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John Galt
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When at the age of twelve, at the time of the Russian revolution, I first heard the Communist principle that Man must exist for the sake of the State, I perceived that this was the essential issue, that this principle was evil, regardless of any methods, details, decrees, policies, promises, and... More
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  • Dear Young Investor,

    Dear young investor,

    People tell me that they "don't know anything about investing but need to invest"... then they will ask me "what should I buy?" This article attempts to answer that question and explain why I have a strong preference to dividend growth investing over the traditional schools of thought.

    So what should I invest it?

    That's actually a pretty big question, there are numerous debates, entire college classes, and various books written on the topic. The real answer will depend on YOUR time horizon, risk preferences, liquidity needs, and return assumptions.

    First you have to understand that there is a relationship between risk and reward. Stocks historically have higher returns than bonds, but they also have higher risks. Let's say that stocks will return 7% and bonds 3% over time. If you don't need the money for many years, why not invest a higher percentage in stocks and a lower percentage in bonds?

    Answer - Liquidity matters and returns aren't linear. What happens if you do put 90% of your money into stocks, the market goes down 50% and you need the money 1 year from now? The math of loss really works against investors, a 50% loss means you need a 100% gain just to get back to 0! Remember stocks have a higher expected reward potential, but also more risk of losing value.

    Traditional Asset Allocation investing advice

    A very basic rule of thumb is to take your age, subtract 100, and use that number as your equity percentage. If you are 35 years old, that would mean a mix of 65% stocks, 35% bonds. That's a very basic rule of thumb and YOU have your own unique situation with your own unique answer.

    Some companies will have you fill out questions - then they put you in a "box" and recommend a certain asset allocation. Hi John, based on your answers you fall into our "balanced growth" box, you should invest like this blah blah blah.

    I believe that people are unique. It's NOT a science, it's a blend of science and art. What if there are twins, with the exact same financial situation but one is an "ant" and one is a "grasshopper"? What if one panics and sells at a loss, and one sticks things through? What if somebody half @** fills out their questionnaire?

    The crazy thing is that people don't accurately understand their own risk tolerance. Where people THINK they are and where they REALLY are can vary greatly. It's easy to pump your chest and say risk risk risk when the market is rising but when the market goes down some of the same people end up cursing the "rigged" market.

    Dividend Growth Investing and its advantages

    I'm very favorable to a Dividend growth investing - or buying stocks that have a solid history of paying and increasing dividends each and every year for the following reasons:

    1) Lower Volatility - It seems like common sense but this article referenced by Keith French from the Chicago Booth School of business shows that over 86 years, when stock market goes down, dividend stocks don't go down as much.

    2) Income benefits - There is nothing worse than buying a stock at say $100 per share, it rises to $140 per share, and then goes back down to $100. You held it and have nothing to show for it, I am biased to owning stocks that pay ME the OWNER a share of the PROFITS. Historically, maybe 75 or so years ago, people used to look at stocks more of the way they look at bonds today or the way DGI investors look at stocks.

    3) Higher % equity - * see below

    4) Dividend growth stocks outperform other stocks - Seng Hong Teoh performed his own study showing that a basket of 10 carefully selected DGI stocks outperformed the general market - not only did they have higher returns, but they had lower volatility.

    Jeff Paul shows a study of U.K. dividend stocks outperforming non dividend payers.

    The Heartland fund advisors article referenced above links a study showing that from 1802 - 2002 that dividends plus growth in dividends accounted for 5.8% of Equities 7.9% total annualized return.

    Due to survivorship bias, and actually which DGI stocks are selected - saying DGI stocks outperform the market can be hard to prove in my opinion. This is why your basket of dividend growth stocks should be chosen carefully. You want the best of the best. A value stock buyer in real estate terms wants to buy the fixer upper in the great neighborhood and flip it. A dividend growth investor wants to buy the best house in the best neighborhood and be a landlord. The DGI investor is generally OK with paying market value for the house even though they ideally want to buy at a discount.

    5) Tax benefits - A DGI portfolio can be placed into a Roth IRA and be collecting growing dividends for decades. Dividends that aren't taxed.

    6) Low cost - You could end up paying hundreds of thousands of dollars worth of fees to mutual funds over your investment lifetime. Just think, if that mutual fund fee is 1%, that's 1% every year, whether the S&P 500 is up 10% or down 20% - you are still paying that 1% (and some funds charge more). Unscientifically I'd argue that most dividend growth investors manage their stock portfolio fee free. It keeps you in control/active and you might even find it fun!

    7) Psychology benefits - This is difficult to quantify but should not be understated. There is a reason why the average investor has lower returns than the market. Everybody knows to "buy low and sell high" but few do. Mike Tyson famously said that, "Everybody has a plan until they get punched in the face". Most people end up buying high and selling low because they are trying to time the market, the financial news media scared them, or forced selling due to liquidity needs.

    As a dividend growth investor I don't have to sit at my computer with my itchy finger hovered over the sell button when the market goes down. I feel more like a stock/company owner than a fast money trader. It actually gives me great pleasure to know that "I" own a piece of the world around me - ownership in some of the best companies in America.

    * Higher % of equity - People say that when you are younger you should invest "riskier". I do agree with that statement, but over time I've changed how I interpret it. When I heard this advice as a young investor I was told to buy "riskier" stocks.

    If I were advising a young person I'd argue that you should invest riskier younger - but in terms of asset allocation - BUT YOU STILL WANT THE BEST QUALITY STOCKS!!! Instead of maybe going 80/20 stocks to bonds you want to go maybe 95/5 for the reasons highlighted above. With a quality DGI portfolio you will have presumably lower risk, higher returns, and income built in. Over time you will have a powerful DGI machine at your service, growing and compounding at an amazing rate - and you don't have to worry about selling or timing the market.

    If you want to take a small portion of your portfolio to try and buy the next Apple (NASDAQ:AAPL), Starbucks (NASDAQ:SBUX) or Chipotle (NYSE:CMG). Fine - go for it! But the Lions share of your portfolio - especially while you are young and learning the ropes should be invested in Dividend Growth Investments.

    So which dividend growth stocks should you buy?

    An excellent starting place is the David Fish CCC list. I'd also suggest reading like minded investors on these pages of Seeking Alpha to manage your own Dividend Growth portfolio.

    Time preference. We don't have unlimited time... Many of my dividend growth stocks I've owned for nearly 10 years. I trust them. I don't have to worry about fluctuations in earnings and "crashes". I can spend my time researching big alpha generating ideas.

    Good Luck.


    Aug 13 8:21 AM | Link | Comment!
  • Bernanke's half truth
    Last Sunday Ben Bernanke was given a softball interview on 60 minutes by Scott Pelley.  It wasn't even an interview, it was 10 minutes of a free advertising - PR campaign.  When you see Ben Bernanke or President Obama go on 60 minutes, you know they are getting desperate as public support for their policies are falling.  In the interview Bernanke made two controversial comments.  "He's not printing money", and he's "100% sure" he can control inflation.  The comments are disingenuous at best and their validity depends on your definition of inflation and certainty.
    One myth that's out there is that what we're doing is printing money.  We are not printing money.  The amount of currency in circulation is not changing.

    Saying he didn't print more money for circulation is true but it's a misleading statement.  QE2 involves trading one asset for another and not printing new money or creating a new asset.  He's hoping the banks do the creating of money.  Bernanke is trading (cash) an asset for bonds ( an asset).  Bernanke's hope is to give banks more cash so that they lend it and expand the money supply and economy.  He can print or trade assets all he wants but he can't force banks to lend and he can't force overleveraged borrowers to borrow.

    What is money?
    M0 & M1 have to deal with how much money the Fed is creating:
    - They've been doing up during the depression and won't increase from QE2

    M3 has to deal with how much money people have:
    - M3 has gone down during the Depression but he's hoping QE2 will increase M3.

    Note:  The Fed stopped reporting M3, go figure

    The U.S. lost trillions of dollars worth of value in real estate and the stock market.  If you want a quick gauge of the money supply, look to see if the value of your home, investment accounts, and cash in bank.  If it's up then we have inflation if it's down we have deflation.   Even with Ben's printing the US economy lost trillions in nominal value.

    Credit expansion (bank lending) expands the money supply.
    In 1929 people were going on 10% margin to buy stocks.  New propserity after The Great War in the roaring 20's made robust high tech industries like the railroads sure bets.  Popular economists said we were recession proof and lending stardards were weak.  Grandpa could have put down $100 bucks to buy $1,000 dollars worth of Union Pacific railroad stock. 

    Fast forward to Party like it's 1999 during the Tech bubble.  "The internet is going to change the way we live".  We were recession proof.  Even though the internet changed the way we live that doesn't mean is worth a billion dollars.  In 2006 housing "couldn't go down".  Remember, " they aren't building anymore land", "people need a place to live", "housing is the best investment" and "don't get priced out of the market"?  Anybody with a pulse got a loan.  The wide swing in housing - most people's largest expense  -  led traditional measures like CPI understated inflation where as now CPI is understating deflation. 

    If a bank collects a million dollars in deposits, government regulators allow them to legally lend 10x that.  When a bank collects 1 million in reserves and lends out 10 million, that's where the money supply is truly expanding.  They have 1 million real dollars but put 10 million dollars into consumers hands due to fractional reserve banking.

    When credit is created, the bank lending the money is taking a risk that the borrower will pay them back.  When you are buying an overpriced house you can't afford that is a huge risk.  The fact that banks weren't keeping the loans, but dumping them off to Fannie, Freddie or somewhere else helped degenerate lending standards.  "Who cares if Mr. and Mrs. Jones can't afford this house, if we are just doing to dump the loan off to the suckers and Phoney and Fraudie"?  Too many people that shouldn't have bought homes did, builders responded by building unnecessary homes.  It's called mal-investment and is extremely counterproductive.  There are many players you can point the finger at but it was a party living off of Ben Bernanke's keg.

    We do have Deflation
    Over the last 12 months, the index for all items less food and energy has risen 0.6 percent, the smallest 12-month increase in the history of the index, which dates to 1957.

    The food index has risen 1.4%, with both the food at home index and food away from home index rising the same 1.4%".

    The energy index has risen 5.9% over that span with the gasoline index up 9.5%.

    Yes energy costs have risen despite record capacity in the oil industry.  On top of that we are swimming in natural gas in the U.S.

    Is that inflation you can believe in?  Whatever inflation there is in the economy it's entirely due to speculation.  This inflation is being created by investment banks like Goldman Sachs being given money by the Federal Reserve.

    Commodity prices always revert to prices near production costs.  Let's take sugar.  Prices have doubled in the last six months.  Producers are scrambling to plant more cane and sugar beets while consumers are looking for cheaper substitues or cutting back.  The higest costs of production with sugar are 15 cents per pound and the price is nearly double that.

    So what's going to happen?  Not much for a while.  The extra supply will probably be siphoned off by the speculators at first.  However supply and demand data at some point will scare off said speculators and when they look to dump, look out below.  Speculation induced inflation always ends in disaster.  Always has always will. 

    Quantitative stealing hurting the poor/middle class
    Inflation is a hidden form of taxation.  It benefits government, wealthy, well connected who print and touch the new money first at the expense of those who touch the new money last.  Wealthy people tend to own assets that rise in value with inflation, where as poor/middle class people tend to own cash that loses purchasing power with inflation.  It punishes savers and rewards borrowers and spenders.  Inflation is better described as a "reduction in purchasing power" instead of a "rise in prices".  The shop keeper isn't really rising prices, it's the Fed.  The shop keeper is just responding to watered down money and businesses are the ones that are often scapegoated by greedy governments.  The dollar has lost 97% of its value since the Fed took over in 1913.

    We currently have 10% unemployment, 20% underemployment and 42% of the people out of work have been out of work for over 6 months.  You mean to tell me with a straight face that inflation is good for them?  Defenders of the Fed will bring up the myth of the deflationary spiral to scare and trick people out of common sense.  Deflation is the after effects of of the massive credit expansion/easy money that we saw from Greenspan/Bernanke. 

    Bernanke being 100% right
    This goes back to Bernanke being desperate to go on 60 minutes.  Public support for the Fed is falling.  It was a PR campaign.  A quick youtube search documents how he's been so wrong in the past.  To say that he's 100% sure of anything takes some serious Chutzpah.  Bernanke went on 60 minutes to quell the masses, the fact that the "journalists" bought it is amazing.  People wonder why there is a market for wikileaks.  The traditional media isn't doing their job.  When you have pinheads like Scott Pelley conducting interviews then Julian Assange is the natural response.  Who is John Galt?



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 10 12:55 PM | Link | Comment!
  • Globalization is Americanization: Invest in America
    What was the American mindset like a decade ago? 
    In the earlier part of the decade I can remember people were very nervous after 9/11 and the bursting of the Tech bubble.  The stock market deflated and a lot of people came to the realization that it was in fact a bubble and we weren't getting back to where we were anytime soon.  It was like yeah, that was a Tech bubble but now what, are stocks undervalued or was there more pain to come?  People were nervous to get on an airplane and people wondered if they were going to get attacked while going to work or a crowded baseball game.  There was just a lot of fear around 2002-2003.  I took a look at the globe and thankfully bought into International equities for a lot of the reasons people are buying today.  Today though, you want to invest in America.

    What is the American mindset like today?
    Today people are still fearful ( there is always something to fear huh?).  Today people fear not having enough money for retirement, impending tax increases, drying up pension plans, Obamacare, too much debt, unemployment and China.  Our media bombards us with tales of fantastic returns from emerging markets and International funds on the other side of the world.  China is growing and the emerging markets gain is America's loss or so they tell you.

    Emerging markets explored.
    Have you talked to many Brazilians, Russians, Indians or Chinese citizens?  Ask them how life is back home and they will all tell you that it sucks!  American poverty isn't even on the same scale as emerging markets.  In the streets of Brazil people get robbed at gunpoint by thugs with AK-47s.  Even in decent 4 star international hotels in the rich part of China people do #2 in a hole in the ground at restrooms.  Russians will tell you that the cost of living back home is similar to America but their salaries are a fraction of what they are here so they are collectively poor.  Oh and don't complain about the government because you might be beaten in public.  Indian poverty has been documented.  In America the fattest people are the poorest people, in India if you are poor you don't eat.  "Poor" Americans live better than middle class citizens of the emerging markets and most of the emerging market residents I talk to have a resounding message, " My country is FUBAR, don't invest in it".

    Don't chase returns.
    You can ignore me and invest in emerging markets and international equities anyway.  Maybe you want to buy some BRIC stocks or funds in companies you've never heard of because you've been lured by the sirens seductive tales of fantastic growth rates and returns.  The bottom line is that no matter what anyone says about growth rates, you can't make real money investing in emerging markets unless that nation has a good rule of law and Bric countries sadly do not.

    Oh what a difference a decade makes.
    A decade ago BRIC countries were called "Third world economies" and today they are given a much more marketable name of "Emerging Markets".  Isn't that a contrary indicator in itself?  If your broker told you he wanted to invest your hard earned money in "junk bonds", what is your first reaction?  If your broker told you he wanted to invest your hard earned money in "high yield bonds" do you have the same reaction?  Do you want to invest in "Third world economies", "Undeveloped markets", or "Emerging Markets"?  One name sells because it sounds good, the other two don't.  I'm here to tell you that emerging markets are still third world markets.

    Where to invest?
    If you really want to invest in an emerging market, invest in the greatest emerging market in the history of mankind America.  The United States of America was once England's emerging market.

    Globalization is Americanization.  You could invest in BRIC stocks you've never heard of and can't pronounce or you can invest in strong US Multinationals that have a history of success and are good at business.  If India grows will ICICI Bank benefit?  Sure but won't Coca-Cola, Johnson & Johnson, Proctor and Gamble and Microsoft as well?  As people come out of poverty and eventually join the global middle class will they drink Coke, put band aids on scraped knees, wash with Tide and use Microsoft Office?

    Yound people around the world want to live like Americans.  They see our movies, TV shows and music and think America is cool.  Americans had more immigrants in the last century than the rest of the world combined.  Europeans always  seem to cynically have that blank stare in their photographs as they are told to live in the collective for somebody else.   Americans have smiling bleached white teeth, are enouraged to pursue their dreams and accumulate lots of stuff that makes them happy.  Young people around the world would rather drink coke, listen to their ipod, check facebook, and pile into a booth at McDonalds with their closest friends on a Friday night than the alternative.  Different places will always have different customs but Globalization is Americanization and not the reverse. 

    America is on sale.  I've never seen people so negative on this country.  The grass is always greener somewhere else.  We have problems and there are things to be fearful about, yes but there always are.  People have been betting against America since the very inception of this country.  The S&P 500 is the same price it was 12 years ago.  In ten years a portfolio comprised of US Large Cap Multi Nationals with reinvested dividends will outperform a portfolio comprised of BRIC securities.  America's best days are most certainly ahead.

    Disclosure: Author is long KO, MSFT, AAPL at the time of this writing.

    Disclosure: Long KO, MSFT, AAPL
    Oct 26 6:46 PM | Link | 3 Comments
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