thinking about how to extend DEDARS
functionality. I decided to go after 25 years of quarterly history for all 180
odd stocks in the DEDARS universe and thus create an historical database.
After another 4,000 lines of VBA code and some period of time to capture
yCharts data for fifty+ metrics for 180+ stocks for 4 quarters over 25 years, I
now have the following capabilities:
Retrieve all metrics for (all stocks/selected stocks/market
sectors/the entire DEDARS universe) for any time period.
Display quarterly or year end status.
Also retrieve daily data for up to 90 days.
I also wanted an “on demand” popup capability to immediately
display data for an individual stock as
I read about the stock in Seeking Alpha. I
successfully implemented such a capability.
Produce graphs for the selected stocks, for selected sectors, or
for the entire DEDARS universe displaying data for selected metrics. See sample
Most of my investment philosophy evolved
from the writings of Benjamin Graham, Warren Buffett, Cullen Roche, and the
myriad of contributors to “Seeking Alpha”. The rest comes from my personal
goals, my stage in life, and
pre-existing bias. I am not
suggesting that “one size fits all” and in no way am I suggesting that the
following should become your philosophy as well.
A first step is to understand your goals and also your risk tolerance.
think that a story I recently read is appropriate.
A group of retirees in Boca Raton, Fla. were asked about their investment
success. Several chimed in with
various comments about the numbers, their advisor, etc.
One man finally said: “my portfolio got me to Boca!”.
In other words, he wasn’t interested in anything other than did he
“win”, much like a Super Bowl winner – all the detail fades into the
background if you achieve your goal.
goal is to have a portfolio that generates enough dividends to pay the bills,
and to see growth in portfolio value as well. My strategy was to create a high
yielding portfolio of Large cap solid dividend paying stocks, with the
capability to sustain the dividends through tough times, and participate in
portfolio value growth in good times. Then
to track them via ongoing review and daily browsing of appropriate “Seeking
Alpha” contributions. This will be
a “buy and hold” strategy as I am not particularly looking to replace any of
the current 28 although if I decide to drop any, I will probably add to existing
commitments of others already in the portfolio.
to risk tolerance. Many folks equate
risk with volatility, that is the Beta of the portfolio.
When, in fact, the risk to the investor is about losing capital.
In my case, since I have the required capital and my goal is to pay the
bills with dividends and stay ahead of inflation, the beta of the portfolio is
unimportant as long as the corporations continue their dividends.
philosophy behind my selections evolved as I gained knowledge in 2013 and 2014
Cap dividend paying corporations with a history of sharing their profits with shareholders.
All are at least $12B in market cap, 75% greater than $50B , 50% greater
than $100B. Ninety percent have paid dividends for at least eleven years, 75%
for more than 30 years, 50% for more than 50 years. And 75% have increased their
dividends for more than ten years.
If dividend growth versus current high yield were in conflict,
because of my age I would go with high yield. Average
yield on cost is now 4.12% excluding my long term Microsoft (MSFT) commitment.
With MSFT my on cost yield is 5.36%. With
5.36% in dividends all I need is less than 5% growth in portfolio value per year
to exceed a 10% over all return per year.
Search for overlooked,
under valued opportunities. Over
80% of the portfolio has a current PE under 20, and almost 50% are 13 or under.
The highest PE is 22.5 for PepsiCo and Coca-Cola. The S&P500 is
currently at a PE of 18.5%. The PE ratios for my stocks were much lower when I made the bulk of my purchases.
Avoid companies with obscene yields, do
not just chase yields. Three have current yields
just over 5%, 33% are over
4%, 75% over 3%.
Yield on Cost is a different story as dividends have increased for
several of my purchases.
machinations such as MLPs, REITs, Foreign stocks (except Canada), and Bonds
(they can only go down in value when interest rates surely rise).
Since I can live on the dividend stream, I do not need the capital
preservation that bonds provide. In
essence, one might consider my portfolio constructed around several “Bond
my Tech background by investing in tech companies that may have low
yields today, but huge
cash hordes and free cash flow thus boding well for their future
dividend growth commitments. Apple,
and Microsoft are prime examples.
do not believe in rebalancing just because I have winners that increase
significantly in value. Why walk away from winners?
While I play some of the diversification game, 80% by value of the
portfolio is committed to 40% of the companies.
largest capital commitment is to cash rich large cap tech companies, with the
remainder of the portfolio being stable large cap long term dividend paying
companies with good to excellent yields.
investing is about finding quality companies which for one reason or another are
being undervalued by “Mr. Market”. The
key is based on the fact that no one can predict the future with any consistent
accuracy. Therefore, finding under
valued great investments allows room to absorb the risk of the future and allow
you to sleep at night. Some of
my value choices are being discovered now and I believe that I am now “playing
with house money” as a result. If
we have a correction, I expect to stay above my initial capital investment while
I cash the significant dividends while I wait for the next upswing.
It may not be fun to watch, but I think I am up to the task.
certainly effects your decisions. Mostly
concerning the older you get the more you need to protect capital. Unless, of
course, you have enough capital that you can live off the earnings from the
capital. The issue being, of course,
that if you need to dip into capital in retirement to help pay the bills, you
run the risk of selling into a bad market.
If that is not a requirement, then what real difference does it make what
the stock market is doing in any given period.
It is like your home, a rising real estate market makes you feel good,
but if you are not going to sell, what difference does it make?
Same with the income from rentals, why obsess over the value of something
you are not planning to sell anyway?
idea of DRIP (Dividend re-investing) is affected by your age.
I for example at 77, am not all that interested in taking a low yielding
dividend champion and watching it grow its yield over the years, as I don’t
have that many years left. So
AT&T, for example, appeals at 5.2% yield even though it grows its dividend
only marginally each year.
On Large Cap
Dividend paying Stocks:
prefer large cap stocks because such companies can make mistakes and survive.
Maybe their halcyon growth days are behind them, but the combination of a good
dividend and growth will win the day in the longer run, if you pick the right
stocks. My portfolio is 100% stocked
with large cap dividend paying stocks, many have been doing it for a very long
time. I have the “big five” Canadian banks paying in excess of a 4% yield,
and having all but one paid dividends since the 19th century, Bank of
Montreal since 1829!
easy to make money in a bull market, all decent stocks go up, some more than
others. However, in a bad market all
will go down, some again more than others. This
is when your strategy and will is really tested. You hear a lot of talk about
buying defensive consumer stocks, because people will always need toilet paper!
I believe that the key is to have a portfolio of companies that will
continue to produce for you an income stream that will pay the bills even in bad
times. All stocks will go down in
bad times, and assuming you don’t need the principle to live on, dividends
will get you through. Like I said
above, what difference will it make if you don’t intend to sell?
Might be painful to watch, but it really doesn’t matter.
selection criteria for a Large Cap Dividend portfolio:
Companies that have a demonstrated commitment to sharing their
profits with the owners of the company – that is the shareholders.
Or tech stocks with a ton of cash just waiting to be liberated.
Companies that have clear capability to share their profits today,
and for the foreseeable future.
Companies that have not been run up by “Mr. Market”.
commitment to share profits:
How do you measure this? I think that an ever increasing dividend stream
and an ever decreasing share balance are two major elements of this.
Once a company starts doing this and makes the list of dividend
aristocrats, etc. they don’t want to lose this status.
The market severely punishes stocks that reduce or cut their dividends,
so it occurs only if there is no other choice.
GE is an example. GE finance almost destroyed the company in the 2008
financial debacle and they cut their dividend. The stock has never really
recovered to this day as a result. That
is why GE is one of my key holdings. They
are divesting GE finance and the low margin GE appliance divisions and focusing
on the heavy machinery success they enjoy. The
stock has not really reacted as yet, but I enjoy a 3.4% dividend yield while I
way, be careful of companies that buy back a lot of their stock but share
balance does not go down. They may
be merely buying stock back to reward their management via excessive stock
capability to share profits:
is all about Free Cash Flow – the excess in cash generated after paying all
the bills including Capital Expenditures.
It is one of the most important metrics of the Value investor.
Dividends come out of this and the percentage is important.
It clearly depends on the industry, but for example dividends that exceed
free cash flow would indicate a company that could be incurring debt in a
desperate attempt to keep their dividend going. Or maybe just a temporary
condition caused by huge CAPEX requirements or just a bad year.
Low percentage of free cash flow going to dividends would indicate that
the company can easily continue this or increased levels in the future.
On how dividends grow in your portfolio:
An important consideration in any dividend portfolio is the idea that
corporations may increase their dividend paid per share over time. In fact many
have done that for decades every year. Coca
Cola and J&J every year for 52 straight, P&G for 58 straight! This is
how you stay ahead of inflation. For
example, the Microsoft I purchased twenty years ago paid no dividends, and only
started in 2004. The investment from
1994 is now sporting a yield on cost of close to 30%!
Early in the portfolio process, one should opt for dividend growth and
reinvestment in order to build the portfolio. As retirement occurs, such
decisions made early on will reward the retirees with significant returns on
these investments made over decades. However,
most young people are not interested and miss this opportunity to become wealthy
over a forty year career.
too much for a good company is a mistake. It
reduces your margin for error. Just
because it is a good company isn’t enough.
On Free Cash
cash flow (FCF) is the key for me in evaluating these companies.
It is the cash left over after actually paying the bills for all
operations and Capital Expenditures.
There are minimal accounting machinations involved and thus it is a much
more accurate representation of the business than say, earnings per share in my
opinion. For example, it is very
possible that a corporation can show decent “earnings”, and not have enough
cash to pay the bills. FCF is much
like your household budget. It
is equivalent to all the cash you have at the end of the year after accounting
for all the cash received (regardless of source) and all the checks written.
For a corporation it is the cash left over each year to retain or to
share with the owners (the shareholders) via dividends or share repurchases.
On ETFs and
funds are actively managed collections of investments.
They have the following issues:
The fees are quite high, especially detrimental when it is a
Mutual funds are extreme in their diversification.
Their managers have to take some risk to
keep up with competition or lose customers.
Mutual fund managers are notorious for not having any better
success than you could have.
are like mutual funds except:
They are not actively managed, basically rebalanced by computer as
The fees are much smaller.
They are available, in many forms focused on almost any
conceivable investment vehicle.
you do not wish to build your own portfolio, I would recommend a portfolio of
ETFs tailored to your own investment interests.
For example – large cap, European, tech, large cap dividend, etc..
go down in value when interest rates go up.
Given the current extremely low interest rates, how can bonds be a good
investment at this time? The
answer is they can’t. However,
this is a function of your risk tolerance. If
in fact, you don’t have sufficient income streams (dividends, social security,
etc.) to pay the bills, then you must be in a position to convert some equity to
cash. Bonds will return all their
principle at maturity. So if you are
near or in retirement, for example, and do not have sufficient income then it is
advisable to have some short term bonds that you continually roll over or sell)
which will cover inflation and may be the correct choice in this scenario. The
most risk free bond is a T-Bill, but these pay a ridiculously low rate.
course, when we get in a high interest rate environment, buying longer term
bonds to lock in a higher rate and generate higher income may be appropriate.
Just be careful that you have not purchased a “callable” bond, as
then the corporation can call the bond back as rates then go lower.
On where and why bonds fit in your portfolio:
As previously discussed bonds primary role is to preserve capital. In
general they are not as good an investment as stocks. Especially in the low
interest rate environment that currently exists. If however, income in
retirement is not sufficient and cash must be available, having short term bonds
is a better alternative to cash as there is some earning power to ameliorate
inflation pressures. And certainly
better than running the risk that your stocks will be in the tank at the time
you need to raise cash.
Warren Buffett and Benjamin Graham divide market players into two groups
– investors and speculators. Investors look to buy stocks the same way they
might buy a house or new car. A
thorough evaluation of their needs and goals against what the stock/house/car
provides; and an analysis of the associated pricing.
No matter how good the subject is, it is a bad deal if it is overpriced.
Speculators however depend on other considerations. A prime example are
momentum stocks that seem to be doing nothing but go up.
“Mr. Market” adds a price structure that ignores intrinsic value and
depends more on the psychological underpinnings of the stock market.
Value investors get back to basics and try to evaluate intrinsic value
independent of the dimensions introduced by “Mr. Market.
I think for example, a $200B Market cap for Facebook is a poster child for
how ridiculous Mr. market can be. Facebook has a higher Market cap then Intel,
AT&T, Coca Cola, or Pfizer for example.
am not a big fan of diversification, although academics love it.
For me, it has more to do with goals, than arbitrary percentages and
rebalancing of the portfolio. That
is, adequate cash to deal with the bills for an extended period, adequate gold
coins to deal with a complete failure of the financial system, and a stock
portfolio that grows in the good times, but also pays high enough dividends to
pay the bills and grows these dividends keeping ahead of inflation.
have done some diversification within my portfolio but as my education has
evolved I have bought into the Buffett and Munger idea that you should focus on
your winners. Forgetting my outsized
legacy commitment to Microsoft – I then have 30% in cash and gold, my top
seven stock choices are 40% of the portfolio, and the other twenty stocks are
30% of the portfolio. “The other
twenty stocks” being my initial commitment to some diversification within the
portfolio, but I am not sure what my strategy will be going forward with these
investing that you don’t understand:
do not understand REITs, MLPs, derivatives, Put and Call strategies,
sophisticated Bond strategies, hedge funds, etc.
Add to that Foreign Currency dynamics, although I did try it once and was
lucky to get out three months later with a small profit. And finally foreign
stock investing. I just don’t
trust the transparency, the rule of law, etc. no matter how sophisticated the
country may be. The one exception
for me is Canada. Although, I think
I am smart enough to figure these things out, why should I?
It is tough enough dealing with the US stock market without adding these
complexities in my opinion.
the level of understanding required to understand smaller cap stocks in the
various sectors across this country is more than I wish to get involved with.
Large Cap dividend paying stocks are enough to keep me very busy, thank
you very much.
On Finding the
I use 3D
printing as an example. This should be a new “wow” industry one would think.
But how to determine who will be the big winners? I am a computer guy and I
don’t have a clue where to even start. This is in many cases a fool’s
errand. For every Microsoft,
there are numerous complete failures.
Trying to get in early is akin to playing Las Vegas in my opinion.
Attaching your investment strategy to momentum stocks may work if you
know when to get in and when to get out, but don’t be fooled by the run up of
the last five years, these momentum stocks will crash when the next major
correction occurs. Just don’t
forget the crashes of 1929 and 2001. By
the way, something much more dangerous occurred in 2008, the entire financial
system as we know it almost disappeared.
don’t just get into a momentum stock because it seems to be doing nothing but
go up and the bandwagon is so alluring. It
is speculation in a pure form.
On trying to
predict the future:
is very difficult to do. For
me the best approach is to focus on the continuing historical success of large
cap dividend paying equities. I pay
little attention to the detail of future earnings and revenue projections by
so-called analysts. Instead, I pick
under valued 800 pound gorillas of specific sectors:
Microsoft, Cisco, Apple, and Intel in Tech.
Pfizer and GlaxoSmithKline in Pharmaceuticals
Coca Cola, PepsiCo, Altria in Consumer
AT&T and Verizon in Communications
GE in Industrials
Lockheed in Defense
The five big Canadian banks
biggest commitment is in tech, which is an area I have been involved with for 55
On On-Cost Yield:
When you buy an elite dividend paying stock, you expect that the yield
will not be static and that it will go up with respect to your initial
investment as the corporation raises its dividends over the years. For example,
assuming say a 7% per year increase in the dividend, your yield on the original cost will
double in ten years. This is like
holding a Bond or a CD that increases the interest rate while you own it.
If you select the right set of dividend paying stocks, your income should
exceed the inflation rate over the years.
leverage, and margins:
have been fortunate to be completely out of debt since 1987.
And I mean all forms of debt including credit card. Probably
a holdover from my parents having been through the depression.
Once a person gets to a point of accumulating some cash, the question
becomes do you pay off existing debt, keep the cash, or utilize it.
I think that one must have cash for emergencies or opportunities. How
much is up to the reader. After that,
then I would sustain the debt only if it is generating returns greater than the
cost of the debt. For example, an
apartment building with stable tenants generating more income than the operating
cost and the cost of capital.
this gets us to a discussion of leverage and margins.
I really have a problem with being over leveraged on speculative ventures
that are looking for capital gains and do not have income streams associated
with the debt. In particular, margin
debt at your stock broker. Remember
what goes up can go down easily, especially the stock market.
The crash of 1929 was fueled by liberal margin requirements and the idea
that the stock market would always go up. It
little story. When I paid off my
mortgage in 1987, I was asked what I would use for tax coverage?
I responded with - it
didn’t seem to make any sense to me to pay a $1 to the bank so I could save
$0.25 on my taxes! It is one thing
to buy instead or rent. It is preferable to live rent and payment free!
you remember from above, at one point I purchased a second house and rented the
first to a very reliable employee at a rent (well below what the market would
normally bring) that was equal to my
mortgage payments, with an agreement that he would perform all maintenance.
He did, and I sold the place for twice what I could have gotten at the
time. That is the kind of debt I am
talking about – one that has an associated income stream.
On a Safety Net:
is a lot of risk in this world, but it is not of the kind often mentioned in
investment – that is, volatility as defined by Beta.
The risk for me is total failure such that I could be in a position of
not being able to pay the bills for an extended period of time.
As a result, I have quite a bit of cash and gold coins. As indicated
above the cash is to be able to pay bills if all else fails, and the gold to pay
bills if the fiat money system fails.
On Timing of
Stock Market Purchases:
years ago Louis Rukeyser had a very popular Friday evening show on PBS for about
twenty years as I recall, that I watched a lot. It was a panel show of
investment experts. At the end of
every year, they would make their predictions for where the market would be in
the ensuing year. In twenty years they never called a market turn. At best they
would hedge there comments, but none would suggest that the market would go up
dramatically after a down period, or vice versa.
intend to remain fairly fully invested regardless of market status. Timing the
market is a fool’s errand I believe. The
better approach is to look for undervalued properties regardless of what the
market is doing. For example, many
say that this bull market is long in the tooth – the third longest ever?
The 180+ stocks I track don’t show a problem as indicated in the
following graph of Enterprise Value (an alternative measure similar to Market
The current market thoughts
about the “long in the tooth” market were around a year ago as I
contemplated building this portfolio. I
am happy to say that I ignored them, made my purchases, and the portfolio is up
over 30% since.
As I have said, I cannot predict market timing in the
future. But hopefully I can find
undervalued good solid opportunities. At this point, however, I believe that I
have such a portfolio and I am not looking for replacement companies. Although I
am tracking stocks I do not own such as J&J, P&G, XOM, BAX, KMB, and a few others as shown in the
following DEDARS table:
world at large (including financial analysts and investors) are so caught up in
the technology that they can see and feel and touch that they miss the bigger
picture from an investing point of view. In
many respects the world is seen as a zero sum game. That is, where there are
winners, there must be corresponding losers. And these “losers” must be the
more established 20th century tech titans.
Facebook, Twitter, Google, eBay, Amazon, etc. may be very successful for
most people but the point missed is that these companies are the tip of the
iceberg when it comes technology. And by that, I mean literally in that there is
an incredible amount of capacity being provided “below the water line” by
companies ignored as 20th century dinosaurs that allows the Facebooks, etc. of
the world to function. Because these
companies bring “20th century” legacy baggage along, they have
been perceived as having missed the current tech revolution.
Example perceived issues with these companies:
Microsoft because they aren’t dominant in the smartphone or
tablet area, and their legacy PC business is supposedly in real trouble as a
Intel because they are not dominant in mobile and are dependent on
the “ancient” PC space.
Even Apple because they have gotten so big, how can they continue
to grow and shouldn’t their margins come under increasing pressure from the
commodity devices that Android represents?
And Cisco, just because they are, well – Cisco.
What has their stock done for 15 years anyway?
AT&T and Verizon are down because pygmies like T-Mobile and
Sprint have price wars going on that the pygmies can’t win, the legacy
wireline business is oh such a “drag”, and their capital expenditures are
Cisco, Microsoft and Intel have huge revenue from Corporate sales
activity. To continue the metaphor,
these activities would be “below the water line”.
It would seem that if it isn’t something you can carry around, it must
be going the way of the Dodo bird! Just not true.
In reality Apple is in the consumer electronics business, Google
is in the advertising business, and Microsoft is in the system infrastructure
business. They overlap but don’t
really compete in each other’s major sandbox.
And in particular, Microsoft’s mobile failures are visible, but the
“below the water line” successes are not “visible”.
companies have a few things in common – they are the 800 pound gorilla of
their space, have a ton of cash albeit overseas, incredible R&D capabilities
and a commitment to and history of success. They aren’t going away, and if
they do who could possibly replace them? And if they are not replaced, all those
wonderful fun things above the water line are in trouble.
all of these companies as hybrid dividend/growth plays, either because they
already pay high dividends (AT&T and Verizon) or because they have lower
yields, but humongous cash reserves that will be shared some day with
shareholders. In particular, when the federal government gets their act together
on tax reform.
are all 800 pound gorillas in their particular space. Which just so happens to
be in a tech world that is revolutionizing how we live, play, and work.
So they have significant growth prospects as well.
It looks to me that the investment world is waking up to the prospects
for these 20th century “dinosaurs”. In the year and a half I have
owned Intel, the stock is up over 30% and my yield on cost is 3.6%.
The Microsoft that I repurchased about three years ago has doubled, and
my yield on its cost is over 4%. The Apple I purchased about a year ago is up
50% and my yield on cost is about 2.6%.
Benjamin Graham – “The Intelligent Investor”
– “Pragmatic Capitalism”
Internet Financial Services:
www.yCharts.com ($1900/year) -
for data download and a great web based data analysis site.
Dripinvesting.org (free) – David
Fish’s excellent dividend champions
seekingalpha.com (free) -
a great resource
do not have CNBC going all day long as many do.
I consider it to part entertainment, part hype to get investment flowing,
staffed with analysts with agendas, and a platform for corporations to hype
themselves without actually saying anything of importance, and all about the
kind of investing that Graham and Buffett would label as speculation.
Come to think of it, these comments could be applied to MSNBC and FOX
cable news channel as well. Even
Fox Business seems more about politics than business.
essence these business channels will lament the bad day or days that the market
is experiencing with forecasts of more bad news to come.
If Benjamin Graham had a business channel, he would be touting the big
sale that was occurring. As an
analogy, would you wait until Macy’s raises prices to go buying? Of course
corrections present an opportunity for the value investor to load up on
companies with intrinsic value at sale prices.
Cable finance channels don’t seem to understand that, at least in terms
of their approach to such market situations.
If you are shopping for common stocks, choose them the way
you would buy groceries, not the way you would buy perfume.
Individuals who cannot master their emotions are ill-suited
to profit from the investment process.
The underlying principles of sound investment should not
alter from decade to decade, but the application of these principles must be
adapted to significant changes in the financial mechanisms and climate.
Obvious prospects for physical growth in a business do not
translate into obvious profits for investors.
The investor's chief problem - and even his worst enemy -
is likely to be himself.
Finance has a fascination for many bright young people with
limited means. They would like to be both intelligent and enterprising in the
placement of their savings, even though investment income is much less important
to them than their salaries. This attitude is all to the good. There is a great
advantage for the young capitalist to begin his financial education and
experience early. If he is going to operate as an aggressive investor he is
certain to make some mistakes and to take some losses. Youth can stand these
disappointments and profit by them. We urge the beginner in security buying not
to waste his efforts and his money in trying to beat the market. Let him study
security values and initially test out his judgment on price versus value with
the smallest possible sums.
Most businesses change in character and quality over the
years, sometimes for the better, perhaps more often for the worse. The investor
need not watch his companies' performance like a hawk; but he should give it a
good, hard look from time to time.
Basically, price fluctuations have only one significant
meaning for the true investor. They provide him with an opportunity to buy
wisely when prices fall sharply and to sell wisely when they advance a great
deal. At other times he will do better if he forgets about the stock market and
pays attention to his dividend returns and to the operating results of his
The most realistic distinction between the investor and the
speculator is found in their attitude toward stock-market movements. The
speculator's primary interest lies in anticipating and profiting from market
fluctuations. The investor's primary interest lies in acquiring and holding
suitable securities at suitable prices. Market movements are important to him in
a practical sense, because they alternately create low price levels at which he
would be wise to buy and high price levels at which he certainly should refrain
from buying and probably would be wise to sell.
It is far from certain that the typical investor should
regularly hold off buying until low market levels appear, because this may
involve a long wait, very likely the loss of income, and the possible missing of
investment opportunities. On the whole it may be better for the investor to do
his stock buying whenever he has money to put in stocks, except when the general
market level is much higher than can be justified by well-established standards
of value. If he wants to be shrewd he can look for the ever-present bargain
opportunities in individual securities.
The risk of paying too high a price for good-quality stocks
- while a real one - is not the chief hazard confronting the average buyer of
securities. Observation over many years has taught us that the chief losses to
investors come from the purchase of low-quality securities at times of favorable
business conditions. The purchasers view the current good earnings as equivalent
to "earning power" and assume that prosperity is synonymous with
Even with a margin [of safety] in the investor's favor, an
individual security may work out badly. For the margin guarantees only that he
has a better chance for profit than for loss - not that loss is impossible. But
as the number of such commitments is increased the more certain does it become
that the aggregate of the profits will exceed the aggregate of the losses.
Investment is most intelligent when it is most
businesslike. It is amazing to see how many capable businessmen try to operate
on Wall Street with complete disregard of all the sound principles through which
they have gained success in their own undertakings. Yet every corporate security
may best be viewed, in the first instance, as an ownership interest in, or a
claim against, a specific business enterprise. And if a person sets out to make
profits from security purchases and sales, he is embarking on a business venture
of his own, which must be run in accordance with accepted business principles if
it is to have a chance of success.
Do not try to make "business profits" out of
securities - that is, returns in excess of normal interest and dividend income -
unless you know as much about security values as you would need to know about
the value of merchandise that you proposed to manufacture or deal in.
Do not let anyone else run your business, unless (1) you
can supervise his performance with adequate care and comprehension or (2) you
have unusually strong reasons for placing implicit confidence in his integrity
and ability. For the investor this rule should determine the conditions under
which he will permit someone else to decide what is done with his money.
Operations for profit should be based not on optimism but
Have the courage of your knowledge and experience. If you
have formed a conclusion from the facts and if you know your judgment is sound,
act on it - even though others may hesitate or differ. You are neither right nor
wrong because the crowd disagrees with you. You are right because your data and
reasoning are right.
In the world of securities, courage becomes the supreme
virtue after adequate knowledge and a tested judgment are at hand.
To achieve satisfactory investment results is easier than
most people realize; to achieve superior results is harder than it looks.