Dipping Your Toe in the Market

I’m going to take a detour from the wonderful world of vagabonding and look at investments.

You may be thinking, “Paul, you’re not a certified professional. How could you possibly know about investing?” You’re right—I’m not a certified professional, so I will emphatically say that my advice is merely based on my 25-plus years of investing my hard-earned money (and gaining the trust of my wife, to invest her hard-earned funds). It’s based upon my having my fair share of dogs and duds—and some went belly-up. It’s also based upon my fair share of satisfactory stocks, and grand-slam homerun equities. And it really only requires a handful of grand-slam stocks to get you to a point where you can breathe a little easier—as long as you know when to step out and take that breather.

And now we are in the midst of a “unique” scenario. We have an unpredictable government in Washington and we are in the apex of a high-flying stock market. Both pretty disconcerting, if you ask me. So why would I urge anyone to engage in the stock market? Because it’s still better than the meager returns of bank accounts. It’s not a replacement for a savings account (you still have to keep about 6 months worth of savings in a money market or savings account… “just in case”). It’s a complement. I invest via CapitalOne Investing—and I’ve done this for close to 20 years (through its predecessor company, ShareBuilder). You can reach CapitalOne here or here.

The good news about investing is that it is simple, if you pay attention to the purpose:  Buy the company, not the hype. You are investing in an asset that you expect to appreciate in value as time goes on. As legendary investor Peter Lynch said: “Never invest in any idea you can't illustrate with a crayon.” Another pearl of wisdom from Lynch is, “If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored.”

Like I said, it’s not complicated. If you can buy a house or an antique, you can buy a stock.

To keep your eye on the prize, focus on three things as your North Star: 1. Taking a hint from Peter Lynch: K.I.S.S. (Keep it simple, stupid!). If you can’t explain what the company does without turning your brain into a balloon animal, then you’re asking for trouble; 2. Do all things in moderation; and 3. Run away when the crowd runs in and run in when the crowd runs away.

So what do I mean by these three cryptic things? The first should be pretty clear from my Peter Lynch reference. The second is, very simply put, dipping your toe in the market through dollar-cost averaging. Start out with one stable security that has seen a bunch of ups and downs. An easy one is Berkshire Hathaway, Inc., B shares (BRK.B). The legendary Oracle of Omaha, Warren Buffett, runs this company—which is basically (for lack of a better term) one very large mutual fund. Note, that Mr. Buffett, a wise man with a wicked sense of humor, does not issue dividends. But that’s ok: the more a company invests in itself, the more likely it is to appreciate in value. Another easy choice for monthly dividends is Realty IncomeCorp. (O), which calls itself “The Monthly Divided Company”. Realty Income is what’s known as a Real Estate Investment Trust (REIT). It purchases commercial real estate that is leased to tenants under long-term lease agreements, generally 10-20 years. The lease payments generated each month are used to support predictable monthly dividend payments to their shareholders. Realty Income owns over 4,900 properties, diversified with 248 commercial tenants operating in 47 industries, located throughout 49 states and Puerto Rico. Realty Income issues monthly dividends, which you may (and I highly recommend this) reinvest automatically; while rates of return can change depending upon price fluctuation, O’s current yield on an annualized basis is 4%, so if you think about this in comparison with the average bank account, it’s a no-brainer!

Point of disclosure: I own both BRK.B and O in my portfolio, and I’ve had them in my portfolio for about 15 years.

One last stock I would recommend for dipping your toe in the water is Starbucks (SBUX), because I’m a coffee addict.  And, honestly, if you have never heard of Starbucks, I would question your take on reality. The company’s dividend is on the low end (1.7%) but still better than the earnings of a savings account. It is a company that has gone from mere food and beverage service, to a veritable necessity among coffee generations, which makes the likelihood of price appreciation in the long run (5+ years) pretty strong. I’ve owned SBUX for 10 years, taken my profit once (meaning: I cashed in stock that appreciated to the point that I took out my original dollar investment and I still have a boatload of shares that are delivering dividends and price appreciation; this illustrates the magic of dividend reinvestment and dollar-cost averaging right there), and benefitted from a 2-for-1 stock split (splits don’t generally change the value of the investment, but make it more attractive for others in the market to purchase shares, thus pushing price appreciation—supply and demand, my friends!).

That last point (Run away when the crowd runs in and run in when the crowd runs away) is a contrarian viewpoint that is embraced by Warren Buffett. The stock market relies on groupthink when we get to the heady highs that we’ve experienced in the last couple of months. What can you expect from this? People who shouldn’t be buying, are buying just because “everyone else is doing it.” Take it from Mr. Buffett and your’s truly: be patient and buy at bargain prices. I have a chunk of cash in my portfolio that is burning a hole in my pocket, but right now, I’m not seeing anything that is floating my boat right now. And, frankly, the irregularity of the current administration gives me pause as well. That doesn’t mean you should NOT invest in the market now (this is why I suggested the aforementioned BRK.B, O and SBUX), but when the “correction” comes (and it will come--it could be a mild correction or a downright nasty one; we don’t know until it happens, but they do happen), be ready to jump in and buy more. This is what we mean by running away when others run in, and vice versa.

I don’t plan to make this a regular feature, but as time goes on, I’ll be sure to give some tips, hints and, God willing, the VERY RARE “don’t do this” advice on investing.

One more thing:  The lion’s share of my investments are nestled in my IRA and Roth IRA accounts, so it ensures that these are long-term investments. I recommend any high dividend investments go into a tax-deferred investment, like an IRA or Roth IRA, so you don’t have to pay taxes each year on your dividends. That doesn’t mean you should not have stocks in a taxable account (I do), but a stock like BRK.B may be better suited to a taxable account because of the tax advantages that capital gains have over dividends.

And, while I would be as proud as anything to have your trust in my advice, I would feel much better if you consult a certified professional and/or do your own research. A good website to start you out on researching potential investments is The Motley Fool. It’s very accessible from a linguistic perspective—they speak “normal Joe or Jane”. And if you find you’re ready to harvest those gains, don’t forget to pay your taxes and use a good program (or accountant) to help you do that!

Go ahead. Dip your toe in the market. Be aware, use your noggin, and don’t go with the crowd (unless it’s part of a company’s successful business model).

Peace and profit!

Postscript from 25 February: This article from Fortune online came out about my hero, Warren Buffett (link embedded), whose letter to shareholders was just published. He points out that his bet with a hedge fund manager worked to his advantage. The bet? $500,000 that his pick over a 10 year investment period--a Vanguard fund based on the S&P 500--would outperform a hedge fund manager's pick of 5 hedge funds of his choosing. Buffett won, and proceeded to eloquently slash and burn hedge fund managers' penchant for high fees and mediocre returns.