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TMFPostOfTheDay (< 20)

Limit Your Mistakes



August 28, 2013 – Comments (0)

Board: Dividend Growth Investing

Author: jackcrow


First I apologize for accidentally unleashing the near religious zealotry of some folks with the apparently touch stone phrase "timing is a fools game". You will find that there are "schools of thought" that run through investing circles and some folks defend those schools as if if you just slapped their grandmother, twice.

What I do know is sophism and phrase plucking to beat ones own drum doesn't earn money in the markets. What earns money in the markets is money at work in the market and that includes all the risks that come with investing. Capital, money, CAN be lost investing in dividend paying stocks. Money can be lost investing in tech, industry, finance .... Money can be lost using CANSLIM, Mechanical Investing, Indexing, Value investing, Growth investing ... Simply, there are risks to capital when one invests.


There is inflation risk and opportunity risk and we can probably come up with others. Opportunity risk is "capitalized" when you fail to act on good instincts and good information. Inflation erodes while opportunity risk simply fails to earn. There are many who refuse to address opportunity risk mainly because they are blinded by capital loss risk. The fear of losing keeps them from earning.

Several have argued that there will be another pull back, one has been willing to date it. History strongly suggest another 10% pull back is near, I don't know how near. 25% and greater pull backs have a catalyst which only a few are wise enough to see in advance and everyone agrees after the fact that we should have seen it coming. More importantly even fewer have the investing fortitude to intelligently capitalize on those inflection points. History tells us very few folks who do see the last catalyst in advance get the next one correct.

So we all agree the market can and will go down. The burning question is what to do about it. Most 10% - 25% pullbacks/downturns/collapses recover in 3 years or less. If you are willing to wait 3ish years to let your money sit and recover while you cash your dividends then that is a perfectly acceptable way to invest. This is an opportunity risk, you have the opportunity to fail to earn dividends by going to cash while the market sorts a few things out. It is perfectly acceptable to accept that opportunity risk and stand on the sidelines if you cannot stomach that risk, if and only if you have a viable method of putting your money back to work.

It is also important to note that "Markets" are macro while individual companies are "Micro" and Micro and Macro don't often move together cleanly. We have a macro inflation number that does not match my inflation number, my inflation number does not match that of my neighbor and so on. If you do the analysis you will find that some companies experience only temporary, measured in months or quarters, losses during 10% - 25% pull backs. In fact there are always companies that power right on through the 10% pull backs. AAPL ignored the spring swoons that caused so much drama on T.V., radio and the Web the last few years.

In the end you need to decide what you are going to do and how you are going to do it. I know I'm going to be wrong often enough that I have built into my system ways to limit my mistakes. I don't bet all in, so I am never all in cash or all in the markets I am not willing to accept that binary risk or being completely right or completely wrong. I'm not smart enough to get that right.

So here are the very basics of an investing system.

Preventing losses is more important than gains
A way to select good companies(stocks) from bad
A way to price the good companies that is in your favor
A way to decide when to keep good companies
A way to decide when to sell good companies

Within the 4 "ways" there are dozens of good and solid means of accomplishing those tasks. The "best" one(s) for you are the ones you understand and can apply consistently even when your emotions over your money are running a little high.


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