Mixing Strategies for Maximum Value

People in the investing community often label themselves in all sorts of manners. From value investors, income generators, to traders or pack rats the titles are endless. Today I wanted to discuss a little where I fall (and what my strategy is) and provide some discussion on the types so you may see where you land and if once you’ve evaluated the other types if it is still where you want to be. Todd Wenning had a post the other day about what constitutes an income investor and the ten key points thereof:

“The Ten Points of Income Investing
1. Income investing is a separate and distinct strategy

It’s not growth, it’s not value — income comes first. (See: The Income Investor’s Manifesto)

2. Discipline and patience are behavioral prerequisites

Great dividend-producing portfolios are built over decades, not weeks and months. It’s critical to keep short-term market moves in perspective. (See: Making Each Investment Count)

3. Insist on owning dividend-paying companies with economic moats

You’ll save yourself a lot of trouble if you own firms with durable competitive advantages. Read this book to learn how to recognize an economic moat.

4. Keep transaction costs to a minimum

Ideally below 1% per year. Remember: you can only compound what you keep.

5. Beware of unrealistic yields

If a yield seems too good to be true, it probably is. There might be something wrong with a stock that carries a yield more than twice the index average. (See: Ultra High Yield = Ultra High Risk)

6. Don’t be afraid to sell, but do so for the right reasons

Trading and income investing don’t mix. Take an investor’s perspective and aim to hold for at least three years. (See: A Simple Guide for Selling Stocks)

7. Have a dividend reinvestment strategy

How you manage the regular cash flows from your dividend portfolio can have a tremendous impact on your long-term returns. (See: 5 Keys for Reinvesting Dividends)

8. Think globally, but be mindful of extra costs

There are great dividend opportunities in foreign markets, but be aware of possible withholding taxes in the company’s home country.

9. Stay away from companies drowning in debt

Companies with too much debt become beholden to creditors and the dividend can come under pressure if the creditors aren’t satisfied.

10. Take a portfolio perspective

A dividend strategy isn’t comprised of one or two stocks, but rather a group of stocks assembled to achieve specific objectives and goals. (See: 5 Rules for Building a Dividend-Focused Portfolio”

Some of the points in that list are hyperlinks to other source material you should probably read. The word editor I use doesn’t like links so it only allows me to use text. As such you should go see the post for yourself on his blog (and probably follow it too as he is very good at what he does), which is located at

                                                                                     http://cleareyesinvesting.blogspot.com

When I first went through the list and subsequent material, I found it is a strategy that closely resembles my own, although there are some differences. Before I get into those here is some information on what constitutes another method called “value investing” on which you can read more at:

                                                                                      http://en.wikipedia.org/wiki/Value_investing

In case you hate clicking on links, the general idea is to find companies whose intrinsic value is higher than their stock price. This is what I would refer to in my theory articles as your low suited connectors. These are companies who as previously mentioned have an extraordinary upside and require a small percentage of your overall chip stack.
One other option that is popular for portfolio strategies is day trading, in which you attempt to make your money on the small fluctuations during the day with a market, although I consider this to be a system better left to someone who hates money as statistics show a very small number of traders ever beat the market.
So then, where do I fall? It turns out I invest using a strategy that is a combination of Value Investing and Income Investing. For instance, in point 2 above, because you’re building your dividend based portfolio over time, you have the luxury of waiting until the market sets a price on a stock you can really benefit from. In doing this you can take advantage of a pull-back that arose for some meaningless reason (I.e., CEO says something stupid and offends some people causing a drop in price) and get in when the stock price becomes lower than the actual value of the company.
Another point in which the two can merge is on number 6. Knowing when to sell a stock is a science all on its own, and there is a significant amount of material online to research I won’t cover it now (but maybe at a later date I’ll aggregate the data for you). The theory I employ is one that allows you to take advantage of the value Investing aspect to make a quick addition to your portfolio. Imagine this example:
 
          Company XYZ trades normally at $30/share and has a dividend of 4%. Due to a press release that the CEO was involved in an ill advised gambling ring in college, people make an emotional decision and mass sell dropping the price to $18/share. You see this as a great buying opportunity and invest given you were going to do so anyways. Six months later the price returns to $30/share once everyone realizes that information was irrelevant to how the company is managed .

In the above scenario were you to invest with the intention of holding at $30/share You would have picked up about 31 shares after fees and such. However by incorporating the value investors buy and sell strategy and getting them at $18/share, You would have gotten around 53 shares in the same company, which allows you to then sell 22 of them (to keep the 31) and invest your additional $600+ dollars into another company. Free money is the best money. So even though the goal is to buy and hold as to reap the benefits of a high dividend yield. Selling on a huge spike can realize  profits and allow you to maintain the same stake in a company you would have had anyways.

All in all, any strategy that works for you is a good one. If you think I left anything out feel free to post a comment or chat me up on one of the many social media sites I use. Till next time.
-D

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