What Principles Govern My Investment Policies? I've never claimed to be a guru when it comes to investments and I have often said that there is no one approach that works all the time for everyone. Still, I have several principles which strongly influence the decisions I make. Here are some of them.
1. Cash Is Not King. Never has been. The real king can be seen in the title to this blog: Cash flow. I'm sure none of my regular readers will be surprised to hear this. You can generate cash flow from a stock portfolio in several ways but the main two are dividends and capital gains. Of the two, dividends are the most reliable; however, it depends on your station in life. If you need the cash flow to sustain your lifestyle, dividends are definitely preferred; however, if you are younger, with ample income to support your needs and a long time frame before you need the cash flow, you can depend more on capital gains. A friend of mine once said, "You can't eat growth."
2. You Can't Time the Market. Over the years, I've met advisors who use several different methods to get you in the market or out at appropriate times. Few, if any, are still around today. While there may be some who are successful at this, I have never met anyone who can deliver consistent results. Anyone who left the market last September and stayed out until the present is sitting on a bunch of cash they can use to re-invest. If you will look at my posts from last summer, you can see that I had some fears about the stability of the market. Still, I didn't have enough confidence to go totally out of the market.
3. You Cannot Not Forecast. I am reminded of Thomas Dewey who once forecast that he would be voted president of the United States. Before he went to bed on the night of the election he told his wife, "Tomorrow night you'll be sleeping with the president of the United States". The next morning, he and his wife heard the news and his wife asked, "Tom, will I be going to Washington or will Mr. Truman be coming here." (I must give credit to my friend Steve Goodier of lifesupport.com for that story). Even if you have no intrinsic forecast in mind, every financial decision you make involves a forecast. For example, if you choose a lower interest rate adjustable mortgage over a 30 year fixed rate, you have forecast that interest rates are unlikely to go though the roof and the current lower payment will be less than with a fixed rate for some time. I would encourage everyone who doesn't have a set of assumptions about what you think will happen in the future, to write some down. These should have an influence over your current decisions and you should always ask yourself if a decision you are making is consistent with your assumptions. You might be surprised at how often they are not.
4, Price is What You Pay, Value is What You Get. The Motley Fool website gets credit for that little slogan. What it really means is that the market may "misunderestimate" the value of a stock. A stock may drop for a number of reasons, not all of which are indicative of the fundamental value of the underlying business. An example in recent times is the large drop in the price of all oil service sector stocks right after Slumberger reported disappointing earnings. Stocks in a given sector often advance or decline based on some event that influences the price of an industry leader. While this isn't always irrelevant, it often is.
5. Watch The Business Not The Stock. I have mentioned before that you are buying into a business any time you buy a stock. Instead of becoming enthralled with the fluctuations in the market price of the stock, watch the business fundamentals and management action. Base your buy/sell decisions on these rather than price changes.
6. Patience Is Genius. It's OK to bail out of a stock if you change your mind about the prospects of an investment but if the company you buy is still fundamentally sound, have patience even if the price drops. I have been advised by a close friend to use "stop losses." which are automatic sell orders if a stock drops to a certain price. Granted, these can be invaluable when a stock drops before the news about the fundamentals come out but I have found it preferable to base my decisions on fundamentals not price. In the late 90's I bought real estate investment trusts, even though the rest of the market thought they were less valuable than the high tech stocks that were all the rage. I chose to stay with them and buy more, a strategy which allows me to work on my own schedule now rather than being chained to my office every day.
These Are Trying Times. High home foreclosures, volatile stock prices, falling home values, and inflation worries are rampant. I know astute investors who have made the decision to get out of the market entirely. My approach is as it has always been. Stay informed and act accordingly.
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