Gamble in Vegas
People always ask me what my top stock picks for this month are and I can't help but shake my head at the question. The stock market is not for getting rich quick. Just like the lottery the average individual will not make a massive amount of money in the short term. Just like with the lottery there are outliers, there are a few individuals that do make a lot of money in the short term but seeking to become one of these individuals is not a profitable approach. The sooner we as investors realize that we will not be making a massive amount of money in the short term, the sooner we will start to realize long term gains. I think it is worthwhile to define what the short term is because perceptions on time horizons change between investors.
Defining time horizons
I define the short term as anything under 5 years. I consider 5 years to be the minimum amount of time that is required to properly assess if your investment in a company is performing up to your expectations or if it is time to make a change. Success and how to measure it is another long article that will be coming in the future. For now lets assume that our intentions when we invest money in a company is to have that money locked up for 5 years. I think it is almost worthwhile to see it as a CD where you can't take your money out before the time horizon without a penalty. Online discount brokerages are both a blessing and a curse to the average investor. The average investor now has the ability to move in and out of investments in seconds. It truly is an amazing thing that this functionality is available to us as average investors. It is also a curse because it gives us the ability to quickly sell an investment at the first sign of decline. Now that we have defined our time horizon as anything greater than 5 years this will start to limit the stocks selection that we are willing to invest in.
What investment do I want to hold for 5 years
The latest high flying IPO, such as Facebook is not an investment that I would want to hold onto for the next 5 years. I wouldn't want my capital tied up in an investment that is extremely volatile and uncertain. Volatility is not necessarily a bad thing but the uncertain valuation of Facebook is what scares me. Investments that I have no problem having my capital invested in for 5 years are dividend growth stocks. Dividend growth stocks are an investment that I am quite fond of. The opportunity for vast quick riches within dividend growth stocks are far and few between, but the opportunity for a steady passive income stream that you can count on quarter over quarter is what draws me to dividend growth stocks. The sooner that we as individual investors accept that gambling should remain in Vegas and that investing should remain in the stock market the better off we will be.
Insanity of financial media
The financial media has morphed into the largest spectator sport on our planet. It is in our human nature to have a need for explanation. We desire an explanation for why the stock market went up today or why it went down. We also have a belief that we can instantly value the impact of an event to our investments. I realize that there is a financial crisis going on in Europe and it may very well have a lasting impact on my investments but that doesn't mean that I have a tool or model to instantly calculate which investments the crisis will impact and what actions I should take. It is insane to believe that this type of precision exists anywhere. Unless there is a direct correlation between an event and your investment, such as the BP oil spill, buying or selling on the latest financial news is insanity.
Dividend growth stocks
My goal as an investor is to have a passive income stream that will replace my current income received from my job. This passive income stream will provide me the most valuable resource for any individual on the planet: time. Time is one of the few things in the world that cannot be purchased. We sell our time for money at our jobs. We sometimes waste our time doing activities that we would rather not do. We cannot buy more time and we do not know how much we have. It is more valuable than gold, silver, oil, or any other commodity that is traded today. The sooner that we view our time as a precious resource that should not be wasted the better. Dividend growth stocks are what I consider the top dividend stocks. Top dividend stocks are investments that provide a growing steady income stream over time. It is truly a remarkable thing to see the double compounding effect when a dividend growth stock is reinvested into itself and the dividend is raised year over year. This is the only investment that I have identified that provides this type of compounding.
As investors. the sooner we accept that we can't explain everything that goes on around us and how they impact our investments the better off we will be. Gambling is fun and exciting and it should remain in the casinos. Gambling has no place in our stock investments. Dividend growth stocks I believe are the best fundamental investment that we can make in our portfolios because they have consistently shown the ability to offer shareholder value. Picking the right dividend growth stock at the right time is a discussion for another article but some of the companies I currently have my eye on to invest into are:
- NOC - Northrop Grumman Corporation
- WAG - Walgreen Company
- MSFT - Microsoft Corporation
Remember to always value your time and invest in companies that will not waste your money.
Disclosure: I am long MSFT.