A Different Way To Keep Score Of Your Investment Performance
Contributor Since 2012
Long term investor mostly in dividend champions which are those great American companies paying increasing dividends for at least 25 years. He is a Certified Florida Public Pension Trustee and serves on a municipal pension board. He is a member of the Virginia Bar.
He is author of Make Your Family Rich; Why to Replace Retirement Planning with Succession Planning. The book promotes the strategy of investing in dividend champions (DCs) and keeping score of portfolio performance not by value but by your constantly increasing income. The Make Your Family Rich (MYFR) System promotes acquiring DCs by Selling the Dips! That’s creating additional income by selling out of the money put options on DCs when they dip. The MYFR System also recommends training future generations to succeed in operating the family asset management business. That way the family’s focus is forever investing rather than an individual’s retirement planning.
A teen-focused investment book Hey Kid; Wanna Own Great American Businesses? was published in 2021. Hey Kid! introduces youngsters to the MYFR System, the enormous advantages of getting started early and the wonderful opportunities of zero commission investing and the availability of partial shares in DCs. Both books are available on Amazon and Barnes and Noble
Summary
- Most investors measure their success by the value of their portfolio.
- Value is largely a function of the business cycle. Assets tend to decline in value during a recession and increase during economic expansions.
- Investors have no control over the business cycle and so have little control over the value of their portfolios.
- What if we measure investment success differently and by the things we can control?
Different games have different ways of keeping score. Think football. How do we determine who wins a football game? By the score, right? What if the inventor of football had decided that the winner should be determined by who gained the most yards? Is it fair that the team that gains 400 yards in a game gets beaten by the team that gains only 200 yards but scores a touch down? Why do we do it that way? Isn’t it because Mrs Football decided that was the way to keep score when she invented football? Then, think about the electoral college way of electing our President. Doesn’t a popular vote seem a better, fairer method for choosing the President? Whoever gets the most votes should be the President. Seems logical. Surely Al Gore and Hillary Clinton think so. But in Federalist 68 Alexander Hamilton lays out the very compelling logic for the electoral college and it has been forever thus in this country.
In both the football and electoral college systems the score will generally correlate to other measures of performance. The team gaining the most yards will usually score the most points and the candidate with the most popular votes will score the best in the electoral college. The measures will track but not always.
So someone decides how we keep score and the measures become ingrained in the way we think. Maybe that is what has happened with investment performance. It has become the standard to think about our investment success in terms of the value of our portfolio. We compare ourselves to others’ performance and a variety of indices over different periods of time. We all do that and that’s how we decide our individual and our investment managers’ performance. Do they beat the averages and achieve alpha or not? That’s how investment pundits keep score and it has become a habit to think about investment performance that way.
What if we measure our investment performance differently? What if we choose a measure that we better control as our determinant of success? Let’s say we make income our primary measure of performance and success. As investors we can control income better than we can control stock values. In fact, we can reasonably insure our income will go up every quarter if not every month. How do we do that? We invest only in dividend champion (DC) stocks. DCs are those stocks that have increased their dividends for 25 years or more. That is, DCs are the stocks that through ups and downs have increased the income to their owners. The managers of these great companies did not eliminate, reduce or flatten the cash flows to their investors through the great recession. They increased their owners’ income through thick and thin. What’s even better is the list of DCs which stood at 139 at the end of April is maintained on Seeking Alpha by Justin Law. That list was originally created and maintained by David Fish until his passing in 2018. Both David and Justin should be inducted into the Seeking Alpha Hall of Fame for what they have created and maintained.
What are stocks? They are really interests in businesses. If we owned a business where our family’s income was constantly increasing would we really care that much about its value? Why do we care so much about the value of our portfolio? If our income is constantly increasingly would we care so much about value?
Justin’s list of 139 companies are some of the best companies in history. The list contains extensive data for each company. Justin also maintains a list of Dividend Contenders which have increased their dividends from 10 to 24 years and Dividend Challengers which have increased dividends from five to nine years. Our series of articles will focus on the DCs. We really like 25 years. It’s a long time and includes lots of down markets. We believe increasing the investors “salary” during those times is a great proof of endurance and intrinsic value. If you worked for a company where all the talk was about the decreasing value of the business and its assets wouldn’t you take comfort if you continued to get raises? Wouldn’t you be inclined to stick with your employer and not look for another job?
We only invest in DCs and as companies are added to the list we add them to our portfolio. On the rare occasion when a company is dropped for failure to raise its dividend we promptly sell. In addition, we DRIP all our dividends. Following this pattern our income increases every quarter and virtually every month. As a result, our performance in the stock market is always up. That’s how we keep score. For those fixated on measuring performance by the value of their portfolio we believe that earnings drive dividends and earnings eventually determine the value of stocks. In time, then, the value of your portfolio will rise with your income.
Look, there never will be a time where a big decline in your portfolio’s value will not concern you. You have been trained to react that way. The value will decline in a down cycle or recession and you can’t do anything about that. We believe you just keep investing and measuring performance by income and the values will increase when markets recover.
We never buy DCs directly; we only sell options to acquire DCs. More on that and our time frame for investing in subsequent articles. We think we have a different, better way of thinking about investing.
Patrick J. Keogh is the author of the recently released “Make Your Family Rich; Why to Replace Retirement Planning With Succession Planning” (www.makeyourfamilyrich.com). Pat plans to summarize his book in a series of Seeking Alpha articles of which this is the first.