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Fantasy Versus Goal

|About: Vanguard Total World Stock ETF (VT), Includes: CSX, FRT, MSFT

Ever since I read Oscar Wilde, Ernest Hemingway and Henry Miller for the first time, I've had it in my head that what I would really like to do would be to live in Paris in the late 1940s. I would wear a black turtleneck sweater and sunglasses, sit at a brasserie, smoke those absolutely vile French cigarettes, sip brandy and carry around a notebook for sketching or to write in. Obviously it makes all the sense in the world for me to dismiss a fantasy like that, because not only is it impractical, it is impossible (unless one happens to have access to a time portal or a wormhole).

Dismissing the mental image I have of living in Paris in the late 1940s and 1950s would have been a mistake. In all the ways that truly matter to me, 2019 Lisbon is the same thing. And I live here. And I wear sunglasses. I don't carry a little journal with me everywhere I go, but I do carry an Iphone which I use for drawing and also to draft articles for SA and occasional short stories while I sip Portuguese white wine at the mercado. I have even been paid a robust sum of $987 so far this year for my writing, which officially qualifies me as what I always dreamed of being: a starving author. 

I've read that the difference between successful people and unsuccessful people is that successful people accurately differentiate fantasies from goals.

Bullshit.

Not only is the argument is false,  it is explosively false, and nowhere more so than when it comes to the topic of investing money. 

Money, you see, is the intersection of practicality and fantasy. What do I do with money? Specifically, I invest in companies with healthy or extremely healthy balance sheets, very large profit margins, competitive advantages, access to profitable opportunities to reinvest earnings back into the business, long histories of steadily rising profits and a consistent obsession with rewarding shareholders. I start by reviewing the top holdings for dividend growth ETFs, I prune out any companies with below investment grade ratings, I look at 10 years worth of earnings history to see which companies have the most steady and steadily growing earnings, and then read annual reports and transcripts to try and understand what gives the business a durable competitive advantage. Once I buy a company, I treat it like it is an operating division of the privately-held multinational conglomerate that is my portfolio. As I see it, my task is to allocate capital so that I can grow the overall earnings per share for my portfolio, just like any business manager grows the earnings per share of any company. I avoid thinking like an investor, and ignore market commentary, algorithms, trading momentum or price correlation. In my mind, I am a business person, not an investor, and I measure my success in the most practical way I can think of: outperform the global stock market.

I have been told countless times, directly and indirectly, that the goal of outperforming the market is pure fantasy. It isn't. Yesterday, for the first time this year, my portfolio's total performance (dividends plus price appreciation) broke above 10% higher than the total performance for the Vanguard Total World Stock Market Index ETF (VT).

 

Now, I really don't see any reason why anyone couldn't outperform the overall stock market by approaching investing the way I do. That's why I publish my portfolio in real time, so it's impossible for anyone (including me) to know in advance what will happen.  Those of you who've read my previous real-time portfolio blog entries over the years (the Model Portfolio series, etc) probably notice that the annual portfolio performance consistently beats the overall US and global stock markets by a large margin, year in and year out. I believe the best way to explain the hows and whys comes down to a mental image of what it means to own and manage a portfolio of stocks. You are the CEO of a multinational business. Each share of stock is an operating division. You allocate capital among the company's divisions to achieve the highest overall earnings per share. That is not a fantasy. That is a practical goal.  That is a goal you can achieve. 

What's coming up down the pike? I'm looking at changing some holdings. I haven't made up my mind yet, but I am looking at CSX Corp. (CSX), Microsoft (MSFT), and Federal Realty Trust (FRT). These each seem expensive - particularly FRT, but might produce higher and more consistent earnings growth than some other assets that are sitting in the portfolio. I've been kicking the tires on these three for a while now and should be in a position to make some sort of investment decision in the next week or two. 

Disclosure: I am/we are long IBM.

Additional disclosure: I am long every position in the attached spreadsheet. I am not an investment advisor and this is not investment advice. Nobody can rely on anything contained in this blog entry for any reason whatsoever, besides entertainment value.