Last January, I decided to take some time and organize all my stock trade receipts onto a spreadsheet. The process took some time, as I have been investing for approximately 40 years and still had paper confirmation receipts from Shearson Lehman and Smith Barney. As I was going through all the receipts, I was amazed at some of the stocks I had at one time, and thought were wise purchases. I owned and lost money in WorldCom, AOL (AOL) after the merger with Time Warner (TWC) and RJR Nabisco. Although it is always good to look back at your investing mistakes and learn from them, what really opened my eyes was seeing the dividend paying stocks I had purchased and later sold. In reviewing those trades, I realized if I had just done nothing but hold those stocks, I would be better off today.
In the first article I ever wrote for Seeking Alpha (here), I discussed what I considered to be the key components for successful investing, two of the traits were Discipline and Patience. A buy and monitor strategy requires both discipline to avoid the urge to trade and the patience to hold a stock during down markets, or years where your return will be flat. In Peter Lynch's book One Up on Wall Street, Lynch talks about his time managing the Fidelity Magellan fund and says:
The typical big winner in the Lynch portfolio generally takes three to ten years to play out.
Now there are some investors out there who have no interest in holding a stock for three to ten years, some don't even want to hold for three months. That is fine if you have the time and knowledge to devote to trading. However, most retail investors do not have the time or skill-set to succeed at trading. For most retail investors, a more likely road to success is to invest in companies that have a sustainable business with a wide moat, have a solid balance sheet, and pay a dividend. In an effort to show this, I'll share some of the companies I owned and sold, and look at where they would be now if I had done nothing.
McDonald's (MCD) - I first bought McDonald's back in 1994. I bought the first lot in August for $26.50 and the second lot in November for $29.50. I sold my entire position in March, 2008 for $51.50, which was a nice gain. I took the funds from the MCD sale and invested it into Wisconsin Central Railroad, a small railroad company. The shares languished for years, and I eventually sold for a small loss. Wisconsin Central would later be acquired by Canadian National Railway (CNI).
As I look back now, it's eye-opening to see how well I would have done with MCD if I had just done nothing. In March, 2009 McDonald's split 2 for 1, which, if I had held it, would have reduced the cost basis on my original shares to approximately $14.00. From there, MCD began a long steady climb all the way to $100.00 in late 2011, and now sits at approximately $89.00. Not including all the dividends I would have collected, the price gain alone is 536%.
Why did I sell? I sold because I had no real game plan, I just invested, I was not a trader, and I was not a dividend growth investor. I just bought stocks without any real plan. As I mentioned in my first article, you need to have a plan and you need to have the discipline to follow the plan. I eventually got back into MCD in January, 2008 at $50.23, and have added to those shares periodically. As long as the fundamental story behind MCD does not change, I won't sell.
BP Prudhoe Bay Royalty Trust (BPT) I purchased BPT in October, 2004 for $45.60 and then turned around and sold it in November, 2004 for $44.26. I used the funds from the sale to invest in a Real Estate Investment Fund. The fund actually did pretty well for a couple years and then, as we all know, turned down. I sold with a small profit, but I would have done much better holding BPT.
BPT sells today for approximately $121.00, which would have been a price gain of over 160%. But the real loss is the dividend stream I forfeited when I sold the stock. BPT has consistently paid a dividend in the 8-10% range, which over time, can really add up. To see what I lost in dividends, I went back to January 2005 and added up every quarterly dividend BPT has paid through the most recent quarter. Had I held the stock, I would have received over $68.00 in dividends for each share I held. Put simply, I would have received more in dividend income than I originally paid for the stock.
Why did I sell? Again, a lack of discipline, real estate was the hot market, and I needed to get in. Hot markets will obviously always be around. So far, just in my lifetime, we have had the technology bubble, the real estate bubble, and for awhile, bio-technology was hot, as were emerging markets. As a disciplined dividend growth investor, you have to ignore hot markets. Instead, find a company that pays a dividend and has a history of increasing the dividend, a sustainable business model that will last for years, and the company should have a solid balance sheet and in the best of worlds, minimal competition. Invest in the business when it is selling for a reasonable price, and you should find success. Jumping in and out of hot markets is not an investing strategy.
Altria (MO) - I purchased Altria in October 2006 for $78.78 and then sold the shares in January 2007 for $85.67. I sold Atria to add to a position I had in Canadian National Railway. The Canadian National investment turned out well price wise, but again, if I had done nothing and just held Altria, I would be better off today.
Calculating where exactly I would be today if I held Altria is difficult, because in 2006 Altria still included Kraft (KFT) and Philip Morris (PM). Kraft was spun-off from Altria in March 2007 and Altria then spun-off PM in March 2008. For each Altria share you received 0.692024 shares of Kraft and for the PM spin-off you received 1 share of PM for each share of Altria. As I write this, PM sells for $91.93, Altria sells for $35.48 and Kraft sells for $39.45. We will use 70% ($27.62) of the Kraft price to reflect the percentage split share received after the spin-off. Add up those three prices and you get $155.03 which is a gain of 99% from the $78.78 I paid for the combined company in 2006. However, I once again forfeited a very healthy dividend stream, as all three companies pay generous and growing dividends.
Why did I sell? In this case, I sold Altria to add to a position I had, which is not always a bad reason. However, under my current investment criteria, I would not have invested in Canadian National, as the dividend paid was too small. To be successful at investing, you need to have a plan and you need to stick to the plan; you cannot stray away.
Lesson Learned - Besides having a spreadsheet that records all my trades, I also keep yearly spreadsheets so I can track my annual results. Several years ago, I had a disappointing investment year, when reviewing the year, I recognized immediately what I had done wrong. There were too many trades. I had one stock I bought and sold four times. After that year, I wrote in my investing reminder note sheet, STOP TRADING! That comment, which I see every time I look back at my notes, acts as a reminder that I should stay disciplined and not deter from my investing plan. I have four criteria for any company I invest in: the company must have a sustainable product, a product that will still be here in 20 years; a wide moat, the company must dominate its business in such a way that competition is minimal, and the barriers to entry into the business are huge; a rising dividend of at least 2%; and the price must be reasonable. If I am looking at an investment and it does not have all four things, I won't invest.
In addition, I will not sell unless I see a fundamental change in the company's business, or there is a change in the dividend payout status. I will let the companies I own expand and let the dividends grow. Some years not much happens; MCD had a big run-up near the end of 2011, ending the year up 35%. I knew 2012 would not be as good, and that has been the case, as MCD is down approximately 10% for the year. The price action in MCD has not changed the business. McDonald's is still adding restaurants and increasing sales, and at some point, the price will rise again. In the meantime, I continue to collect the generous dividend.
Warren Buffett, like Peter Lynch, believes in buying and monitoring, not trading. Buffett is quoted as saying:
Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.
I freely admit that I have had difficulty controlling the urge to do something. I follow the market daily, and fairly often see what I believe are opportunities. My mind starts working on how I can sell this to buy that or maybe if I sell a little bit of these two stocks, I can buy some of that stock. Fortunately, I have enough experience with that urge that I regain my senses and tell myself to remember my discipline, buy and monitor, do not trade. If I need any further proof, all I have to do is look at the above three investments and consider what could have been.
Warren Buffett has another quote, which I have taken as my investment motto:
Lethargy, bordering on sloth, should remain the cornerstone of an investment style.
If it takes lethargy to be a successful investor, I am the man for the job.
.Disclosure: I am long (MCD)