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The Psychology Of Long-Term Investing

|Includes: Dr Pepper Snapple Group, Inc. (DPS-OLD), F, JNJ, KO, MCD, PEP, PG, WBA

I'm not a psychologist. I've never even taken a psychology class in all my years of education.

As an investor, however, I have recognized some patterns in my own behavior as it relates to the stocks I hold in my portfolio. And I'd be willing to bet that a broad swath of individual investors exhibit at least somewhat similar behavior.

What I'm referring to is the tendency to patronize the companies whose stocks I hold. I am a shareholder of Dr. Pepper Snapple Group (DPS), so when I'm in the soda aisle, I'm much more likely to purchase DPS products than those of Coca-Cola (NYSE:KO) or Pepsi (NYSE:PEP). I'm also a shareholder of Walgreen's (WAG), so when I need medicine or some household or small grocery item, I happily swing by my neighborhood Walgreen's. And I get a double whammy when I buy Dr. Pepper at Walgreen's!

When the time comes for Ford (NYSE:F) shareholders to buy a new car, which lot are they most likely to check out first? And with the plethora of fast food establishments out there, where are McDonald's (NYSE:MCD) shareholders most likely to go for their lunch?

Rationally, I realize that the bottle of aspirin I just purchased makes no difference in Walgreen's bottom line. But I enjoy doing what I can to "help" out these companies that I own a small part of. I suppose the owner aspect is the basis of my behavior, as well as the overall basis for long-term investing. As an owner, I, along with millions of other shareholders, should feel like part of these companies. I am invested in DPS. I own DPS; therefore, I should do my small part to patronize and promote their products.

Another part of my psychological satisfaction comes from dividends. If I were the owner of a profitable small business, where do you suppose those profits would end up at the end of the year? After rewarding my employees and making some charitable contributions, a good portion of my remaining profits would end up back in my pocket. As an owner of several profitable large businesses, the concept remains pretty much the same. I receive a portion of whatever profits are left over after capital investments, bonuses, charitable contributions, etc. In turn, I use those proceeds for my own capital reinvestments to increase my returns over time.

Despite the continued sluggish economy, over the last year, consumer staples stocks have performed very well and become quite expensive, relative to current earnings. There are any number of reasons for this. Many of these companies have offered investors high yields compared to bonds and other sources of fixed income. I believe in an time of overall economic insecurity, when one jobs report or one statement from whichever Fed chairman can send the market either soaring or plummeting, many investors seek out companies with which they are intimately familiar.

It's really not hard to see why these stocks have performed well. John Q. Investor might not have gotten a raise in three years, but he can walk into any corner store and see Proctor and Gamble (NYSE:PG) on the shelves. He can feel and taste Coca-Cola products. When his kid has a skinned knee, Johnson & Johnson (NYSE:JNJ) comes to the rescue.

These companies and many others like them offer investors what people naturally seek: stability. When the next recession comes, owners of P&G and J&J know they will still receive their dividends. And investors know they can continue contributing to the well-being of the companies because the condition of the overall economy is of little matter when it comes time to do laundry, buy groceries or wash dishes.

Considering the catalysts of the latest financial meltdown, is it any wonder that bank stocks have trailed the overall market?

Disclosure: I am long DPS, WAG, INTC, OXY, GE. 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.