Today is Super Bowl Sunday. It’s a fun day for many (football fans or not) because of the social gatherings, good food, the famous commercials, the mega halftime show…and, all of the gambling activities, especially around proposition (prop) bets. I’m a huge football fan, so I’ll be watching the game closely. There are intriguing storylines for both teams which make this game especially interesting. However, I’m not much of a gambler myself, so I won’t be wagering on the contest.
And, with that in mind, when thinking about this week’s Durable Dividends article, I wanted to stick to this gambling theme.
The sad reality is, many individuals view the stock market as the Wall Street Casino.
I’ve spoken to many individuals who not only believe that the market is a speculators’ game, but that it’s also rigged against the little guy (retail investors).
Because of this mindset, these individuals either tend to avoid the U.S. equity space all together (because they believe that the risk is too high and that success is unachievable) or they totally buy into the speculators’ mindset and put capital at risk in very undisciplined and oftentimes irrational ways.
To me, both of these reactions are a mistake.
I call this mindset a “sad reality” because in my view, this outlook on the markets couldn’t be further from the truth.
Yes, the valuations attached to share prices are largely based upon consensus expectations of future cash flows, and therefore, it’s impossible to totally remove speculation from the equation when owning equities (they are risk assets, after all).
However, the fact is, even with this risk in mind, the U.S. stock market has been a wonderful wealth generating tool for individuals for decades and decades on end. Moving forward, I don’t see any reason why this is going to change.
To me, when I think about the American Dream and attempting to climb the social ladder, I continue to believe that the U.S. stock market is the simplest, easiest, and most effective way for most individuals to generate real wealth.
And, I’m not talking about the fantastic homerun bets that you sometimes hear about where someone placed a speculative bet on a technology/bio-tech startup that turned them into a millionaire overnight.
I’m talking about the slow and steady compounding of wealth that comes from owning blue chip stocks.
I’ve discussed this before, but I think it’s worth discussing again (and frankly, I’m sure this won’t be the last time that I express a similar opinion because of how important of an idea this is to continually hammer home), but you don’t have to be a rocket scientist, have a Ph.D in Economics, or understand sophisticated options/derivatives trading strategies to achieve long-term success in the markets.
I’m living proof of this…
I am an English major from the University of Virginia who studied Education at the graduate level, before changing career paths and transitioning into the agricultural industry (I was the farm manager of a vineyard for several years), and then transitioning again, into the real estate industry this time (after realizing that the real value of the vineyard scene came from event organization, short-term rentals, and ultimately, rising property values), and finally settling on the portfolio management space (eventually, I came to the conclusion that I’d rather generate passive income via equity holdings than by managing physical properties).
In short, I never studied economics, never took a high level calculus course, and I’ve never traded options in my life. And yet, over the last decade or so I’ve seen the value of my portfolio and the size of my passive income stream grow by leaps and bounds because of the dividend growth investing strategy that I discuss with you all every week.
I don’t say this to brag. I don’t believe that I’m special in any way, shape, or form, when it comes to the markets. The truth of the matter is, I believe that anyone who is both patient and disciplined can beat the broader markets on a regular basis (contrary to what professional asset/portfolio managers will tell you).
It’s important to mention that the naysayers, when it comes to the potential success of the Average Joe investor in the stock market, who largely exist in the portfolio management and institutional investing space, are essentially talking their books when they talk down the retail investor.
Those individuals/organizations make money by charging fees for their products and services. And demand for those fee-bearing services rise as self-directed investors lose hope.
But I hope to restore that hope here with Durable Dividends…
At the end of the day, here’s my take on the Wall Street Casino misconception:
All an investor has to do to achieve consistent and reliable success in the markets is buy shares of high quality companies when they’re trading at discounted valuations and then hold them over the long-term.
Believe me, the management teams of these blue chip companies are highly incentivized to compete, and win, in their various sectors and industries too. Over the long-term, patient investors get to benefit from partnering with best-in-breed companies as a shareholder.
This sounds simple, right? That’s because it is.
But, it’s also a difficult practice to put into place consistently because doing so requires investors to overcome basic aspects of their human nature.
You see, blue chip equities are oftentimes rather boring.
When I say “high quality” I’m talking about companies that have wide competitive moats that generate strong cash flows that they can then use to sustain high levels of research and development, mergers and acquisitions, and also to provide strong shareholder returns.
Doing so means that these companies are likely to maintain their strong competition positions, continue to take market share, and ultimately, grow sales and earnings over the long-term (oh, and enrich their shareholders as this process plays out).
But, the fact is, companies in this situation are generally mature. They’re proven winners. Their periods of hyper growth are a thing of the past. They’ve already been there and done that. But, this doesn’t mean that they can’t continue to generate significant wealth moving forward.
Mature blue chips are rarely exciting plays in the market. They often have low betas. And because they tend to experience lower levels of volatility, they’re not often the stocks put into the spotlight by the financial news media.
And, because human beings are often attracted to shiny, exciting things, these types of investments may not seem appealing at first glance.
We’re also susceptible to falling prey to herd mentality (regardless of whether or not the “herd” is being rational) and therefore, the boring nature of staying disciplined and building a portfolio of mature blue chip/cash cow companies can make the process difficult.
When massive speculative rallies happen elsewhere in the market, the fear of missing out (or FOMO, for short) is likely to rise up, causing the investor who is focused on boring blue chips to question whether or not they’re truly on the right path.
It’s difficult to overcome the greed associated with chasing momentum, but as we’ve seen in the markets in recent weeks, stocks that rise up to irrational price points are bound to experience significant sell-offs eventually…and when that occurs, the investors who avoided the speculative herd in the first place are likely going to be happy that they did so.
The wonderful thing about owning blue chips…and yes, I say owning, instead of trading, for good reason…is because doing so doesn’t require successful market timing.
It’s certainly possible to make money chasing momentum, but doing so requires knowing when to get out of the trade. And, being that working crystal balls do not exist, that’s not a game that I’m willing to play.
Instead of attempting to time markets, I’m content to own shares of dividend growth companies that grow their fundamentals reliably over time and use those rising cash flows to pay me reliably increasing annual dividends.
Instead of chasing momentum higher, I attempt to bolster my portfolio’s returns by going against the grain and buying beaten down blue chips (because yes, even the highest quality companies in the world experience poor sentiment and sell off from time to time).
When buying blue chip dividend growth stocks below fair value, not only do I get to benefit from the ongoing fundamental growth (which eventually pushes share prices higher over time), but I’m also setting myself up to benefit from multiple expansion, via mean reversion, when the market realizes its folly, its sentiment changes, and we see a return to fair value.
Furthermore, when buying dividend growth stocks into weakness, not only are investors reducing risk and increasing future potential with a wide margin of safety, but they’re also increasing their yield on cost…meaning that they’re using irrational behavior in the markets to increase the size of their passive income stream.
It requires discipline to go against human nature, to ignore speculative momentum, and to focus purely on the underlying fundamentals of a stock (which dictate fair value). And, then, it requires patience, which is something that many humans struggle with as well – especially in today’s society where the expectation is often for instant gratification, to wait for mean reversion to occur.
But thankfully, the dividend growth strategy helps with that.
Knowing that I’m being paid while I wait for my share prices to move higher over time makes sitting back, avoiding irrational urges, and simply holding blue chips and accelerating the compounding process by re-investing their dividends relatively easy to do.
All of the dividend payments that roll into my brokerage account are all of the instant gratification that I need to stay confident and grounded in this strategy.
Many of the best investors of all time are value investors. Buying low and selling high is a tried and true method to increase one’s wealth. However, because of fear and greed, this simple success can be difficult to achieve.
But, the dividend growth strategy actively rewards investors for buying low, which is what makes this strategy so effective. Also, the dividend growth strategy demands that investors pay close attention to fundamentals because they’re what sustainably growing dividends are directly based off of. Therefore, not only does the dividend growth investing strategy inspire investors to adhere to traditional value investing principles, but it rewards them for doing so with a reliably increasing passive income stream.
So, with all of this being said…I hope that you come to realize that Wall Street is not a casino and therefore, if you have the urge to gamble, do so (responsibly) on the Super Bowl…not with your equity holdings.
Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.
Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.
