Road Trip New Mexico: Lessons Learned Out In The Desert

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Includes: CHK, CL, CSCO, EMR, GPS, IBM, JNJ, JPM, JWN, KMB, KMI, KO, KSS, MCD, ORCL, PEP, PM, QCOM, RIG, RL, WMT
by: David Crosetti

Summary

Some investors like to focus on "returns".

There are all kinds of "opportunities" out there to make you rich.

But when those "opportunities" have "guarantees," you have to be a bit skeptical.

Introduction:

Recently on my road trip to New Mexico, I was driving around and listening to an AM radio station that was "all business, all day." In fact, however, it was a bunch of hosts who had one-hour slots, who were trying to sell you something.

There were the guys who were suggesting that you buy annuities. There were the guys selling precious metals. There were the bulls. There were the bears. Anything and everything that you could imagine.

One of the things that I noticed was that none of these shows was taking calls from the public. They were just droning on and on about whatever it was they were selling.

But they were going on and on with vague generalities and very little in the way of specific advice. What they seemed to have in common was that they would all offer you a "free initial consultation" or a "free analysis of your investment portfolio" and then give you specific advice on what your next steps should be. How wonderful is that?

But It Gets Better:

In addition, between the shows, there were the usual commercials touting cheap Viagra substitutes (why pay $30 a pill), the car dealers (no one in New Mexico beats our price), and one in particular that really piqued my curiosity. Keep in mind, this was not one of the shows, but a commercial that ran every 15 minutes or so.

In a nutshell, this particular company was telling listeners that their company would guarantee investors a 9% annual return backed dollar for dollar by hard assets.

Think about it for a moment. A 9% annual return on your money would mean that every 8 years your investment would double in value! If you were to invest $100k, that would become $200k, then $400k, then $800k, then $1.6m and that's over the next 32 years!

Does that sound like an investment you'd like to make? I mean a guaranteed 9% a year with "no risk?" You bet your life!

What I Found Out:

So, when I got home, being the curious type that I am, I decided to check out the firm's web site. Here is what they have posted:

OUR MISSION:

(This company) is a full-service firm with advisers having over 70 years of combined experience in the financial services industry. As asset managers we help investors of all ages develop a plan to accomplish their financial goals. Success is attained only when your family's financial objectives become reality.

Does this mean that they have 70 advisors with 1-year financial experience each or does it mean that they have 10 financial advisors with 7 years of financial experience each? Or any other combination that you'd like?

OUR GOAL:

We hope your visit will help you understand the opportunities and potential rewards that are available when you take a proactive approach to your personal financial situation. Most importantly, we hope you see the value of working with skilled professionals to pursue your financial goals.

I am sure that after I get to see the slide presentation on Power Point and I begin to "see the value of working with skilled professionals" that some people would be more than willing to write a check, for sure. I mean a 9% annual return?

OUR EXPERIENCE:

  • 70 years of combined experience
  • Diverse Portfolio
  • One-on-One Consultations
  • 9% Return on Investment

Are your eyes beginning to water and your heart beating faster?

But Wait, It Gets Even Better:

The founder and CEO of the company has a book. It's free. Here's what he says:

There are always new and creative ways agents, advisors, and bankers attempt to scam you for your money. As Woodie Guthrie sings, "Some will rob you with a six-gun, and some with a fountain pen."

You spent a lifetime accumulating your assets and protecting them so you can retire with a sense of dignity. This is vital to your peace of mind. Senior adults control 70% of our nation's wealth and are the most-targeted by the financially dishonest.

I will show you how you can keep yourself from being scammed by financial predators and reveal some of the latest ways the industry and agents attempt to deceive you with high commission products. I'll identify these financial predators through a breakdown of the 2008 financial crisis. Get ready for the ride of your life as we pull back the curtain on financial predators and explore the true investment opportunities that will allow you to protect and preserve what you have spent a lifetime accumulating.

Just pay shipping and handling.

But, come on folks, you get a free book, you make an appointment, you sign up for the program and bingo! You are going to double your money every 8 years. This is almost as good as winning the lottery.

But that's all that you are going to find out on the firm's web site. You will not find out anything else unless you "make an appointment" and sit down with your personal financial professional.

So What's Going On Here?

There is an old saying: "When things seem to be to good to be true, they probably are."

I'm sorry, but I am a pretty skeptical guy. I tend to see things from a darker side than most people and over the years, I've learned that trusting someone to manage my affairs (especially when it comes to money) is something that I don't take lightly.

I am even sometimes a little skeptical about my own abilities to manage my own affairs (including money matters). That can be a blessing or it can be a curse.

In the recent past, there have been many investors who saw "opportunity" in a number of companies. As a Dividend Growth Investor, I find that when we allow "the story" to become "the reality" we can find ourselves getting burned and burned badly.

Caution Is A Virtue:

How many people saw tremendous opportunity with Kinder Morgan (NYSE:KMI)? Here is a company that went from being a REIT to becoming a traditional equity investment. The history behind the company as a REIT was very interesting. What's not to like? They move oil through pipelines. Kind of like a railroad stock, right? How's that worked out? Maybe the company makes a dramatic turn around and maybe it's an incredible opportunity here, but "why?"

How about Chesapeake (NYSE:CHK)? The company never had a consistent dividend history. So, why would a company like this appeal to a Dividend Growth Investor? But for some reason, it did. How'd that work out over the last 12 months?

Then there's Transocean (NYSE:RIG). No consistent dividend, no compelling story, lots of debt and a catastrophic investment over the last 12 months.

Last example. How about the retail stocks like The Gap (NYSE:GPS), Kohls (NYSE:KSS), Ralph Lauren (NYSE:RL), Nordstrom (NYSE:JWN)? My youngest daughter is a regular "clothes horse." When she has a new outfit or a new pair of shoes and you ask her if she bought those at (pick a retailer) she will say: "Dad, (pick a retailer) is so "not now. No one shops there anymore."

Dividend Growth Investing:

I don't need to hit home runs. I need to hit for "on base percentages." To do that, the discipline for most DGIs will center around a few "rules" of investing.

First Rule:

Invest in companies that increase their dividends on an annual basis.

When we try to find those companies, in order to do our due diligence, we can look at the Dividend Champions, Contenders, and Challengers (link here).

This is a compilation of companies that have a history of at least 5 years of increasing dividends on an annual basis. There are all kinds of companies here: traditional equities (stocks), REITs, MLPs, and a couple of BDCs. In all, there are over 700 companies for you to go through and find the "gems"

Second Rule:

Select companies that have the potential to continue increasing dividends, annually, moving forward.

Companies like Coca-Cola (NYSE:KO), Kimberly Clark (NYSE:KMB), Colgate Palmolive (NYSE:CL), Johnson and Johnson (NYSE:JNJ), Pepsi (NYSE:PEP), McDonald (NYSE:MCD), Walmart (NYSE:WMT), and many more (108 companies in all) have raised their dividends annually for more than 25 years in a row.

Third Rule:

Reinvest your dividends, habitually.

Most brokerage houses will allow you to reinvest your dividends back into additional shares of the company that paid the dividend. This should be a "free" service to you as an investor who uses the brokerage. If that is not a free service, then look for a new brokerage.

Many of us have or have had 401k plans at our place of employment. The "strategy" with 401k investments is called "income averaging." That means that every paycheck, your contribution amount is invested in your mutual fund selections, a little bit at a time. The theory is that when prices are high, you buy less and when prices are low you buy more. Over the long haul, mathematically, this strategy works out to your advantage.

Rule Four:

Valuations matter.

Some people like to overthink "valuations." You will often see that statements made by some people, lead you to believe that at best, valuation is subjective. But no one goes to a car dealership and is willing to pay the MSRP price on the car's window, do they? If the MSRP is $40k, do you think that's a value when the dealer cost for the car is $35k?

How about taking a vacation? You can pay "high season" prices on a cruise or you can pay "low season" prices on the exact same cruise. Would you be happier paying $1500 per person to visit the Caribbean or would you be happier paying $750 to enjoy the same vacation and have an additional $750 to spend on the trip adventures?

Stock metrics (fundamentals or technical analysis) can tell you if a stock is a value or not. Develop your own skill set and use that evaluation method when selecting individual stocks.

Rule Five:

Don't be afraid of averaging up or averaging down.

The principle here is to evaluate why a company remains a bargain at its current pricing or why it is not a value at its current pricing. Let me give you an example. Recently in my IRA, I decided to add to my positions on two companies.

I first purchased Oracle (NYSE:ORCL) in June of 2013 at $30 a share. In January 2016, I purchased additional shares at $35 a share. Today, the stock is priced at $41 a share. Averaging up.

In October of 2013, I purchased shares in Phillip Morris (NYSE:PM) at $85 a share. In March of 2015, I purchased additional shares of PM at S77 a share (below what I paid originally). Today, the company is selling at $101 a share. Averaging down.

As long as a company is something that you want to own, because of the value of the business, there is no reason to not purchase more shares of the company.

Rule Six:

This is a marathon and not a sprint.

In a previous articles (link here and here), I discussed companies that I wanted to own in my taxable account. I made purchases of five different companies and provided readers with the trade notification orders to validate the purchases.

The companies I purchased were: Cisco (NASDAQ:CSCO), JPMorgan Chase (NYSE:JPM), Emerson Electric (NYSE:EMR), International Business Machines (NYSE:IBM), and Qualcomm (NASDAQ:QCOM). These companies were added to my portfolio in February and March of this year.

CSCO has appreciated 24%, JPM has appreciated 15%, EMR has appreciated 7%, IBM has appreciated 6%, and QCOM is down .25% as I write this.

As a group, the five companies are positive 10% as a group. Some would suggest selling and taking the profits. But I'm not in this for the short term. I'm in it for the long haul.

Summary and Conclusion:

Be wary of anyone who promises you anything and remains sketchy in the details of the promise. If it's to good to be true, then it probably is to good to be true.

Ask yourself, "why am I buying this particular investment and is this purchase consistent with my strategy and goals?" If an investment is nothing more than a shiny object in a stream, look out. It could be a lure from some fisherman in a boat.

If you have a strategy and a plan of attack to achieve your own goals, whether it's through buying individual stocks or mutual fund style investments, just make the purchase consistent with your goals.

Don't be chasing anything that moves. That activity is best left to dogs.

Disclosure: I am/we are long CSCO JPM EMR QCOM IBM KO CL KMB PG JNJ ORCL MCD JPM PM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.