Posted by BM on March 1, 2021
Our goal as dividend growth investors is clear, “‘we buy quality individual dividend growth stocks when they are sensibly-priced and hold for the growing income (cash flow).”
The process we use is a ‘rules based’ process. It is a repeatable process in all markets that tilts the odds of making a quality investment decision in our favour.
I like this quote from Annie Duke in her book ‘How to Decide-Simple Tools for Making Better Decisions’. Why does your process matter more than anything else?
“Because there are only two things that determine how your life turns out: luck and the quality of your decisions. You have control over only one of those two things.”
A quick story to demonstrate why a good process is so important.
Being Lucky vs Being Good– Vishal Khandelwal
Let’s say you sponsor a contest to determine the “world’s best coin flippers.” About 100,000 people from across the world come together to participate in this contest. Everyone flips a coin at the same time.
After each coin flip, those who flip “tails” must leave, until the only people left have flipped 10 consecutive heads. Basic statistics suggests that we could expect about 98 coin flippers to remain at the end of the contest.
The odds of flipping heads 10 times in a row are 1/2^10 = 1/1024. So, for 100,000 participants, there will be 100,000/1,024 = 98 people who would have flipped 10 consecutive heads.
Then, these 98 “skilled” coin flippers would get thousands of likes on Facebook, and followers on Twitter. Those with the best smile and social media skills will write bestselling books about coin flipping, sharing their secrets of how to become a world-class coin flipper.
Sadly, most of us most of the times judge the quality of our decisions and actions by one single factor, and that is our one-off good performance that comes easy and at the very beginning of our endeavour.
Investing is not any different. As investors, we often struggle with judging whether a decision was good or not, even in hindsight, because like the winning coin flippers we often only look at the outcome and not the process. The truth, however, is that a good process is the only thing that could help you bring the odds of success in your favour. It’s only with a good process that you stand a chance to do well in investing over the long run.
As dividend growth investors we do things differently. That is how we win!
“I do believe it is possible for a minority of investors to get significantly better results than average. Two conditions are necessary for that. One is that they must follow some sound principles of selection that are related to the value of securities and not to their market price. The other is that their method of operation must be basically different from that of the majority of security buyers. They have to cut themselves off from the general public and put themselves into a different category.”
Ben Graham
By standing on the shoulders of giants, those great investors who came before us, we have come up with a process that is simple to understand with only three basic rules:
- Quality; only buy large-cap companies that have a long dividend growth streak and good financial safety metrics in an industry that is stable and growing.
- Valuation; look to buy a company that is sensibly priced or undervalued by looking at a company’s track record. Undervaluation introduces a margin of safety. You are in essence tilting the odds in your favor that future price movements will be upwards.
- Monitor; keep an eye on your dividend growers; especially the current yield; fluctuations in yields send signals. The consistency of a firm’s dividend growth is the best measure of management’s confidence in the long-term growth outlook for a company.
Our dividend growth magic formula is: Quality + Value + Yield + Growth = Long Term Success
The blog will help those interested in dividend growth investing to better understand how it works and how to use it on their own with a little coaching.
We will also review our outcomes regardless of if they were good or bad. Having a good process means you go back and review your decisions when they fall outside your expectations. We can then make tweaks based on our findings and enhance our process. Only then will we know if we were good or just lucky.
