This is the season of year end reflection and giving thanks. Because of this, I wanted to write a follow up piece on one of my recent articles, "Why I'm Considering Selling My Core Position In Coca-Cola." I won't draw out the suspense, I haven't sold any shares yet. I said in the article that I had a sell target near $50 and the stock's run has stalled in the mid-$40s. But what's special about this piece is the fact that while it will be focused on Coke (NYSE:KO), the lessons that I learned from the vast comment stream that the previously mentioned article generated can be attributed to any stock or investment idea. These are lessons that all investors should consider. I consider myself to be a self-taught investor. I say this because I don't have any formal education in finance. If you've read my pieces in the past you know this already but I imagine some of you haven't, so what you really need to know about me in the most basic sense is that I'm a husband trying to manage his family's finances, a father (no kids yet, but two dogs that fit the mold perfectly), a farm manager at a vineyard, a football coach, and an English major whose primary focus was contemporary poetry. Why is all of this important? Because I think it's necessary to know and appreciate your sources. Also, honesty is key and although I write articles for this financial site, you'll never see me claiming to be more than I am. I believe I have knowledge that is useful, but I also think it's important for readers to know where this knowledge came from. It wasn't until after college that I discovered my interest in portfolio management. And this is where Seeking Alpha came into the picture. I call myself "self taught" but really, that cannot be further from the truth. They say that it takes an entire village to raise a child. Well, I think that statement applies to the investor as well. I've read several books related to value investing and those that chronicle the lives of my financial heroes; however, the vast majority of the investment knowledge that I've picked up over the last several years has come from the dividend growth investing community here on SA. I have devoured articles written by a myriad of authors. I follow all of the notable contributors who write for the dividend and income section. Stories, phrases, and analogies given by these powerful voices always bounce around my brain when it's time to make market decisions. I read as much of the dialog that articles spawn as I can because I've come to realize that many of the readers and commenters are a treasure trove of knowledge, whether they're a contributor or not. I wanted to write this piece because while penning articles about my decisions can be self-serving in a meditative, cathartic sort of way, ultimately I write with the hopes that my words, ideas, and stories might help someone else through a difficult decision making process. After all, investing, even in tried and true dividend aristocrats, can be stressful. I hope that in some way, I might be able to save a reader a bit of time or energy, which they can better spend making a positive difference in the world. Because the comment stream on the Coke article was so inspiring and informative, I wanted to write a reflective synopsis of the advice that I was given, hoping that others can take away as much from it as I did.
But before I begin I want to say that I've decided it is best to focus on the advice given, rather than the advice givers. Some commenters use their real names on their accounts, some don't. I've decided to focus on the messages I received without mentioning the sources because oftentimes in the thread, these messages overlapped and I don't want to leave anyone out. I do want to wholeheartedly thank everyone who gave me advice or told me their story with regard to Coke. It was all very helpful and if you see your thoughts being reflected in this article, you know who you are and I hope you smile to yourself, knowing that you've made a difference.
So, the premise of the Coke article was that I am considering selling my out-sized Coke position because I feel as if the company's growth prospects don't mesh well with its current valuation. I fear that the stock is overvalued and because of its stagnant growth I worry that the company will have trouble rewarding investors in the future as it has in the past. I noted that these feelings are so troubling because when you buy a company like Coke, you typically expect to hold it forever (or at least I did). I was being torn between my focus on reliable income and my focus on value. It's difficult to properly sum up a 4,500-word article in a short paragraph, but there you have it. Please feel free to refer to the previous article for a better understanding of this situation and for more data-driven details; I feel as though it would be a disservice to readers to rehash old information here.
We Must Make Our Own Goals And Think For Ourselves
It's difficult to know where to start with the advice that I was given and in no way is this a top to bottom list of hierarchical importance, but one common message has stuck out from the rest: an investor must make the decision that feels right to them. There is no perfect stock out there. There are entirely too many variables and too many valuation and performance metrics for the overall market to consider for a company to ever really be firing on every single cylinder. Because of this an investor must prioritize his or her goals for an investment. Do they want growth or do they need income? What level of risk are they willing to tolerate? What sort of capital allocation is right for them? What is their investment timeline? These goals are what is most important. And "like snowflakes," these goals will never be exactly the same from one investor to the next. Our lives are an accumulation of our experiences. No two people's experiences will match perfectly, and neither will their futures. Each and every individual must decide what they want and need to achieve with their portfolio and take the necessary steps to meet those goals. Every investor must sift through all of the information and advice that they are given (it would be unwise to simply ignore these teachings) and ultimately, make their own decision. This can be difficult in a world so full of rapidly spreading information. Sometimes your head can become so jumbled with contradicting ideas that you forget where you originally stood on the matter. Sometimes this can be a good thing, an expanded mind can open up new pathways to a better place. Sometimes it isn't so good, like when you realize your original setting was preferable but you can no longer find the pathway home. This is why setting clear goals and having a clear plan to achieve them is so important. Always leave yourself bread crumbs; a blueprint to come back to, to ground yourself. Sure, changes can be made along the way as change is often a good thing, but you never want to forget where you've come from and where you hope to go. I will end this section with a quote taken from the comment thread that I truly believe in and cannot better articulate myself, "To not find our own way is to have merely adopted someone else's strategy, which is never a recipe for long-term success."
There Are More Ways Than One to DGI
I found it interesting that several commenters of my last article claimed that I was not a "true" dividend growth investor because I was considering selling Coke. Most people thought it was crazy to consider selling a company that has treated dividend investors so well. Others (though admittedly fewer) thought it was a perfectly reasonable decision to make due to the company's current valuation and growth prospects. And even fewer still admitted that they would have never really thought about selling Coke (mainly, because you know... it's Coke, crown prince of DGI), but the discussion that arose on the subject was cause enough for them to at least evaluate their position and for them to re-examine their feelings towards the stock. Ultimately, what I realized as I read through these different opinions regarding how to hold and when to sell a dividend champion is that there are many ways to proverbially skin the DGI cat. This relates directly to what I said above about how everyone should have a plan and that these plans will likely be unique to an individual's circumstances. While there are tried and true guidelines for building and managing a successful DGI portfolio, there are not a set of laws or rules written that all DGIers must abide by. And as members of the DGI community, we should not anoint ourselves into positions of judgment, because the "success" of an individual's portfolio will be as unique to the investor as his or her goals are. Success is relative, which can be difficult to understand. I've said before that I'm more interested in total return than someone who has a completed nest egg and is enjoying life, living off of the income stream that it presents. If my holdings don't appreciate, I will be upset with myself, even if my income stream grows (which, in the back of my mind, I will be thankful for). Someone else might say, "Well, in that situation, I would be totally fine with the results, because all that matters to me is my income stream." This doesn't mean that he is a "true" DGIer and I am not. It simply means that his goals were met and mine weren't. In life, far too often we all believe that our way of doing something is the best way. Sometimes we take this a step further and we think that our way is the only correct way. It may be true that our way is the best or correct way for us, but that doesn't always hold true for our neighbor. Also, we limit ourselves with this mindset if we aren't willing to attempt to understand alternative methods of achieving our goals, stunting our potential growth. I think the 100% income-focused dividend growth investor could do well adding a bit of valuation, total return focus into their mindset, just as I believe that the investor focused 100% on the value of his holdings would do well to sit back, relax, and be willing to collect dividends from reliable positions even if they've experienced a price run up that is irrational based on current fundamentals. Compromise is key here, because it eventually leads to diversification, which to me, turns into safety.
We Must Accept And Learn From Our Biases
Writing about such a wonderful company like Coke, I can understand where this "you'd be crazy to sell" sentiment comes from. I can even quote myself in the prior article as saying, "Coke has become synonymous with DGI." Many of the comments I received regarding my contemplation of selling Coke affirmed this. However, these comments also caused me to worry a bit about the DGI community as a whole, because it seems as though many of us are allowing ourselves to drive our portfolio cars, looking only out of the rearview window. Anyone with a driver's license will agree, this is not a very safe thing to do.
One of my primary goals with my portfolio is capital preservation. I want to see the value of my holdings increase on an annual basis, but what is more important than that, is not seeing them decrease. I've said this before as well, but I think it bears repeating: growing up as an athlete, I loved winning. But even more so, I hated losing. This hatred of defeat fueled my fire for years and allowed for me to live out a very successful athletic career. Now, I take that same passion and use it to position myself in places of perceived safety in the market. I do so by evaluating fundamentals and searching for a margin of safety. This is why I am contemplating selling my Coca-Cola shares. To me, after the stock's recent run up this safety margin is wearing thin. I like buying positions with strong upside, limited downside, and a healthy dividend. Right now, I don't have a strong belief that Coke meets all three of these standards, so I must ask myself, why settle? Just because of a shiny name?
As dividend growth investors, oftentimes we're dealing with boring, slow-moving, but reliable companies that simply get the job done. Earlier I mentioned I was a football coach so I think it's appropriate to align many of the typical DGI aristocrats with the offensive linemen on a football team - the big grinders up front that work so hard every play and make the offense work, but never get the amount of credit that they deserve. This credit will usually go to the flashy quarterback or running back who has a flair for the dramatic with the ball in his hands. Well, I think for DGIers, Coke is this flashy player. Coke is idolized because it stands out from its peers. Coke has worldwide media campaigns; right now the Christmas polar bear commercials come to mind. Coke is arguably the most recognizable brand name in the world. The company's ads have done a tremendous job to create a sense of timeless nostalgia. This, I think, is why there is such strong pushback against selling a stock like Coke (I can't say this for certain, but I imagine if I wrote an article talking about selling a core position in 3M (NYSE:MMM), the article wouldn't have generated such a strong response). But as investors, we must realize that this is a marketing campaign meant for consumers, not for shareholders. While greatly appreciating the returns that it has given us over the years, we must put aside our rose-colored spectacles when looking at Coke, even if the company has treated us great for 30 or 40 years. Those decades are in the past and at this point, essentially meaningless for driving future growth... I'm not saying that Coke won't continue to outperform the market and give investors outsized rewards for another 40 years; however, what I am saying is that the previous 40 have little bearing on the next 40, performance-wise. What matters now is the same thing that mattered years ago: earnings growth. This growth is what enabled Coke to pay such a steadily increasing dividend over the years. This earnings growth is what has allowed the company to expand its product lines, distribution network, and marketing campaigns over the years. It is undeniable that KO's management has done a tremendous job navigating stormy waters in the past. I think they're doing their best to find safe harbor in the midst of the current health foods crisis that is miring their industry right now (I liked the recent milk product that the company introduced). But just because KO management has always done well with this navigation doesn't mean that it will automatically do so this time or the next. The vastly fortified ship that the company has built for itself will certainly help when storms come, but investors must be wary of the unforeseeable rogue wave, especially when the ship is carrying an overweight valuation.
I know I'm harping and harping on this, but I think it is so important for dividend growth investors to remember age-old teaching on rational, logical thought: "past results do not guarantee future performance." For many this phrase has become old hat. I've heard it said so many times that I can't help but imagine one of those old sing-songy cartoons with the lyrics scrolling across the bottom of the screen and a bouncing ball moving across each word, from left to right, keeping the viewer in tune, every time someone starts to say it. I bob my head back and forth and recite words that have become haggard in my mind. As investors, we can never allow for this complacence to occur because regardless of the cliché nature that this statement has accrued, it remains remarkably true. We cannot allow our biases, no matter how well earned, to cause us to forget that: "Past...Results...do...not..guarantee...future...performance" (who else pictured Steamboat Willy tapping his foot and whistling?).
Viewing Positions as Partners
Sticking with the metaphors here, another great piece of advice that I received was to regard my positions as "partners." This idea wasn't new to me, but it was something that I had lost track of. I think it is important for the DGIer to think of his holdings not as simply ticker symbols on a brokerage screen, but as little bits and pieces of a business. When putting together a DGI portfolio, you are essentially becoming CEO of a holding company. This is a romantic notion; we can all hope to build our little Berkshires. But romanticism aside, it is an important notion, because when we view our holdings in this light, we begin see our dividends and capital gains as earnings generated by our business and we're able to rationally track performance and focus on the long term, rather than getting caught up in short-term, capital gain/loss thinking (we trade tickers, we invest in partners). For the most part, a company is illiquid (unlike the shares we hold). If you decided to buy a farm, or the local coffee shop on the street corner, you (most likely) wouldn't consider selling them a few months later because their perceived value had changed. So long as the cash continued to roll in as expected, you would be satisfied. We can more easily focus on our "earnings growth" rather than the net asset value when we view our portfolio as a business and our positions as partners. Also, our selectivity will most likely increase when using this partnership mindset. It's a lot easier to buy shares of a ticker symbol that you don't fully understand or trust because it's the newest Wall Street fad than it would be to enter into a partnership with someone who you felt the same way about. In life, we would take the necessary steps to get to know those that we allow to enter our inner circle. Well, in the investing world, we should do the same thing with our holdings through our best due diligence.
Also, when thinking of a portfolio as a business, it is easier to compartmentalize your holdings. With the overall goal for our business in mind, it is easier to delegate responsibility in different ways in pursuit of that goal. As CEO you can surround yourself with as many different types of partners that you need to achieve your goals. You can choose ones that are unique with the talents and assets that they bring to the table. You can cover all of your bases by finding compatible strengths and weaknesses that when working together, symbiotically complete each other. An income-focused investor might build his business with talented partners across the income spectrum, from risky high yield to very low yield with great dividend growth prospects. Everyone's allocation across this spectrum will be different according to their goals, but even so, we should all as CEOs remember one thing: the responsibility that you gave each piece of your portfolio when you entered into your partnership. It is important to evaluate the performance of the pieces of your business in a relative fashion with their individual responsibilities in mind. For instance, it wouldn't be fair for me to get upset at a high yielding piece of my business for not giving me regular double digit growth. Typically, when I enter into a high yield partnership, I know well and good what my expectations are: to receive my high-yield payments on schedule and for the payments to increase at a rate just above inflation. A real-world example: as a business manager I would never become angry or upset with a member of the janitorial staff if he or she could not fix a complex IT issue - I would call onto my IT specialist. That being said, the janitor's job is still very important to the overall quality of the business, especially when dealing with clients in the office. It is not much of a partnership if I unfairly forget this and burden one of my partners with unrealistic expectations - relationships like this don't last very long.
It was brought to my attention that this was a mistake that I was making with Coke. As I stated in my article, I bought Coke as a defensive, core position. I liked the company's low Beta, strong historical earnings and dividend growth stories (especially throughout bear market periods), and KO's strong, conservatively managed balance sheet. My position in Coke was meant to bolster my portfolio's performance during rough times, because regardless of how bad one's financial situation becomes, he or she still needs to ingest liquids and Coke does a great job of offering the consumer tasty, well-priced options. I'm going to paraphrase here, but someone asked me in the comments, "I understand that you're trying to raise cash with the market at all-time highs, but you have to ask yourself, is Coke really the best option that you have for doing so?" This advisee noted that I said I owned over 50 positions and they thought it would be odd if Coke was really the best company for me to liquidate. Along the same lines, someone said in regard to Coke, "Can it go lower? Absolutely, but with a beta of half the S&P 500 and a dividend yield of approximately double, I'm holding. You should, too."
Go Big Or Go Home Mindset May Not Apply To Investing
I touched on this before, but I've always thrived on competition. I attribute much of who I am today to the life lessons I learned during competition when I was an athlete. I learned at an early age that if you are going to do something, you might as well do it right. And, for the most part, in athletics anyway, doing something right means pursuing perfection, which requires one's entire focus and passion. This mindset worked out well for me, filling my mother's shelves with trophies and medals, and allowing me to accessorize with several championship rings. But as I've grown older, I've come to realize that while this "all or nothing" attitude works so well when training one's mind and body for competition, it isn't necessarily the best way to live one's life. I've began to realize that many things are better in moderation. I still believe that winning is everything (why compete if you aren't interested in victory?), but I now know that there are always more paths than one towards that ultimate goal. I was a sprinter, but my wife is a distance runner. My competition days are over, but she's still competing, not yet in the prime of her career, so I've began to live vicariously through her athletic success. Watching her train for and race distances that I wouldn't dare attempt, I've come to realize: you can't sprint a marathon. Investing isn't a sprint, it's a life-long endeavor. This is a slow process that requires thoughtful patience.
Probably the best single piece of advice that I got from the comments on my last Coke article was that if I was going to sell, I should trim my position rather than completely cut it. This seems obvious, and probably is to most, but it wasn't to me at first because of my aforementioned, "go big or go home" way of thinking. I thought to myself, if I'm willing to sell one share of Coke, I should just sell them all. It's ironic that my mind worked that way because I've taken special care to average my way into positions, never going "all in" even when I thought the margin of safety was clear. This entry strategy involving slowly averaging into a position is probably the most prudent way to exit one as well (this is at least the case when one is exiting a position due to valuation issues, rather than a change in company policy that doesn't mesh well with one's goals). What it comes down to, and someone mentioned this as well, is that I have much more experience buying positions than I do selling. As a matter of fact, I have very little experience selling - I've only sold 3 positions since I began investing: Caterpillar (NYSE:CAT) because I didn't like an earnings report, which I regret; Annaly (NYSE:NLY) because I realized I didn't truly understand how their business works; and Solar City (SCTY) because I was speculating and I knew it, I set a limit order to sell and it hit. I don't regret either of the latter. Getting back to partners and relationships, cutting ties can be much more difficult than creating/building them. I wanted to liquidate my Coke position because it was large and I believed the shares were becoming overvalued. I knew the position was overweight, which is one of the reasons that I looked into selling. I'm thankful that I wrote my article before doing so, because although I haven't sold yet, if I do, I will surely take the advice of my readers and partially exit my stake so that I don't completely lose exposure to this wonderful, defensive company.
I haven't sold my KO shares yet; the stock's November rise has faltered a bit and it remains in the mid-$40s, just slightly overvalued, in my opinion.
An investor must always remember that while there are many great and useful opinions out there, the most important one is undoubtedly your own. This is because only you completely understand your financial goals.
I think that as a community, we must all understand that while we have similar goals: a reliably increasing income stream generated by our portfolios, there are many ways to achieve this goal, from traditional DGI Champions, to risky(er) high yielders, to passive dividend funds, to trading options, or simply trading in and out of DGI stocks due to valuation or other important metrics. Regardless of which method you prefer, I think it is important to at least attempt to learn the strengths and weaknesses of each, to fully optimize your own strategy's potential.
We must all accept and rationalize our biases. There is no forever stock or forever company. We cannot predict the future, though we can attempt to deduce the fates of companies with relevant information that we have at hand. We must remember that the past is the past, no matter how glorious; it is more than OK to reminisce, but it is not OK to disregard the present because of fond memories. We set ourselves up for failure by doing so; the status quo may not have changed, but we cannot know this without due diligence.
As dividend growth investors, we aren't traders. Compounding takes time. To help put ourselves into a long-term state of mind it helps to view investments as partners, not ticker symbols. Don't think of yourself as the little guy with a teeny-tiny piece of a wonderful company. Think of yourself as an important shareholder... better yet, think of yourself as CEO of your own company, a holding company whose earnings (dividends) will allow for you to meet your financial goal(s).
I have been convinced that in this case at least, where I would be selling a stock because of an over-heated valuation, not because its responsibility within my portfolio (company) has changed, it is best for me to trim the position rather than completely eliminate it. Coke is still a wonderful company even if its valuation isn't wonderful. I wouldn't buy shares of Coke at a $50 price point; however, that doesn't mean that I have to sell them all either. If I do decide to make a move with my Coke shares, it won't involve all of them, I will likely cut my position in half, taking it from roughly 5% of my portfolio to a figure more inline with the majority of my holdings.
And lastly, I appreciate the wisdom and advice that I've received in response to my previous Coke piece and many others in the past. It is important to know the wide impact that a thoughtful conversation can have (I've been told by others that they've learned a lot from responses to my articles as well). The last response to the "Why I'm Considering Selling My Core Position In Coca-Cola" article that I want to share with you all is this: someone said to me, "Sharing knowledge in a free society is not only personal fun I believe, but a social duty and obligation of community." I think this message holds true for all readers as well as contributors here on Seeking Alpha. There has been a wonderful DGI community built here and I am thankful to have been a part of it. Until next time, keep sharing.
Disclosure: The author is long KO.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.