Investing in common stocks can be exciting. Between the talking heads on CNBC, the blinking lights and numbers that change by the minute, it’s easy fall victim to overactivity with your investments. On the other hand, investing can be boring, dreadfully boring. It’s equally difficult to hold onto a common stock for years with no capital gains. Good thing today we will reinforce the secret success factor of DIY Investors to manage these problems.
The secret success factor of DIY investors is taking a long-term focus to investments. DIY investors don’t need to worry about daily, monthly or quarterly returns.
Taking a long-term focus can provide you with an edge over the professional investment managers. You are not obligated to trade in and out of positions to juice returns. You can establish positions in quality companies with the intention of holding for decades. If you pick a few winners out of a group, you will generate returns in excess of the market overall.
You won’t need to listen to every quarterly presentation (I still do.). For some simple businesses, you can check in once a year to make sure your management is performing against its stated objectives for year.
- Have they met their stated sales and earnings targets?
- Have they completed that acquisition and realized some cost savings?
- How have margins changed?
- Did they increase the rate of capital returned to shareholders?
- Are there any red flags in the future direction of the company?
- What is the valuation of the company? Has it changed? How is it trending against its own history? How is it trending against competitors?
This list of questions isn’t exhaustive, just representative of a few things to look at. After you check in with your company, you can probably sleep well knowing it will continue to generate a satisfactory return.
By taking a long-term perspective, DIY Investors can minimize the costs of holding common stocks.
There are two main expenses when investing in stocks.
What if I told you your commissions could be virtually $0? After setting up an account, your ongoing cost of new investments can be $0. For as long as you hold your company you will pay nothing. Who would be so crazy to allow you to invest for free? The company itself. Just log in to a transfer agent like Computershare. There are wonderful companies like Abbvie and Exxon which will pay all fees to buy shares of their company. There are hundreds of no-fee options and many more low fee options. I admit, this website is not very user-friendly, but the value is unmatched.
What if I told you that you could defer taxes into perpetuity? All you had to do was pick a few companies that have an overwhelming chance of existing decades into the future and never sell your holding. All your capital gains can sit unrealized in your accounts while you take your dividends to do as you please.
How would the DIY Investor find such opportunities for long-term holdings.
Peter Lynch’s book was the first investing book I ever read. His lessons are still very relevant and valuable.
Here are two quotes from Peter Lynch:
Invest in what you know.
Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.
Any ideas yet? No, okay…
The next best place is Valueline. I know, Valueline only provides free tear sheets to Dow 30 companies and you might be too lazy on a cold December morning to get to your library.
So I will clue you in on another great resource provided for free. Please check the spreadsheet on Dividend Champions, companies with over 25 years of increasing their dividend.
Most of the companies that make up our portfolio can be found on the three tabs of the company categorizations. They include dividend Champions, Contenders and Challengers. The category reflects the number of years they have increased their dividend in a row 25, 10 and 5 respectively.
Most of these companies you already know. Many are blue chips and typically referred to as your grandfather’s investments. Perhaps your grandfather was wise to know that these companies compound your investment dollars while minimizing volatility.
Do you take a long-focus to investments? What is the longest you have held an investment? Where do you find your best ideas for long term holdings?