Thoughts About Investing 
49 Comments
The following is a guest post. If interested in submitting a guest post, please read my
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Tony, a young investor, blogs at A Young Investor to share his thoughts about the markets, economics, politics, and psychology.
Never Trade the News
I know traders who spend their whole careers trying to predict the market data reports, earnings reports, unemployment numbers, etc. And you want to know the commonality among all these traders? They’re all poor.
No one can be 100% right, and even if he can predict the news, so what? The same piece of news can be interpreted in a hundred different ways. You cannot assume that bad news will cause the market fall, because bad news is shrugged off during bull markets, and good news is shrugged off in bear markets.
From the years of experience of successful traders around me, the market is going to go where it’s going to go, regardless of the news that comes out. The news doesn’t drive the price; the price drives the news. When the market is going up, the news that is constantly being relayed across the major news channels will be good news, and vice versa.
The Numbers Don’t Lie
But they way they’re presented do lie. Let me give you an example. A couple of weeks ago, I read an article titled “Why It’s Easier to Get into Harvard Than It Is to Get a Job at McDonalds”. In author based this “fact” from the fact that 7% of Harvard applicants are accepted as opposed to McDonalds’ 5%. From the way these facts are represented, it would appear as if it were easier to get into Harvards than it were to get into McDonalds. However, this is a lie. The way the numbers were presented is a lie. Only the highest caliber (academic-wise) of people apply for Harvard, while almost all teens at one point in their lives have applied or thought of applying. So out of 10,000 people, maybe only 100 applied for Harvard, of which 7% got in, which equals to 7 people. Out of 10,000 people, probably 2000 applied, of which 100 were accepted. See the difference? By representing the numbers in a specific way, an untruthful statement can be implied.
Such tricks are far too common in the financial industry. Be wary about corporate financial numbers – unless you’re an expert, be careful because there’s bound to be a lot of “lies” among those numbers. The numbers don’t lie, but the way their presented do.
Buying On Percentages
Many investors (including myself) buy into positions on percentages (scale in) – for example, I buy 25% worth of my portfolio into the position at a time. In the past, I did this based on the assumption of risk and profits – if I buy X% a time every $Y up/down, how much risk will I be taking, and how will doing so protect my position? But recently, I’ve read some books that gave me an insight: buy on percentages not because you want to protect your portfolio – buy on percentages because you want to protect your psychological sanity. Investing is moreso about being in the right mentality than being in the right market. Buying on percentages will keep you psychologically satisfy and prevent you from making any brash moves. Here’s an example.
I want to use 10% of my portfolio to buy stock XYZ. However, I feel that the market may be a bit overbought. So instead, I’ll buy 5%. If the market keeps going up, my mentality will be happy because I’m making money. If the market goes down, I’m still happy because I’m averaging-down my position cost. If I hadn’t bought when I thought the market was overbought, I could very well have chased an even more overbought market, which is a financially disastrous move.
Why I Don’t Like Dividend Investing
A lot of investors fill up my portfolio with “nice and pretty” dividend stocks, which I find to be absolutely ridiculous. The money that can be made by trading a stock makes the money that can be made from dividends look pale in comparison. A small 5% decline in the stock price can wipe out a dividend investor’s entire year of returns from dividends. Using Rogers Communication stock from early 2011 to 2012, we can see that:
During this entire 1 year period, Rogers Communications Inc paid out approximately 4% in dividends, but its stock price experienced 20%+ swings. Are you willing to forego 20%+ for the sake of a single digit return (not including the fact that you could have lost money on the stock price itself)?
Feel free to read Tony’s great post about the differences between market tops and market bottoms.
Editor’s Note: Well I don’t agree with Tony’s views on dividend stocks, he does make some other good points. With dividend stocks at least you have that almost guaranteed dividend to partially protect yourself from dips in the market. It’s a lot better than investing in a non-dividend stock that dropped 20%. Plus dividend stocks can act as an income source during retirement. Also I wouldn’t ignore market news either since I believe it would affect people’s investment decisions.
What are your thoughts about the points Tony makes? Do you agree or disagree with him?
49 Comments
Nice post. Several good points including the way the the presentation of “facts” can distort the truth. I agree that the financial world is a prime offender here.
As to your comments about dividend paying stocks, I prefer to look at total return. That’s not to say that I don’t like dividend paying stocks or funds that feature them. I tend to look for dividend growth rather than just the payout amount. Dividend growth reflects continued financial strength in my mind.
One other dividend comment. I’ve seen and heard a lot in the financial press of late about how it makes sense to shift from bonds to dividend paying stocks for investors seeking current income yield. Before doing this investors need to understand the implications for the overall risk profile of their portfolios. Reminds me of those who said “.. its different this time…” circa late 1999/early 2000 in regard to tech stocks with no real business model and no balance sheet. We all (hopefully) recall how that turned out for many investors.
Good point about dividend growth. I agree that should reflect continued financial strength, especially if they have been growing for a long time.
Stocks do definitely have more risk than bonds, but you just have to be willing to ride out any recessions without panicking. Unfortunately too many investors buy and sell emotionally. So if things are looking bad they end up selling for a loss. If they’ve invested in a solid company though, it should recover when the economy picks back up.
I find (at least for me) that dividend growth is highly unpredictable. Even in good economic weather, dividends can be slashed without warning, and that’s not to say what can happen in poor economic weather.
Tony recently posted..Should I Or Shouldn’t I Use a Stop Loss
That may be true for some companies but there are companies that have increased dividends every year for decades.
I think dividend stocks are a smart play as long as the fundamentals of the company are where they need to be. Obviously you can just buy them because of the dividend.
For sure, dividends are only a small part of the picture. Ultimately you should be investing in a solid company that you honestly believe is run well and will continue to do well.
I’m interested to see what happens with dividend taxation in Canada over the next few years. Policy-wise, I can see the desire to create stability in the market by encouraging holding, but also the desire to have a less complicated and more level playing field. Everyone’s reactions and strategy changes will be interesting.
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That’s something I hadn’t thought of. I’ll have to pay attention to that if I do decide to focus on dividends with my future investing strategy.
I would agree. I can also see a trend blooming in this direction. More market stability is something everyone is craving after the 2008 crash. Dividends stocks are nice and easy to manage which is part of their appeal.
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Although it’s something everyone craves, I don’t think we’re going to see it in the immediate future. As money gravitates from the many to the few (who use computer trend following models), the markets should get more volatile, not less.
Tony recently posted..Should I Or Shouldn’t I Use a Stop Loss
I think being in the right mentality is a good point. So many people are scared of investing right now, especially young people who really need to get started. You have to be able to sleep at night, and if that means getting in very slowly, it’s better than avoiding altogether.
Anyone who is scared of investing now just needs to analyze how the economy and stock market has always recovered shortly after any recessions. The times when prices are down is the prime time to be getting into the market.
Better late than never!
Tony recently posted..Should I Or Shouldn’t I Use a Stop Loss
Nice post. I completely agree with the idea of not trading the news. “News” can be skewed many ways by many different people. I’ve seen many days where there is great news, but the market takes it on the chin that day. The market is 90% emotion and 10% reason, and thus people often make foolish decisions (myself included too many times to care to remember) based off of what the news is telling them.
I don’t entirely agree with the dividend stance though. I get the point and dividends have their place within the investment world. I myself personally would rather go in to a growth stock and take the chance that I’ll get to benefit from a nice upswing. For many though, that is not an option as they’re not comfortable with the risk. Dividends, in general, can give peace of mind with the assumed income, but can never be counted on (like BP having to slash their dividend after the Gulf Oil Spill).
In the end it comes down to diversification. Being completely in one type of investment over another can possibly have ill effects on one’s portfolio.
Thanks again for the post!
It would be tough not to over-react to some news. Sometimes we can feel so certain that the news must be a sure sign to buy or sell. Often we assume that the masses will react a certain way too. In the end though if it is a truly solid company, it will get over any kind of speculation and the market will correct itself.
You’re definitely right that even a dividend paying stock comes with its own risks. You never know when disaster can strike even a seemingly strong company. I do think there are certain stocks which are a lot more secure though.
“90% emotion and 10% reason” I like that quote. In the past, I didn’t really agree with diversification, but I think that once you make it big, you really need to sock something away, just in case something should happen.
Tony recently posted..Should I Or Shouldn’t I Use a Stop Loss
I agree on the spin issue – be careful of how they spin the numbers. But I agree with Roger that you can’t ignore dividends.
Tony doesn’t come right out and say, it, but it sounds like his view of investing is closer to trading. Nothing wrong with that, of course, and many people make money doing that. And many people lose money doing that. There are also people who make money with a longer term horizon than three years (and of course many lose money doing that). The point is that trading, or short view investing isn’t the only way to make money. (Warren Buffett is an example of long view investing working.)
Tony does the exact thing about dividend stock investing that he warned against in his first paragraph: he puts a spin on his numbers to make it sound like all dividend stocks stay the same and only pay 4% dividends. That, of course, is not true. If your investment horizon is a month or two, then yes, his point is valid – then dividends are just a distraction.
However, if you elect to take out your horizon to, say, 18 months, it changes. Take for instance, Kinder Morgan, the nation’s largest pipeline operator: you could have bought it around $70 beginning 2011 and sold it for around $80 a year and a half later. In addition to the $10 gain, you would have pocketed another $6.85 in dividends. That would have taken the return from 14% to 24% for the period. Why would you choose to ignore that?
Neither the short term or long term view is better than the other – it’s a matter of preference. Both can work or not work. To flatly dismiss one type of investing as “absolutely ridiculous” is probably overstating a personal preference a bit… and goes counter to his second piece of advice: the numbers don’t lie – dividend investing can work very well
I think with the section about dividends he was just looking to stir up some debate since he knows his stance is different than a lot of investors. I know when I switch from mutual funds to self managed investing I plan to take more of a long term approach. When you’re thinking long term dividends start to make a lot more sense. Those dividends can be dripped back into the investment without fees. Then when you retire you could rely on those dividend payments as part of your retirement income.
Tony does spin numbers to make a point which is a little ironic. It’s a good illustration of how numbers can be used in any way that people choose to make any kind of point.
Sorry, but I admit I did spin the numbers a bit. You’re totally right – just to make them go in my favour. However, I don’t recall any successful investors who were dividend investors.
Tony recently posted..Should I Or Shouldn’t I Use a Stop Loss
The media’s job is to create hype and find explanations for what is happening. I am not surprised at all that numbers would be manipulated to serve their purpose at any given point. They are still true stats but they chose the best way to display them for the particular point they are trying to make.
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I wouldn’t say the media’s job is to create hype, but they do know full well that it is what catches people’s attention. The problem with those stats is that it often blatantly ignores part of the picture leading people to jump to conclusions which might not necessarily be true. So you really have to do your own research outside of what the media is telling people.
The news is terrible! Too many people have short term memories. the media hypes up a lot of negative info.
I can’t say I agree 100% with dividend investing..maybe it’s not the right stratedgy at this time. But dividend investing provides some “protection” againist market dips and for those who are in a stage in their life where income is needed.
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I think dividends are much more than just for people who need the income at that point. It is essentially a small, almost-guaranteed return on your money outside of what happens with the market. With the advantages of dripping, it can really help build up your portfolio over time.
The news is so annoying, but I like what you said “The news doesn’t drive the price; the price drives the news.” It’s true. The news wants ratings and they don’t care about how you are doing in the market. So I don’t listen too intently.
Dividend paying stock are very interesting to me, and are something I want to look into a bit more. Maybe they get a smaller return, but the also pay a dividend every year. The stock are more stable than most, so it seems like a win-win.
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I barely listen to the news at all these days. With the way they present stories it really isn’t the ideal place to stay up to date unbiasedly.
Dividend stocks don’t necessarily get a smaller return. If it is a solid company it can have just as much potential. I really like how the risk is offset in such a way that can be used to compound your investment over time.
lol, I like that you disagreed with some of what he said and had to put the little note at the bottom
For a dude who doesn’t know much about investing, it was a nice post becuase it kept things simple. Which is a nice place to start. Good guest post!
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Well I knew I wouldn’t be up at 6AM to post the first comment. So I had to put in my 2 cents. I know for a topic like investing people are going to have all kinds of opinions about what strategy is best. If you’re looking to get into investing the trick is to read as much as you can about it. Based on everyone’s different strategies you can come up with a strategy that you are personally comfortable with.
I diversify between dividend paying and non-dividend paying companies by investing in a 500 index fund. Can anyone prove that dividend paying companies dividend payout plus capital appreciation will be higher than the capital appreciation of a non-dividend paying company? Theory says they should be equal except for the fact that you have to pay yearly taxes on dividends while capital appreciation is allowed to compound tax free.
Go to my site and search dividend investing for more info..
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Isn’t that only true if you are actually withdrawing the dividends? I think most dividend investors use drips to avoid that. I don’t think theory says any stocks should be equal. Each company is unique and the returns are primarily based on the market. Dividends just provide a nice cushion that you can be confident will be there most of the time.
I am an aggressive investor as well, but I have to agree with Jeremy that dividend investing is one of the best and safest way to invest. You can invest in a growth company like Apple, and get best of both worlds — growth and dividend.
Also, have you noticed that major financial houses always upgrade stock when it’s already up significantly? And, downgrade when it’s down significantly? I firmly believe that they do that to shake out investor confidence so that they buy side or sell side house can snatch millions of shares at a deal.
I’m sure there is all kinds of market manipulation like that. People and companies are often just serving their own personal interests. Any advice needs to be analyzed carefully even when it’s coming from so called trusted sources.
And thanks for agreeing with my stance on dividend stocks. I don’t know much about investing yet, but dividends seem to make a lot of sense to me.
I’m a dividend girl myself. And I gotta admit I don’t understand what buying on percentages is exactly..
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lol I’m not sure exactly either since I’m still picking up all the investing lingo. It sounds like he’s referring to buying based on how much of your portfolio that investment will represent.
Sorry for the confusion. For example, you want to buy 10% of your portfolio into XYZ. At $24, you buy 2.5% worth, at $25, you buy another 2.5% worth….
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I don’t pretend to know half as much as I would need to to be an informed investor. That’s the big reason I stick with dividend-paying mutual funds. Lower risk, lower volatility.
That’s all I’m involved with at this point, but I am not satisfied paying a MER on that investment. I think if I did my research I could probably get a better return without paying that fee. Plus I have all kinds of investing bloggers to hit up for advice
I have to disagree with his stance on dividend investing in general as well. That said, I do think there is a push recently to invest in stocks solely because they offer a dividend that may hurt some people who are not informed enough about investing and are simply following trends. Dividends should form part of a diversified portfolio, but they are not a catch-all solution.
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Good point that people shouldn’t just assume that any dividend paying stock is a good choice. They might see a fairly high dividend and not take into consideration that stock’s traditional growth. Some companies may even be taking advantage of that ignorance by purposely offering a high dividend for that very reason.
The news doesn’t drive the price; the price drives the news – I love this statement. So true as well. I am yet to play properly with the stock market. My main thought is that it will be a long term investment and I will try not to let it affect me mentally in the short term. For now I am happy with my employers share scheme – they buy me 2 for every 1 I buy each month (capped obviously).
Investing in the company you work at can make a lot of sense, especially when they give you that kind of deal. That way you end up caring a lot more about the company you work for. It can also lead to problems if people aren’t pulling their weight though. My investment strategy will definitely be more of a long term approach too. I don’t want to be glued to the news each day trying to guess how that will affect things.
I don’t agree with Tony’s views on dividend stocks. Sure Roger’s could be down 20% but if you didn’t sell the stock you didn’t lose any money, and you continued to earn a dividend.
Also the key is to buy stocks when they are undervalued, most people don’t know when a stock is undervalued, and therefore unintentionally buy high. Buying low ensures that further declines are highly unlikely.
You also have to consider dividend increases. A company like Procter & Gamble has had 55 years of consecutive dividend increases.
Active traders typically don’t have the patience to wait for dividends to increase over time. And people with busy lives don’t have the time to monitor their stocks holdings every day, which is why the dividend approach is ideal for them.
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Thanks for confirming my likely plan to focus some of my investment portfolio on dividend stocks. I totally agree with your points. I don’t intend to be an active trader since that seems to carry a lot more risk and lots of extra fees. I’d rather invest in some quality stocks, especially if they happen to have increasing dividends. The part about buying undervalued stocks is something I’ll have to spend some time to really figure out. I guess the trick is to keep a close eye on specific targets when you are ready to buy and then be patient waiting for a good price.
I’m going to admit that I’m a fairly lazy investor, and have the vast majority of my retirement fund in stock index funds. The advantages: Simplicity, Diversification, and Low Fees.
I don’t worry much about the lastest investing fads, because time has shown that they come and go. For those in or near retirement that are worried about low bond yields on their investments, I can see how dividend stocks could be enticing. There are arguments both for and against, and I think there’s merit to both arguments.
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I think index funds make sense when you have limited time to manage your portfolio. A large portion of investors end up doing worse than the various indexes. Of course if you do have plenty of time for research and monitoring, it’s probably better to invest in individual stocks instead. Then you have a lot more control over what kind of securities you are investing in and you could potentially earn more than the indexes.
The reason I like this post is that you back up your point with a specific case study. The example illustrates the market noise and red herrings within the finance business and blows some smoke away from the mirrors. As I’m a … Pessimist…or realist…they often blur…I’m always reading between the grey lines to spot continuity errors. Good work!
A specific case study can help make a point, but an example can be carefully chosen to skew things in their favor despite contradictory evidence.
Regarding dividend stocks…
Not all dividend paying stocks are equal. Some dividend stocks are risky because the underlying company is desperate to attract investors and pays an unsustainable yield, while other dividend stocks are paned for being “boring” because they have a history of increasing their yield and do not experience 20% swings.
In short, his example is more suited toward illustrating the importance of due diligence in stock/company picking than in why dividend stocks are bad.
I wouldn’t say dividend stocks are bad either, but you can’t just base your decision on what kind of dividend a stock is paying. There is a lot more to the story that you need to look into.
It’s a wise decision if you do have thoughts on investing, and you are on the right path, that’s because it’s the first step to becoming financially independent. We must see investing as serious business. Investing is building wealth, through careful investments, over a long period of time. Try to own investments whose income or dividends keep pace with inflation. There are many companies that have long term records of rising dividends, and lots of mutual funds that do the same.