As a new investor I’m slowly learning a lot of things. One of them is how and why my emotional me is probably my worst enemy.
As a big fan of Warren Buffett I read many books about him and all his letters to shareholders. One thing I remember from his advice is that the biggest mistake an investor can make is not knowing when to stay put. Just sit on the sidelines and wait!
I think that’s what I did during summertime. Here’s why.
But first, I just want to say that today, I bought 9 shares of Exxon at 91,10$ per share. This adds 24,84 to my annual passive dividend income. My initial yield is 3,03% with this purchase. This brings my daily US dividend income to 2,17$ per day plus 0,94$ CAN per day for a rough total of 3,11$ CAN per day (not taking into account exchange rate which is favorable for me). My goal is to reach 65$ per day 365 days per year. I’m at 4.78% of my objective.
The threat of human’s emotions
Human’s emotion is a great limitation that can cost you a lot as an investor if you are unable to manage your emotions properly. It can make you buy when it’s not the right time and sell… when it’s not the right time either. In fact, most people buy high and sell low when they should buy low and sell high… It is a proven fact that emotions can affect investors and make them act without any rationality. I could cite many behavioral finance study here, but that is not the purpose of this post.
Anyway, I consider myself a mostly rational guy. I try to do things and act with a defined purpose and I try to back my actions with some logic most of the times. That is why the dividend growth investing strategy appealed me because even though I spent a lot of time learning technical analysis, backtesting several methods or techniques with Metastock and even programming a “downloader” to grab free market data from Yahoo to use them in Metastock, I never jumped in the stock market with real money because, somewhere in my head, I never was fully convinced that all this extra work was really worth more than flipping a coin…
I played with fake money, created a fake test portfolio on Investopedia and made some great gains… only to lose them on a bad trade… after several months I ended up quitting that strategy because the only thing that was “really” working with past data was Stan Weinstein technique. But this technique can be used mostly at the beginning of a bull market and at the end of it. These are events that are very hard to forecast and that do not happen very often…
I also knew that “betting” a lot of my hard earned money on a penny stock with the term “China” in its company name would have costed me an heart attack. Is it possible to sleep at night with 20,000$ invested on a single stock with a beta of 4 or more? I couldn’t do more than day trading on such volatile stocks and even that… I guess I couldn’t quit my computer to go to the bathroom because I would be in too much fear to lose my money. After all, even with a pre-programmed stop-loss, a bug could happen.
Worst! Imagine waking up in the morning only to know that a bad news has been published and suddenly your 20,000$ worth of stock is down 40% and the stock market is not even opened yet!
In a way, I know most of my limits. I’m okay with some volatility if I’m invested in great companies that I’m pretty sure that they will grow their income and as such, the stock price will keep up and the dividend will be maintained. In fact, I welcome volatility with such titles as it could provide me with nice entry points to buy more shares.
So, I know my limits.
I want to be mostly invested in stock with some kind of moat (the wider the better) and a low beta. I can afford some risk with some good REITs. But I don’t want to be invested in very volatile stocks whose stock price is mostly based on future expectation from fans of Star Trek! (Read Tesla ahah).
I’m sure that one day we will colonize other worlds, have established colonies down the ocean and on the moon, we might even be able to teleport ourselves and talk with dead people. Drones might one day deliver me pizza (miam!!!) and robots do my dishes. Hell!!! I might even have a clone that could go to work at my job while I stay home and watch TV. I could even stop investing in income producing assets!!! But… this ain’t gonna happen within 5 or even 10 years… well chances are at least!
So until further proofs of financial success, I prefer to be invested in companies that have a working product resolving a current need and that people are using in their everyday life.. right now! Not in a science fiction future. If we would have listened to scifi authors of the ’70s, we should all have flying cars… and maybe even be able to travel through time! Imagine what would your flying car stock worth today…
Warren Buffett once said :
It’s when the tide goes out that we can see who’s swimming naked!
I’ll leave Tesla stock and other stocks alike for traders and scifi fans for now and wait until they really start to make real money… not future potential money. Remember that Testla lose 1,35$ per share with 123,600 shares outstanding… That’s a huge loss for a 227$ stock. It doesn’t even have a P/E because to qualify, you need a least to make some earnings!! 🙂 Maybe I’ll bite myself 10 years from now, but I like the saying “one bird in the hand is better than two birds in a bush.”
Investing makes us learn about ourselves
What I didn’t know about myself was that with money in my account and the stock market as my shopping mall, I would feel like a kid in a candy shop!
I’ve been able to keep 8,000$ aside for a while during summer waiting for a dip. I knew there would be one… there are always dips here and there during the year. But, timing the market is hard and I finally decided to buy stocks. I selected stocks that were at a fair price and even though many of my holdings are down right now, overall my portfolio is still in the positive zone and is delivering me consistent dividends.
I’m happy with most of my buys. But the mistake I made was to keep nothing… no $$$ handy to be able to jump on an opportunity when one would come. I remember that I bought some stocks at a “fair” price, perfectly knowing that they could be more “on sale”, like JNJ. I bought that one at 100,55$. Not a bad price! But, today I saw it drop to 95,34$. This was clearly a great opportunity to buy shares of one of the best company out there.
Last week was full of opportunities. Today was full of opportunities and I had only a meager 1000$ to invest! So, instead of buying extra shares of JNJ, AFL, ARCP, MCD and maybe even Mattel… Instead of being able to add other great companies to my portfolio, I could only pick one and buy a couple of shares…
I chose Exxon. XOM is a dividend aristocrat that has also increased its dividend by 8% or more over the last year, 3 years, 5 years and even 10 years averages. I know that there is downward pressure on oil price these days but XOM is a solid company and at such a price I consider it a bargain. Plus, I’ve been pretty heavy with buying slow dividend growers like REITs and I’m over-exposed with MCD already. My goal is to get at least 3,5% as an initial yield and this goal has been reached and exceeded for 2014 so far but I also want a dividend growth of 8% or more per year. And for this, I have to add lower yields stocks with higher dividend growth prospects to my portfolio. XOM is one of the companies I want to be invested in to fulfill that part of the job.
What’s worse than being in a candy shop and seing all you favorite candies for sale while you only have pennies in your pocket?
During the week-end, I read a great post from RetireByForty about how bear markets will make you rich! It made me realize even more the huge mistake I had made.
I’m happy I could buy something during the dip. But I would have wished I could buy more great stocks at good prices. I could have used credit to leverage my investments and buy more. I currently have a lot of available credit since I don’t use my credit card and personal margin anymore. I have to say I was very tempted. But as I said, forecasting the market is hard, and I believe it is not a game anyone should play. I am an amateur investor and even professional investors are bad at predicting market crashes and bull markets. That dip could be the beginning of something more deep… after all the market has been bullish for a while (too long in my own opinion) and a crash will eventually arise. The question is when?
Instead, I think I will continue to buy stocks every month and slowly build up a “dip money pile” that I will be able to use to take advantage of these rare opportunities. Something like 4-5k sounds like a good idea given that my portfolio is worth less than 32,000$.
What is your strategy to take advantage of dips?
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