dividend growth investing (in high quality companies), I argue, is immensely superior to simple growth investing, and especially so during secular bear markets.
I offered this response in the comment thread,
I had the same thought five years ago, when I bought shares of PFE, GE, AB, etc. and set them up for dividend reinvestment in an IRA. Take a moment to pull up the five year charts on those stocks.
Any form of un-hedged, long-only investing insufficient in a secular bear market, unless you time your purchases so you make them at or near the secular market low in valuations.
But a chart is worth a thousand words:
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It's worth noting that hedging, of course, has its own costs. When to hedge is a question worthy of its own post. I had an interesting discussion about that this week, and came up with some preliminary ideas for a heuristic for this. Details down the road.
Hi Dave -
I guess the problem is that it's difficult defining "high quality" to everyone's satisfaction.
There are a lot of good companies out there, to be sure, but good companies only fare well in good times - during bear markets, as you point out, it's a different story.
I think if Mr. Market has taught us anything the last couple of years, it's that simply good isn't good enough.
When I say "high quality" I'm not talking about "good" companies - I'm talking about the absolute best companies you're able to identify. Period.
With all due respect, GE, PFE, and AB don't fit that bill.
Yes, GE is big, but do you have any idea the massive amount of debt required to maintain that empire? Debt that's only intended to be serviced and never repayed frightens me, whether it be governments or corporations. (
(That's why I steer clear of telcos, too, no matter how often I hear them described as a "conservative investment" or as "safe as utilities.")
And PFE has been in decline for 10 years, not just the last five. Everyone knew their diminishing pipeline issues (and full disclosure - I lost money on PFE myself since I failed to listen to my own advice).
In my mind, the whole pharma industry is structurally disadvantaged - the whole concept of patent expiration on drugs baffles me. And makes for a dicey investment - why would I ever invest in a company that, in time, would be required to hand over the results of their own research and development to competitors who would mass produce the same products and drastically undercut them on price? Where's the true long term competitive advantage in that?
RE: AB, I'm sorry, but money management is money management, and the bigger the manager gets the less control the manager has over the results. I personally have a soft spot for both Legg Mason and Raymond James, but I'd never in a million years invest in either one.
There's nothing wrong with short or intermediate term trading if that's what works for you, but for true long term investors (and buying and holding index funds or mutual funds isn't investing - it's a lazy crapshoot), then you must be obssessively diligent about business selection.
The truly great companies - if you had to pick 5 companies to invest in for the rest of your life, and if your own life depended on it, or the lives of those whom you love, would 3 of those picks really be GE, PFE, and AB?
Incidentally, thanks for not using an Enron or GM example - lesser detractors usually stoop to that argument.
Thanks for the lively discussion . . .
Brad,
I've since (within the last few years) eschewed owning companies with net debt, and you've probably noticed that I my focus has shifted to micro caps, but it's worth noting, at the time, that GE had a rare triple-A rating, so the conventional wisdom wasn't much of a concern. It was also considered to be one of the best-managed companies in America, with numerous senior GE executives going on to become CEOs at other companies.
"why would I ever invest in a company that, in time, would be required to hand over the results of their own research and development to competitors who would mass produce the same products and drastically undercut them on price? Where's the true long term competitive advantage in that?"
You really don't understand the value of a patent monopoly? The value is in the money that can be made during the life of the patent. As for PFE being in decline for ten years, Bruce Berkowitz made it a number one holding last year. And at the time I added it to that IRA, it, along with GE, was a triple-A rated company.
"RE: AB, I'm sorry, but money management is money management, and the bigger the manager gets the less control the manager has over the results."
Money management is an extremely high-margin business (as is that other business you don't like, pharma), and at the time I bought it, AB had been one of the best performing stocks since its inception. Also, as an MLP, it paid out ~90% of its profits (pre-tax) to its shareholders.
There were other dividend-paying stocks I picked for that IRA at the time, including MO (there's an ugly 5 year chart for you).
I reiterate my point that un-hedged, long-only investing -- even in putatively high quality, dividend-paying stocks -- is insufficient in secular bear markets.
Actually, we're probably not that far off.
We might differ on what we consider high quality and where we focus our attention (I primarily focus on large and mid cap companies), but I use options heavily in my own portfolio.
It can be considered a form of hedging, but what I'm primarily attempting to do with various option strategies is to, in effect, continually lower the cost basis both on individual holdings as well as the entire portfolio.
I describe the strategy variously as: Leveraged Investing, Adjusted Cost Basis, Buy and Hold and Cheat, etc.
I maintain that dividend growth investing (in high quality companies) works in any market, but my primary objective is dividend income, not capital appreciation.
Leveraged Investing takes what I consider to be a proven form of investing and simply attempts to speed up the process.
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