How to improve your investing over time

As dividend investors, we focus on identifying and selecting the companies to include in our divided portfolios. The ultimate goal is achieving our stated dividend income objectives. As a result, a lot of effort is put into the company research department. I believe that this is all great. In my investing, I have found that this is very helpful. I have found however that I want to improve over time as well.

The thing that helps in this department is objectively evaluating my investments, studying mistakes and successes. This is a somewhat labor intensive process, which is a reason why few investors evaluate their investments.

This review should identify potential improvement points related to companies you are investing in, and potentially common success factors prior to investing in a stocks. It could also help identify common denominator problems that could be avoided in the future. This process could also show improvement opportunities for your process.

When I reviewed my investments, I noticed a few interesting patterns. As my review is an ongoing process, I have corrected some of those items. For others, despite my best efforts, I am still making those mistakes.

One of the biggest lessons I learned is that I do not know which of all the companies I have invested in will do the best. I have found that, the whole concept of identifying just 20 companies and sticking to that list is not a good idea for me. I have found out that the best performers I had were after my twentieth idea. The lesson learned is to strive to maintain equal weighting in my portfolio holdings, and to keep an open mind about new investments that fit the qualitative factors. This means that the best way to succeed is to plug away every month, screening the list of dividend champions and contenders, analyzing companies one at a time while trying to be as objective as possible, and then acquiring all of those companies that seem attractively priced, regardless of my opinion as to which one is better than the other.

The second lesson I learned is to avoid selling companies, as much as possible. I have previously made the mistake of selling a stock whose yield fell below a certain arbitrary number and the P/E was either close to 20 or slightly above 20. I would then reinvest the proceeds into a company that looked cheaper and was yielding more. It is possible that I was chasing yield in the process as well. Very often the outcome was that the original company kept doing well, and kept delivering higher profits, dividends to justify the temporary high prices, while the new company didn’t do as well. Therefore, it made little sense to sell a perfectly good company that merely looked pricey, and pay all the taxes, commissions and hassle factor, in order to get into a mediocre investment. The lesson learned is to avoid selling as much as possible. The biggest sin in investing is the desire to act on tips, rumors, things you read, your beliefs that a stock is too high etc. If you are a long-term investor, the important lesson is to stick patiently to your investments, and just collect those dividends. Very few can outsmart the market and correctly sell a stock at the highest price, only to reinvest the proceeds at another stock at the lowest price, and still come out ahead despite taxes and commissions. Instead, I mostly sell stocks now only after a dividend cut – this is a move where the goal is capital preservation.

The third lesson I have learned from observing my losers is that they had a few common denominators. My dividend cutters are concentrated in pass-through entities such as REITS, BDCs and MLPs. The problem with pass through entities is that they send the majority of free cash flow to shareholders in the form of distributions. This leaves them with a low margin of safety in distribution coverage when things temporarily get tougher.

The fourth lesson I have learned is to develop my personal methodology to follow in identifying companies for further research. In my case I go through my normal screening process regularly. There are reasons why I have a screen to begin with – to only focus on companies that have stood the test of time, and have weathered a few recessions without much damage to their financials. A record exceeding ten consecutive years of dividend increases is an important first threshold that only 300 or so companies in the US have. That being said, it may be helpful to listen to others for feedback, in order to identify blind spots. However, that doesn't mean to follow anyone blindly, but to determine if you are learning anything new from them.

If I purchased blindly any investment that someone has told me about, I am at an immediate disadvantage. That's because chances are that I have not done much research on it. If an authority figure has approved this investment, then chances are that I may ignore red flags and initiate a position in the stock, while hoping for the best, rather than crossing my T’s and I’s.  I would not know when things are going poorly, and what to do if things do not work out as expected. However, if I learn of a company from someone else, and it fits my criteria for valuation, quality and fundamentals after I run it through my process, I will consider investing in the stock.

If you do not develop your own methodology, you are at a disadvantage because you do not learn about investing. If you develop your methodology, but do not follow it, you are also at a disadvantage.  However, it does pay to follow different strategies and investors, in order to learn from them and identify tools that you can implement in your investment arsenal.

I have personally learned a lot about investing by reading academics, index investors, active day-traders, and other dividend investors to name a few. By synthesizing information from a variety of sources, I can develop and improve my investing over time. I believe that you can learn from everyone you meet, even if you learn what not to do. I have learned by studying the success of others, but I have also learned by studying failures as well.

Thank you for reading. I hope this article serves as an inspiration to look into ways to improve your investing over time.

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