Sushi Money

     I wish I had a penny for every opinion I’ve read on market strategy and investing.  Short-term, long-term, technical, fundamental, computer-based trading, indexing, etc.  There is no shortage of opinion when it comes to money!  It’s great to have access to so much information these days, but I think we have to be careful and apply a little context to what we read.  In other words, don’t simply take what an apparent expert says at face value  (or a part-time blogger for that matter!).  What the professionals do write may have a great deal of truth and application… for those it applies to.  Although we may share similar goals over time… that being to accumulate wealth, the context and relevance to each of our lives may be very different. 

     I read an article today from Investor’s Business Daily for example.  A great publication with an enormous amount of useful information in it.  The article I found today on the topic of investor education is called Cut Losses: Don’t Buy and Hold.  The author raises some valid points, but in my opinion does a poor job justifying the basis of the article beyond being sound advice for stock traders.  The end of the article shows a graphic that portrays how even “good stocks go bad” but uses examples such as Covad, Infospace, Iomega, Juniper Networks, etc.  All tech stocks… no dividend payers… no long-term, well established companies, no name-brand consumer companies that people have known for years.  In that I agree…. don’t buy and hold those tech companies!   Yet the title of the article may hit home with many investors who do buy and hold.  Does the author talk about the reasons investors may buy and hold?  Let’s use an example about someone who loves dividend stocks, bought them many years ago, and are now reaping dividends which have been reinvested over time.  Maybe that stock provides a nice income stream.  The author’s sell-side rule of 7%-8% down may be right on for a trader.  But it depends upon your goals… your strategy if you have one (you should!), and many other factors such as tax planning, financial needs, etc.  

     Motley Fool hit the issue on the head for dividend investors in an article today called The Secret of Dividends.  The author, Shannon Zimmerman, uses an excellent example:

“Between January 1926 and December 2006, 41% of the S&P 500’s total return was due not to the price appreciation of the stocks in the index, but to the dividends its companies paid out. That’s right — a cool 41%. On an annualized basis, that amounts to 4.4 percentage points. To put it in dollars-and-cents terms, consider this: An investment of $10,000 over that stretch of time would have grown to $1,013,000 without dividends. With dividends kicked in and reinvested, however, that same sum would have been worth a whopping $24,113,000 by the end of the period.”

“Talk about the miracle of compound interest!”

     Yet the IBD author states that, “One of the worst things that investors can do is let a winner turn into a loser. If you’re holding on to a profitable position, you’ll need to decide how much of your gains you are willing to give back.”  Makes sense to a point (especially if you can’t afford to lose any money), and it is hard to argue with taking profits, no matter one’s strategy.  But sometimes the worst thing an investor can do is to sell a long-term winner, especially where dividends are concerned.  When a dividend-payer is down, even for a few years, the sheer function of reinvesting dividends over time buys more shares at a lower price.  I’m talking about top-notch companies like General Electric (GE) or Coca-Cola (KO).  Even these companies share prices may have gone nowhere for many years, but their income growth coupled with the dividend yield has made many investors wealthy over time.   Certainly there’s risk in any investment, and if the stock is down precisely during your retirement years, it may be hard to see any value and really hurt your bottom line.  But for quality, large-cap dividend payers, most investors have done very well over long periods of time.  And that’s one of my personal goals.  There’s a lot more to the dividend story of course.  Especially tax considerations where long-term gains are only taxed at 15% thanks to legislation in recent years.  That may change, but short-term gains (gains on assets held less than one year) are taxed as ordinary income, which may be pretty high depending on your tax bracket. 

     The IBD author does show his colors eventually, as well as his strategy and goals, when he says “Instead of buying and holding, let the market and sound trading rules decide when to sell.”   If he’s talking about “sound trading rules” then he’s a stock trader… and more power to him.  But for those who do not trade stocks, for profit or pleasure, that advice may be ill-served.  Heck, I’ve traded many stocks and done very well at times.  The advice is on target where trading comes in, as I’ve also ruefully learned the hard way about holding on to winners too long, and then losers too long.  But not every investing mantra or headline is on target for how other other investors approach the market.  The IBD article could have done a better job exploring the pros and cons, and qualified the approach in terms of trading.  Just my two cents… and you know what that’s worth!

Full Disclosure:  Long GE at time of writing.  No ownership in KO at time of writing.

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