People Who Think They Are Conservative Investors

Includes: NLY
by: Roger Nusbaum

For the last couple of days we've been talking about pros and cons of buy and hold. On the Seeking Alpha version of one of those posts a reader left a comment noting that buying and holding forever does not apply to tech stocks because the technology changes so frequently.

This is an interesting comment for two reasons. The first thing is that in the past it is quite obvious that many investors have believed that tech stocks were buy and hold forever. Many names, like Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), DELL and Cisco (NASDAQ:CSCO), had true-wealth creating runs lasting 10 years or more and cognitive deficits being what they are, many people expected that to continue for a long time.

Fast forward to today and I would say it is quite obvious that many people feel Apple (NASDAQ:AAPL) is a name to own forever. Maybe tech should never have been considered buy and hope to hold forever but it has been thought of this way.

I think there was a religious-like devotion with many tech stocks 12 years ago as there is with Apple and some dividend strategies today (there are probably others too). Anyone who has been reading this site for a while knows that I spend a lot of time looking out for these devotional themes and that I will often reduce or eliminate our exposure to them or discuss why they should be avoided if we don't own them.

One clue that I am on to something when I write about this or take action in this context is getting flamed in the comments or via email. This has been the case with solar stocks, Bank of America (NYSE:BAC) and most recently when we reduced our exposure to Apple a few weeks ago. In a similar context, there have been a lot of blog posts that have focused on what to avoid and how important that can be in contributing to a long-term result.

In terms of isolating this devotion in a stock or a narrow segment of the market (like solar) it is not very difficult to find these and then avoid or underweight them. The more emotional others get the more likely something is happening that is worth avoiding.

With some of the emotion surrounding dividend strategies these days, the answer here is a little more complicated. Growth of dividends is a vital component to a long-term portfolio success. What I think I see going on in this space is a large group of investors who believe they are conservative and may not fully understand the risk they've taken; the love of mortgage REITs is a good example.

I've written before about the love that people have for Annaly Mortgage (NYSE:NLY). Recently it cut its dividend by a nickel to $0.50 and the stock has sold off noticeably although not in ruinous fashion. With so many articles out there validating the idea that because bond yields are so low, people should put more into equities and here are some with great yields and solid businesses (sticking with the mortgage REIT example but there are others) there are people taking on additional risk and they are unaware of this.

The thing with risk is there is no way to know whether there will ever be a negative consequence for a risk taken but I can tell you from comments left on my blog and my Seeking Alpha posts from four years ago that people absolutely come unglued when things hit the fan and then they forget the pain once the market recovers some (as it always does).

It seems to me that if someone is inclined to spend a lot of time arguing on what amounts to message boards about how great some sort of investment is, then that person is also a candidate to meltdown when/if there are negative consequences to that particular investment.