A man in a hot air balloon realized he was lost. He reduced his altitude and spotted a man below. “Excuse me,” he shouted, “but can you help me? I promised a friend I would meet him but I don’t know where I am.”
The man below replied: “You are in a hot air balloon hovering approximately 30 feet above the ground. Your latitude is between 40 and 41 degrees north and your longitude is between 56 and 57 degrees west.”
To which the balloonist said: “You must be a broker.”
To which the man on the ground replied: “I am. But how did you know?”
“Because,” said the balloonist, “everything you told me is technically correct – but I have no idea what to make of your information. The fact is, I’m still lost. Frankly, you’ve not been much help.”
Lost in Translation
You wanna know where you are as an investor? Wall Street doesn’t lack answers. Soft recovery. Continued high unemployment. Weak spending. Big government deficits. Foreclosures accelerating. And global bubbles emerging…
An unsettling big picture, for sure. But exactly where does it get you? Still feeling lost, I bet. And a little scared.
That’s no accident. That’s how Wall Street rolls. If they had a mission statement, it would be “Scare ‘em and leave ‘em in the dark. Then they’ll follow you anywhere.”
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An Inconvenient Truth
The truth is, Wall Street fund managers aren’t paid to make you money (and, in fact, 99% of them lost money for their investors in 2008). They’re paid to…
* First and foremost, expand their funds with your incoming cash.
* And beat their benchmark (not necessarily making a profit).
If their benchmark is down by 10% and they’re down by “only” 8%, they get their bonus and you end up with less money socked away.
And if they lose a lot of your money, your nest egg would need years of outsized growth to recover. Consider…
With a 50% loss in 2008 and a 50% gain in 2009, do you end up even? Nope. It doesn’t work that way. Just to get even, you’d need a 100% gain in 2009.
Avoiding big losses should be your number one investing priority.
Three Simple Building Blocks
At Sound Profits, we’re not interested in chasing high-risk big returns. We go for the singles and doubles. If, by chance one, of our doubles turns into a homerun (as it does on occasion), we consider it frosting on the cake. But the cake is what matters.
We like to keep things simple. We think that…
- How you do over the long haul is more important than short-term gains. Your broker may be able to tell you what your “north latitude” and “west longitude” is at the moment. But tomorrow? Next week? If he says he has any idea where the market is headed, he’s lying. We don’t chase short-term performance.
- You can’t build a high-quality portfolio without quality companies. And it’s easier than you think. We’ve found that if a dividend grows, so does the stock. We love companies that have hiked their dividends not just for the past couple of years but for the past couple of decades.
- Snapping up cheap assets is the key to making good investment choices. It’s nice when you can buy companies at or below the cost of their assets. We don’t always do it, but we usually get very close – meaning we get the “business” of those companies almost for free.
Once you accept these principles, it becomes pretty obvious how to invest.
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Go Where the Growth Is
Even in the worst of times, there’s growth somewhere in the world. For example, if the dollar is falling, another currency must be rising. (Foreign exchange trades come in pairs.)
And if investors are selling, other investors must be buying.
And if investors are fleeing a particular market, they must be running to other markets.
The point is, there are plenty of long-term growth trends out there right now. And in every monthly issue of Sound Profits, we track the six global “difference-maker” trends we first told you about in our January 2010 issue. Then we make recommendations based on our latest findings.
Putting It All Together
Add it all up, and what do you get? A high-yielding portfolio of favorably priced, quality, dividend companies riding one of those six major trends. A portfolio that is extraordinarily safe and virtually recession-proof. In the past two years, for example, dividends have gone up in energy, health care, technology, consumer discretionary, consumer staples, and telecommunications. In fact, they’ve gone up in every sector except financial. (Recession, indeed!)
This kind of portfolio is also built to give you rich returns. Consider…
If you had put $1,000 into a portfolio of the 100 highest-yielding stocks on Jan. 1, 1957, by Dec. 1, 2009, you would have accumulated more than $450,000 (assuming all dividends were reinvested). That same $1,000 invested in the 100 lowest-yielding stocks returned only 8.8% per year, a full one-third lower than the return of the 100 highest-yielding stocks.
In other words, dividends are much more than the cherry on the cake. They are cash providers and market beaters. Most important, dividend-paying companies are proven winners over time.
If you’re interested in ratcheting down risk as much as possible without sacrificing upside, check out our investing advice in Sound Profits.
Invest Safely,
Andrew Gordon
Investor’s Daily Edge
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