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Value, dividend investing, growth at reasonable price, portfolio strategy
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Introduction:

My dad was a grocer. As such, he did not have very many weekends where he was not working. Instead, he typically was off on Tuesdays and Sundays. One of the things that he loved the most was the Sport of Kings, horse racing. I used to love summer vacation, because that meant horse racing in Northern California was in full swing and every Tuesday, I was going to the track with my dad.

There were two premier horse racing tracks in Northern California, Tanforan Park and Bay Meadows. On Tuesdays, during the summers, my dad and I would make our way to the track. We would pay our admission and then head for the paddock area. That's where they kept the horses. We would spend a lot of time there, watching the horses and matching them up to our program. We wanted to see all of the horses that were going to be running in each race. That way, we could begin our selection process and pick the horses that we were going to bet on that day.

What You Need To Know:

There were people at the track, known affectionately as "touts." Some of the "touts" were very professional. They would produce their analysis of each race the night before and sell a program to you, rating each horse and that horse's strengths and weaknesses. What they did was called "handicapping." They would sell programs telling you which horse to bet on and why. It was a "science." Then there was the less professional tout. For a small fee, he would tell you, in secret, which horse you should bet and why.

But, my dad had his own system. It not the most logical system, nor was it the most brilliant. But, for some reason it seemed to work for us. When we would go to the track it seemed that most of the time we came back home having at least earned our expenses for the day, and many times actually turning a profit. Here's our strategy and I will share it with you for free:

I was born in April, so that's the number 4. I was born on the 7th day in April, so that's the number 7. What we would do is purchase $2 win, $2 place, $2 show tickets for the 4 horse and the 7 horse, for a total of $12 per race. Now, depending on the odds-makers rankings of the horse, any 4 horse or 7 horse that was rated as the overwhelming favorite would not have tickets placed bought for that horse. I mean, why buy a chance on a horse that is paying you back less than you invested for a win? So, in that case, we'd only invest $6 on the other horse.

When we would actually go to the races, one of the things we would do is keep a record of our wins and losses. When we won, we would take our winnings and use those to fund our next trip to the races. At the end of the season, if we had more money than when we started, then we were winners!

And The Point Is?

In many ways, stock market is very much like horse racing. First, there are the tracks. You can bet on horses that run at the NYSE, the NASDAQ, the AMEX, and of course, the foreign exchanges.

You can bet on horses that are broken into classes. There's the Dow 30; the S&P 400, 500, or 600; the Russell 2000 and many more. Sometimes horses "step up in class" and will race against stronger horses and sometimes horses will "drop down in class" and run against horses with similar "breeding."

Then there are the horses, themselves, and boy, do we like to handicap them! We compare AT&T (T), Verizon (VZ), Century Link (NYSE:CTL), Frontier (FRT), and Windstream (WIN) just to highlight a few of the ponies in the telecommunications category.

And then there are the systems. Everywhere you turn, there are "touts" telling you which horses you need to bet on. They will tell you which stocks are the best ones for you to bet on and why. They will tell you that one is better than another and for every guy touting one stock there is another telling you why it's a lousy investment.

Just go to the "search" function box at Seeking Alpha and type in the symbol for Intel (INTC). Now, you will come to a page that lists a number of articles that are both pro and con, concerning Intel. Each article will have its own method for arriving at their particular conclusion. Fundamentals, Technical Analysis, Charts and Graphs, and some, like a recent article I read, rely on the Chinese practice of I-Ching. It's amazing.

I'm going to let you in on a little secret-again, for free. Every system is a potential winner and every system is a potential loser. Sooner or later, every stock "wins" and every stock "loses." The most important thing to remember is that you want to win more times than you lose. If your system is working for you, don't abandon it for another.

Don't criticize another system. Just work yours. To this day, whenever I get the chance to go to a horse race, I still bet the 4 horse and the 7 horse. It works for me, because my expectations are very low when I go to the track.

Where Are We Going From Here?

I love spending time at Seeking Alpha, because there are so many articles that are handicapping stocks. You can find really great articles on why one company is a buy and why that same company should be a sell. When you read the articles, you can get very strong, logical, and rational commentary on either side of the equation. So what's an investor to do?

Glad you asked. I have been using a system called Dividend Growth investing for years. The important notion here is "years." You see, you can flip a coin 100 times and have it come up heads or tails 20 times in a row, but if you toss it enough times, it will come up 50% heads and 50% tails.

When you purchase a particular stock, at a high point in price or a low point in price, eventually, the stock price will revert to mean. That is its natural price. If I purchase stock in a company like Coca-Cola (KO) at $77 a share, is that a good price or a bad one.

Here's What I Like To Do:

When I purchase stocks, I am trying to find companies that:

  1. Have a history of paying dividends and raising those dividends, annually, for a minimum of 5 years in a row. That's because I want to identify companies that have a culture of returning money back to me, as an investor.
  2. Grow those dividends by a rate that is larger than inflation. In order to even stand a chance at an income stream that keeps place with or exceeds inflation, the companies that I invest in have to grow those dividends faster than inflation, or I can't secure an income stream that will support me in the future.
  3. Dividends that are greater than the rate paid by Treasuries. For me, investing for the long haul in a company that pays less than 3% yield just isn't part of my long term strategy. At my age, I don't have the time to wait for the growth of the dividend to reach a point that makes sense from a return basis. Where I can, I actually prefer 4% yield points, without having to lock myself into a portfolio of utility stocks.
  4. Are market leaders and offer an entry point that represents a value, relative to the intrinsic value of the company and offers the opportunity for potential capital gain moving forward.

In addition to these criteria, I tend to hold positions for the long haul. As the market gyrates, I may trim my holdings to maintain relative consistency of ownership, within the portfolio or I may purchase additional shares as an entry price point becomes more attractive, relative to the underlying strength of my company.

Recent Acquisitions:

Three of my most recent purchases were Aflac (AFL), right after the Japanese Tsunami. In September of 2011, I purchased a position at a price of $31.40. In April of 2012, I purchased shares of Walmart (WMT) at $57.25. Most recently, I purchased additional shares of Procter and Gamble (PG) in June of this year at $59.25. Each of these purchases is going to turn out to be a winner for me. Why?

First, AFL was hammered by one incident, with the thought being that cancer policy payments would skyrocket, since the Japanese nuclear reactors had leaked and AFL would be facing massive insurance claims against them by people affected. Well, maybe. In twenty years or so. But, not then. Not now. AFL is one of the best insurance companies you can own. They are not a general insurer, but they are a specialty insurer. The company is often used as a "backup" insurance to existing health insurance programs which are employer provided. Less risk.

Walmart was accused of bribery in Mexico. The stock took a big hit that day. I've owned WMT for a number of years and always thought it was a little pricey lately. I was listening to the radio and they made the announcement that the stock was down 6% for the day! I pulled over, pulled out my I-Phone and placed an order that was executed in minutes. Yay for me! Nothing has changed for Walmart. It still is the largest retailer in the world and has a business model that is working great. It was priced at a value and if we are waiting for pullbacks, this was the "mother of all pullbacks."

With PG, the issue was earnings. They are declining. The stock was ratcheting lower in bits and drabs. Nothing dramatic, just steady. In April, the stock was priced at $67 a share. It dipped below $60 and I made a purchase. Five years from now, PG will still be the powerhouse that it is today. There may very well be new management in place, but the core values of the company are something that they protect unlike many other companies. PG used to be (and likely still is) one of the most fertile recruiting grounds for executives in the food industry. PG trains them right and rewards performance. Their employees with any significant tenure are very hard to steal away.

Conclusion:

If you count yourself as a trader, none of this advice is going to be worth very much to you. If you think of yourself as an investor, then I hope this will help you.

  1. Develop your own strategy for investing. Where do you want to be in 1, 3, 5 years or more? How are you planning on getting there? What models have you run to see if your plan is going to work? What targets do you have and how will you measure your results against those targets?
  2. Develop criteria for selecting your stocks. There are all kinds of arguments out there about the different metrics for stock selection. Some people are rigid in their criteria, others are more flexible. Some will, for example, overlook a large debt load by rationalizing that the company has enough free cash flow or whatever to cover the debt. That's fine. Just be consistent and don't forgive one company while giving another a pass.
  3. Once you have defined your criteria for stock selection, only buy those stocks that meet those criteria. It is fine to do nothing. Sometimes I go a whole year without purchasing a single stock. Sometimes I am being very active in purchasing. I don't have a need to be buying every day-neither should you.
  4. Don't rationalize. Sometimes when we make excuses, we end up making bad decisions. I want to remain detached as unemotionally involved as possible. I try not to talk myself into something against my better judgment. Sometimes it's better to "miss" an "opportunity" than it is to invest and make a mistake.
  5. Be open to the possibilities that you can make money or increase income in many different ways. Learn those strategies, study them, and if you are comfortable with them go ahead and use them.
  6. Never stop learning. Ask questions. Look at both sides of the story. Make like Columbo. "There's just one more thing……."
  7. Don't be afraid to make a decision. Let's just suppose that I was wrong about my purchases of AFL, WMT, and PG. Let's say they continued to go down in price. How would that change things? Would it mean I made a bad decision? Not in the least. I can't call a market top or a market bottom any more than you can. I can, however, determine when I think a stock is priced at a value, though. Once I know what that price is, I'm fine with buying the stock, regardless of what happens to the price over the next few months. Why? Because I'm buying for the long haul-not for the short.
Source: The Sport Of Kings And Stock Investing: It's How You Play The Game