Since I have recently disclosed to some regular Seeking Alpha readers that I had made well-timed investments in both Bank of America (BAC) and General Electric (GE) that have done well for me so far, I thought it would be useful to give investors a more complete picture by including some of the boneheaded moves that I have made in the past year or so.
A little while ago, I had to make a choice between investing in Conoco Phillips (COP) and Phillips 66 (PSX). Conoco was trading in the low $50s, and Phillips 66 was trading in the low to mid $30s. I had researched both companies (although the information for Phillips 66 was much more limited, as is often the case with freshly spunoff companies). Anyway, I decided to buy ConocoPhillips in the low $50s, even though I knew that Phillips 66 was much more attractively valued. I remember actually thinking at the time, "Phillips 66 has some fantastic hedging programs in place, and the input costs at some of their refineries are so low that it could give them a tremendous advantage so long as commodity prices do not fall significantly. This is going to be one of those classic cases of the spinoff company being undervalued due to investors flocking to perceived safety of the parent company."
What triggered me to go with Conoco instead of Phillips 66? I came across item 2.01 in this 8-K:
In exchange for the shares of Phillips 66 Company common stock, Phillips 66 issued shares of its common stock to ConocoPhillips, assumed certain liabilities from ConocoPhillips and made a special cash distribution of approximately $5.95 billion to ConocoPhillips on April 30, 2012 (which may be adjusted based on actual levels of Phillips 66 cash, inventory and working capital as of April 30, 2012).
I actually remember thinking, "Ahh, screw it!" at the time I came across that line in my reading. Phillips 66 was taking on vaguely described "certain liabilities" that were not spelled out explicitly, and they were handing over $6 billion to ConocoPhillips. At the time, that disgusted me enough to think, "Conoco is getting the advantages from this spinoff, I'll go with them." Well, Conoco is still trading in the $50s (although some days it flirts with the $60 mark), and I'm still collecting a $0.66 quarterly dividend (which Value Line predicts will not get raised this year. I'm not commenting on whether I agree with that prediction, but just letting you know it's out there). In the case of Phillips 66, the price of the stock has almost doubled to the low $60s and the dividend has climbed from $0.20 to a smidge over $0.3125. I didn't do an exact calculation, but it looks like my decision has been the difference between a 15% gain and no income growth compared to an 80% gain with over 50% income growth.
In a lot of ways, I "missed the party" when it comes to Phillips 66. Right now, the refineries are producing record profits. It has fantastic hedges in place through 2016-2018. In essence, Phillips 66 is going through a period where everything is going well, and it is now priced accordingly. It will be curious to see what happens five years from now when the input costs at Phillips 66 go up meaningfully and the company loses some of its current advantages, particularly if commodity prices experience any kind of decline over that time frame. I had the opportunity to capitalize on Phillips 66 before it started its "Glory Days" run, and I did not do so.
Coca-Cola had gone up a couple bucks per share relatively quickly after my purchase, and thinking that the company had become slightly overvalued, I sold out to buy JP Morgan. Then JP Morgan went up a couple dollars fairly quickly. So what did I do? Why, I sold JP Morgan the next week, even though I knew the bank had great potential ahead (hey, a guy that is willing to sell a gem of a blue chip to buy a bank is really capable of doing anything out in the wild). After letting that capital simmer as cash for awhile, I eventually settled in on Johnson & Johnson (JNJ), but I made things a lot harder for myself than I needed to.
What I was doing there wasn't investing. It was trading. And it was stupid. Don't get distracted by the fact that, technically, I made money. I got lucky because I did it during this rising market, which enables even novice investors to see the visage of Warren Buffett when they look in the mirror. Plus, I would have had more money if I stuck with Coca-Cola, and I would have had a lot more money if I stuck with JP Morgan. Instead, I played a game of "hot potato" with that pool of capital.
But the problem there isn't just the fact that I would have made more money with Coca-Cola or JP Morgan. From my perspective, it was just a bad way to live. Moving into and out of stocks does not suit my own temperament at all, and it is not pleasurable for me to fall for the trap of overthinking stock selections.
After that, I took some corrective action to make sure I don't do something like that again (usually, when it is all said and done, I can make peace with the mistakes I make. Rather, it is making the same mistake twice that gets me frustrated). Ever since then, I have stopped treating the stocks I own as investable capital that can be deployed elsewhere (the only exception would be cases of gross overvaluation. I wouldn't want to own something like Procter & Gamble (PG) at over 30x earnings because I can't come up with a rational basis for owning something that only has a 3% earnings yield. It takes a lot of future growth to justify something like that).
After dealing with that "restless capital", I decided that I would much rather spend my energy (1) acquiring capital to invest, and then (2) finding a company that is attractively priced or high quality (ideally, both) to own. Then, I let the companies I own do their thing while I repeat steps one and two. In terms of how I choose to spend my energy, it seems like the sanest way to build a slowly growing collection of dividend machines.
For me, the entire appeal of dividend investing is the fact that the energy is upfront. You spend your time coming up with the money, you acquire assets that have good likelihoods of paying out more dividends 5-10 years from now, and then you keep repeating that process. When I buy something like BP (BP), I like thinking that there is a decent chance the 2018 version of myself will be thankful that I planted that dividend tree. The really fun thing (for me, at least) is the fact that all the energy and effort happened in 2013. That's what makes dividend investing fun. When done right, you get seemingly free rewards for decisions that you made long ago. It took me a couple mistakes to hammer that point home.