My investing career dates back to the late 1980s. I have nearly 30 years of investing experience to my name. I’ve been schooled formally in investing, in college and by the CFA Institute, and informally, in the school of hard knocks.
I can attest that the latter of the two schools, the school of hard knocks, has delivered the most poignant and most penetrating investing lessons. There is no substitute for experience, and the experiences that produce costly mistakes are the best lesson providers.
Merciful Minerva, I’ve made plenty of costly mistakes. But I had the good fortune of clustering those mistakes in my youth, when amounts lost were relatively small compared with amounts I invest today (though at the time they, they were large compared to my meager income).
The losses proved invaluable, for they imparted unforgettable lessons that serve me well to this day.
An Array of Investing Lessons
The most important lesson was to find a strategy and then stick with it. My early investment portfolio lacked rhyme or reason. My strategy was flighty because I had no strategy. Investment decisions were based more on a whim stimulated by a favorable article in Barron’s or The Wall Street Journal than sound analysis. I was a leaf blowing in the wind.
Thank goodness for the market’s unrelenting discipline, for nothing focuses the mind like a monetary loss. I suffered enough losses to push me to a crossroads: quit or find a strategy that fitted my temperament and outlook.
Fortunately, I found that strategy through a fortuitous article a finance professor distributed to the class. The article featured Ben Graham, the father of value investing and a relentless proponent of dividends and income investing. Graham’s focus on income and value suited my temperament. If I could implement any strategy and adhere to it, it would be Graham’s dividend-centric strategy.
That said, no strategy remains continuously popular, no matter how theoretically sound it may be. Investment strategies ebb and flow: Momentum might be popular for a while before it relinquishes its attractiveness to contrarian value. Growth will hold court while cyclical languishes.
Investing Lessons Lead to Dividend Focus
That said, dividend investing, infused with value and a frequent peppering of contrarianism, has served me well over the years. It has enabled me to accumulate wealth that I’m sure I would have never accumulated had I not moored my strategy to Graham’s tutelage.
But a sound strategy moored to sublime tutelage isn’t enough. Finishing is what counts.
Finishing demands patience. One of Warren Buffett’s more profound utterances goes, “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” Here, here!
To belabor the obvious, no one wants to see his stock portfolio drop 50%, but popularity, like fashion, is a fickle mistress: You think you’re in at the onset of a rising investment strategy only to discover you’re at the cusp. (FYI, the word “cusp” is used incorrectly. A cusp is a pointed end of a horn, e.g. a crescent moon, or the point at which two branches of a curve meet. To say “XZY stock is on the cusp of a recovery” is to say XYZ’s recovery is over.) You have to endure that which is unpopular.
Patience and Endurance
A sound capital structure buttresses endurance. It also enables you to even exploit that which is temporarily unpopular. I refer not to the company’s capital structure, though it matters. I refer to your capital structure.
Maintain sufficient liquidity. I counsel investors to avoid investment debt. Never buy on margin. Yes, margin debt amplifies returns . . . and it amplifies losses. Here, I again speak from experience: The amplified losses are considerably more painful than the amplified returns.
Also, keep sufficient cash on hand. My cash is 60%-to-80% invested, but never 100%. Cash helps you maintain sanity when stocks sell off. Better yet, cash enables you to buy the exceptional values that arise during a sell-off.
Adopt a good strategy, practice patience, and maintain sufficient liquidity. If you can do that, your chances of accumulating wealth through stock investing rises more than you can appreciate.
Stephen Mauzy, CFA