Thanksgiving Edition: Long-Term Investing Rules And Suggestions

Summary

• Before you start investing and trading, you need to practice financial hygiene first.
• The first investment is Cash. You should have a cash cushion for emergencies. The next is maxing out your 401(k) and IRAs.
• Long-term investing is the foundation of wealth building. Trading should be separate from investing. When you are investing for the long-term, you are an owner.
• The great advantage of Investing is time scale. Use time against traders and you can win.

I write a lot about trading because it's fun, done right can create wealth, but your financial foundation must be investing

People tend to confuse the two with potentially disastrous results. I have touched on a number of differences between the two ever since I have been writing for a larger audience. I feel that in the remove of Thanksgiving and the closed market today, it makes sense that I consolidate my thoughts into one piece.

Financial Hygiene

First, it is important to talk about financial hygiene, before you start risking money on trading, and even investing, there are several things you should work on:

• Have enough cash on hand to cover your absolute necessities - rent/mortgage, food, insurance, etc. - for at least six months. I would shoot for 12 months, but six is the absolute bottom line.
• Do you have credit card balances that are just carried from one month to another? You know the banks are charging you 20% for that, right?
• Put your everyday bills on auto-pay. Late payments affect your credit score.
• If setting aside cash for an emergency seems impossible with all your expenses, and you are running your credit, you are living beyond your means.
• With 3.5% unemployment, perhaps you should look for a higher paying job, or look for some side consulting. Maybe you should really look at what you are spending your money on. Maybe you bought too much house. I know these are uncomfortable thoughts, but your friends aren't going to say anything or your family. Leave it to this annoying old guy to just give it to you straight; bankruptcy starts very slowly and imperceptibly until it happens all at once.

What to do?

• Stop using your credit card. Use cash until you spend down your balance. Don't carry your credit card with you. Reserve it only for special situations like travel.
• If you go out with your friends every night or golf every weekend, cut back a bit on expenditures and put it in your savings, or money market account.
• Preparing meals for friends at home is fun; take turns.
• If you have a 401(k), you should be maxing it out, along with your IRA.
• Start saving for your kid's college ASAP; there are special 529 plans for that.
• If you have a 30-year mortgage, consider going to 15 years. The payments will be larger, but over time you will be paying less in interest. Your home is the best saving plan you have. Once your home is paid off, that monthly payment should go into your long-term investment.
• Buy a used car instead of a brand new one. Think about waiting for sales and discounts. Review all your subscriptions. Do you use all of them? Treat your money right and it will treat you right.
• Keep a spending journal for a 2-3 week period...You'll be surprised about what they reveal.

If you have made it through this scold, congratulations. Now let's talk about investing

• Keep your investment accounts separate from your trading account.
• Never trade in and out of your investments; in fact never sell an investment.
• Investing means that you are an owner. Would you buy and sell your home, and then buy it again? Nope...
• As an owner you want your business to pay you for your risk. That means the majority of your investments must pay a dividend.
• The goal is to build up enough of your investment that you could live off the dividend or at least substantially cover expenses. That is one goal; you may have another.
• DO NOT INVEST or TRADE USING MARGIN.
• Besides generating income, dividends are important as a signal of earnings quality. A company that is sure of the sustainability of its income stream will pay a dividend. Others that are in a rapid growth phase will need every penny to fund growth. There is nothing wrong with such companies, but I would rather trade them than invest.
• Studies have shown that over time dividends provide the bulk of returns, especially in bear markets.
• You must make sure that each stock in your long-term investment account is on a DRiP, Dividend Reinvestment Plan. This means that your dividends will be paid in equity. So that when the stock goes down in price, that dividend will buy more equity. Over time you will grow your wealth automatically; until such time, you need to harvest your dividends.
• You should consider your Long-Term investments as part of a savings plan. Every month or every quarter allocate new funds into your long-term investment. The best thing is to do this automatically from your checking account. If you slowly allocate funds on a regular basis, you will buy at times when the market goes down, buying more equity at those times. This is called "dollar-cost averaging."
• You should be very comfortable with the business you are investing in. If you can't explain in a simple sentence or two why you are investing in a company, DON'T DO IT.
• Remember you are owning this company FOREVER. If you are not comfortable with a company because you don't understand it, the moment there is bad news, you might be scared out of owning it and sell. Instead, if you know the business, you may want to buy MORE.
• That also means you don't invest in something just because your neighbor tells you he's making a killing in pot stocks, or Bitcoin, or whatever. Don't invest in tips.
• If a company is announcing, it is cutting its dividend, think long and hard about staying with that company.
• If a company has an excessively large dividend, it might not be suitable in a long-term investment account. The business may be failing and they are going to cut the dividend (#7 below is an example).
• Long-Term investing should be geared towards value investing. Look for good companies with temporary problems, but make sure they can pay that dividend even in the bad times. The idea is that you have the advantage of a decade to wait out temporary problems. Most market participants don't have that advantage.

Let me list some stocks as examples. Please don't just run out and invest in these. Do your own work:

1. Johnson & Johnson (JNJ): Dividend (2.77%). A fantastic company being sued for its involvement with opioids. By all accounts, the involvement was relatively minor, and it had a product that was difficult to abuse. At the same time, it is being sued for asbestos in talcum powder. So far there is no evidence of asbestos in recent products if ever.
2. Boeing (BA): Dividend (2.23%). Two terrible plane crashes and the company is embroiled in trying to get its 737 Max re-certified. Recent news has the process possibly stretching into 2020. There are only two providers of airliners; the other being Airbus (OTCPK:EADSF). BA is a better manufacturer. Airbus is not delivering as many planes as it said it would. The longer this stretches out, the better it is for the long-term investor. The stock stays "cheap" and you can buy in more shares, either with your DRiP or new investment. Meanwhile, BA has a backlog of thousands of planes. On top of that, airlines are still ordering more Max-es in the hope the approval comes through soon.
3. AT&T (T): Dividend (5.42%). It acquired Time Warner and also DirecTV. Some feel that T is out of its depth in competing with the likes of Netflix (NFLX) or a Disney (DIS). Yet, it acquired a crown jewel in HBO, and it has a great distribution network in all of those phones. DirecTV is an issue since it is hemorrhaging subscribers, but this too can be solved given enough time.
4. 3M (MMM): Dividend (3.8%). This is the premier research-driven industrial company. It has a double-whammy, it does a lot of business in China, and it has a pollution issue. If MMM can't fix this, count on an activist investment group to come in and push for sales of divisions and spin-offs. I think MMM with all of its brainpower will figure it out.
5. Altria (MO): Dividend (6.74%). Look, I know that Altria to some of you might be like investing in Nazi memorabilia. This is an example. If you hate it, move on to the next one. MO invested way too much money in JUUL, the vaping company. It got caught up in a health emergency with people dying from vaping. Turns out that the really acute health issues were from counterfeit cartridges and cannabis vapes. The other issue is very real and that is the epidemic of kids using JUUL. Look, the founders should be strung up by their thumbs for all I care. JUUL is taking the flavored product off the market. The truth is vaping does help millions of people who are addicted to cigarettes. Recent studies have shown that smokers' lungs improved once they started vaping. MO is also getting involved with cannabis with the ownership in Cronos (CRON) shares, and once it is legalized nationally, it will get more involved. It also has a wine business, and a part-owner in SABMiller (OTCPK:SBMRY), the beer business. MO has a future, and in the meanwhile, it offers a great dividend.
6. Chevron (CVX): Dividend (4.03%); Exxon Mobil (XOM): Dividend (5.07%); and BP (BP): Dividend (6.51%). According to the media, these are evil, evil companies. If you don't have a Tesla (TSLA) in your driveway, get real. We need oil, we need natural gas, and we need plastics and chemicals. What's more, we will be manufacturing plastics and petroleum-based chemicals at least for the next 50 years. We will be using gasoline for 30 to 40 years, at least. Isn't it a comfort that we no longer have to be hostage to countries that want us dead for our gasoline? In any event, these are great dividend-paying companies. Use the dividends to support the Sierra Club if you like. There are all kinds of good dividend-paying companies in this space, like the pipeline companies Kinder Morgan (KMI) (dividend 5.07%). If you read my articles, I've reported that Richard Kinder buys like $6 million in shares every month in KMI. If an insider is doing this, maybe you should consider it too. Or how about Enterprise Products (EPD) (dividend 6.61%) or ONEOK (OKE) (dividend 5.12%). My point is there are areas of the stock market that are overlooked by traders for the large part because it is unexciting or out of fashion or having issues, but these are just the type of companies you should be looking at for long-term investments.
7. What companies you should avoid? Companies that may not be able to pay their dividends like Macy's (M) (dividend 9.75%). Will Macy's be able to turn its business around? Maybe, but this is not for a long-term investment account. This is more of a speculation.

With that, I think you probably have enough of my scolding and finger-wagging, rules and suggestions. Long-term investing works very well when you use the power of time to your advantage. A good company having temporary trouble is a "no touch" to a trader, but after some analysis, it could be very rewarding for an OWNER. If you think like an owner as an investor, you should avoid a lot of mistakes. You don't only need to invest in stocks of temporarily unpopular stocks. We can cover other types of long-term investments in the future. Also, in future articles, I will get to trading and speculating dos and don'ts. This is a distinction that I make, speculation is normally used interchangeably with trading, but for the lack of the word, it is more of long-term trading. I think it is useful to delineate it from trading and investment.

Happy Thanksgiving!

Disclosure: I am/we are long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.