There are many ways to make money in the market. I know this as I have seen it done. I do not profess to understand all of these ways. While knowledge is certainly powerful, it is not necessary for someone to maintain a grasp on each and every profitable path that our financial system offers. All one really has to do to be successful in the market is to hone down one or two strategies that mesh well with his or her financial expectations. Like anything else, it will take practice and hard work to formulate this personal plan. Mistakes will be made along the way and the best investors will learn from these mishaps. In the words of Alfred Pennyworth, "Why do we fall, sir? So that we might learn to pick ourselves up."
For me, nearly a year into my personal investing experience, I have learned the importance of patience in investing. Human nature, or at least my own impulses, tends to lead me astray. It is difficult to remain patient when the system moves and changes so rapidly. Opportunities arise and disappear in an instant with both human and computerized eyes constantly monitoring the markets, scouring the horizon for deals. Timing in key to investing with entry and exit points so important, especially to those making short-term bets.
I used to be one of these investors. I saw the market as a game. I've always been good at games and I possess an unrelenting passion to win. The idea of competition brought me back to my high school days, I could feel myself standing on the goal line between a running back and a potential game tying touchdown. I was standing at home plate, digging my cleats into the dirt, eyeing down the pitcher, daring him to throw me his best stuff. I clearly remembered awaiting a hand off for the anchor leg of a relay knowing full and well that regardless of the race position that I received the hand off in, my team would be standing atop the podium in a matter of minutes. I could taste all of the victories and the feeling of immortal fearlessness that certain big-headed boys experience in their teen-age years. I thought that investing would be no different; like taking candy from a baby. I watched the market for a short while attempting to gain an understanding and a feel for how things worked. I jumped in heard first with grand plans of beating the market by a wide margin, again and again. I was ignorant and naive, doomed by fate and my own arrogance to fail.
Before this gets too dramatic, let me say that I was lucky. I didn't lose my shirt. I was actually able to secure fairly decent profits with my first two trades. The circumstances of these two trades taught me a lot. I imagine that this same lesson could have taken much longer to learn if they would have played out differently, especially in regards to my bankroll. I am grateful for this.
Now, let me explain the trades:
First, on October 4th, 2012 I bought shares of Zipcar (ZIP) at $7.85/share. I admit that I can be a hopeless romantic at times and I wanted to invest in a cause that I believed in. I am of the belief that the world's widespread burning of fossil fuels is doing damage to the planet. I fear that these damages are irreparable. Zipcar had a presence at the University of Virginia where I had recently graduated from. I thought this company offered a unique service that would not only benefit people living in densely populated areas (not to mention college towns where there is absolutely no parking), but planet Earth as well. Zipcar markets itself as a green company with its high mileage/low emission rentals. At U.Va., the Zipcars available were all new-age fuel, efficient vehicles I bought in without even looking at the fundamentals. I should also say that even if I did look at them, I wouldn't have known what these numbers, percentages, and ratios meant.
Several weeks later (October 23th), in the same naive position, I bought shares of Nokia (NOK) for $2.68/share. Looking at the long term performance of NOK I am not sure what I saw in the company. The company has negative margins, management effectiveness numbers, 5 year sales, and EPS; not to mention the rumors of an unsustainable dividend. I'm sure that I ran across the stock in a "Buy These Cheap Stocks For A Quick Profit" type publication. I liked the idea of buying a recognizable company for less than $3.00/share. Not understanding fundamental ratios I didn't realize the relativity of price/share. It's shameful, I know; but, these purchases would serve me well, both educationally, and by happenstance, financially as well.
Flash forward 2 months. By now I had gained a better understanding of the market and the helpful statistics associated with it. It's amazing how much information is out there for those of us who have not been formally trained in the arts of finance. Zipcar had essentially been fluctuating between $7 and $8.50 a share. My Nokia shares traded stably in the $2.70 range before spiking to $3.50 in late November. Soon after this spike the shares fell back to $3.10 and I saw my unrealized profit margin fall drastically with wide, fearful eyes. I would watch the movement of these shares incessantly. It was mesmerizing watching the money in my brokerage account rise and fall. On good days this was exciting, on bad days it was stressful. I didn't realize it but I had purchased a very expensive lava lamp.
About this time, all I would hear about on the television was the dreaded "fiscal cliff". I bought into the rumors that this would be a terrible, terrible event, possibly sending the U.S. back into an immediate recession. I thought that I would make the responsible decision and pull my money out of the market before disaster struck. I pulled the trigger on Nokia first. Knowing that the cliff was looming I had been looking for an opportunity to pare down my positions. A week after NOK's late November dip that I spoke of earlier: from $3.59 to $3.15, the stock began climbing again. I saw this as an opportunity and sold my entire position on December 4th, at $3.30/share. This represented a 23% gain. I was satisfied by this until I watched the stock creep ever higher, closing at $3.44 on the 4th before topping out at $4.75 a little more than a month later (what would have been a 77% gain, if only I had waited).
My Zipcar story is eerily similar. No one knew exactly what would happen with the cliff but consensus opinion seemed to be pointing to the negative. I sold my entire stake on December 26st when fear was rising. My shares were then valued at $8.60/share. This was another solid gain for me: nearly 10%. I was happy with myself again, going two for two in less than two months with double digit trade gains. I was feeling cocky again, "candy from a baby," right?
Incorrect. As fate would have it, on January 2, 2013 it was announced that Zipcar had been bought out by Avis (CAR) for $12.25/share, a 42% increase from the price I sold at 7 days prior. So, let me recap. I sold two positions for short-term gains of 23% and 10%. However, if I had waited 7 days to sell both, my gains would have been and 39% and 42%. What did I learn from this? Foremost, amongst many things: that I have terrible market timing.
The anxiety associated with buying and selling (selling much more than buying) had become too much. I hated that guilty feeling in the pit of my stomach that arose when I felt that I had potentially lost my family money. I had already been considering changing my investing philosophy; going from a greed driven strategy with a short term horizon to a more stable long term plan. The buyout of Zipcar on January 2 was the final straw. With cash on hand from my Zipcar and Nokia trades I decided to start building a dividend growth portfolio. I had been reading a lot of DGI-type articles here on Seeking Alpha and was beginning to buy into the power of long-term compounding. I had recently picked up a copy of Benjamin Graham's The Intelligent Investor and was realizing that I had a lot to learn. I read several books written about Warren Buffett and his long-term investing strategies.
After studying Buffett, I knew that I would have to begin thinking about my investments as a business. Before, I viewed the ticker symbols of the companies I bought as poker chips. Gambling is a game, a game that I would surely lose. Just because I lack the funds of a Buffett or an Icahn doesn't mean that I shouldn't be thinking of my investment portfolio as a holding company. Regardless of value, any dividend growth portfolio should be viewed in this light. When you invest, you are buying little pieces of companies, not electronic poker chips. I decided that I would only invest in high quality companies that I believed in over the long haul. No more chasing rumors. No more wide-scale speculation (Graham talks extensively about speculation). I was interested in predicable, steady growth, especially in terms of dividends. As dividend payments increase, so will my holding company's free cash flow. I have the option to invest this cash back into my business (reinvesting them, or starting new positions) or returning it to my shareholders in the form of cash. My company only has one shareholder: me.
Because patience, or the lack there of, had cost me money in my first several months on investing I decided to use a focused restraint as the keystone to my new strategy. I would only buy great companies at great values. I would only sell these companies when their business model changed drastically to my dislike or if their share price became absurdly overvalued. I've said it before, I get anxious about selling shares and leaving money sitting on the table. The great thing about dividend growth investing is that I get rewarded for holding onto my shares. So long as the dividends I am receiving are reliable (I monitor earnings reports, free cash flow, payout ratio, and debt load intensely), the more shares I own, the more cash I should expect to receive in the future. This prospect puts my mind at ease.
Something else that this strategy enables me to do is turn off the lava lamp. The daily up and down swings of my portfolio's value are not important with this philosophy. With no immediate plans of selling it doesn't really matter which way my stocks are heading. If they go up, it's obviously great. If they go down, my yield goes up. Due to the nature of most predictable dividend stocks, I can also expect that if my portfolio's value is dropping, the general market is as well, which will give me opportunities to add to my holdings at value prices. It's odd, but I often find myself hoping that the market will drop. This means that many of the numbers in my "current targets" list will be red. These red numbers bode well for me during an accumulation stage. The accumulation of shares is paramount to a long-term dividend growth portfolio focused on reinvestment and compounding. The value of these shares during the accumulation phase is important as well because initial entry point will go a long way in determining your business's long-term profit margin.
No more lava lamp:
Without the lamp on, I can sleep better at night. This fact, above all others, in the best aspect of a dividend growth portfolio.
To see how I've put this new philosophy to use, follow my experimental portfolio here on SA. As previously stated, I don't have the funds to build this company exactly how I would like to. This portfolio allows for me to do this. All of my actual holdings are represented in this portfolio along with others that fit into my strategy during a time when I had no cash on hand. In Q2 2013 the only move I've made thus far is a purchase of IBM (IBM) on its recent pullback. This purchase was documented in real time by a stocktalk. I enjoy the CEO aspect of this experimental portfolio and I will continue to manage, track, and explain its performance via stocktalks and articles here of Seeking Alpha.