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No Need to be Smarter or Faster

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July 02, 2012 – Comments (5)

Board: IV Value Central

Author: TMFBigFrog

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Hey Dragon --

As an individual investor, your best shot at an edge over the market is driven by your patience. You don't need to be a 'smarter' or 'faster' analyst or have better access to information. Unless you've got the billions the big trading firms do, any edge you have, other than patience, is going to be minor and short-lived, anyway.

That said, the longer I invest, the less I care about relative returns.

For one thing, my primary strategy is based on trying to grow our dividend income. What I've found is that the strategy works well in boom times when companies naturally raise their payments, but that it also holds up well in not so boom times, when each new purchase or reinvested dividend buys all that much more stock... A lousy year on the net worth front that STILL brings with it a double digit increase in passive income isn't all that bad in my book.

For another thing, what I've found is that our general pattern from a performance perspective is that we're getting decent overall returns, often beating the market when it tanks and often losing a bit of ground when the market booms. There's a very real risk that if I go chasing faster returns by looking to 'beat those booms' that I'll wind up chasing things right off a cliff.

And finally, as I talk to friends and family in this economy, the more I realize that the most important split isn't who's beating the market and who's not, but who is capable of managing their money and who isn't. I know far too many people who make more than I do who are struggling way more than we are. The acts of budgeting, saving, and investing matter a ton more than the returns on any investment, when it comes to personal money management. I'd rather have cash invested earning a market-trailing rate of return than have no cash available to invest in a market-trouncing system...

-Chuck
Inside Value Home Fool

5 Comments – Post Your Own

#1) On July 02, 2012 at 6:15 PM, Option1307 (30.03) wrote:

Great thoughts!!

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#2) On July 02, 2012 at 6:16 PM, Option1307 (30.03) wrote:

Great thoughts!!

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#3) On July 02, 2012 at 7:07 PM, awallejr (79.49) wrote:

Don't need to twist my arm here.  I've been arguing for years here to create a core holding that generates income and then use that income to constantly grow one's holdings.  Of course monitor to make sure the thesis for holding a given stock hasn't changed, but over the years you will be surprised how higher and higher that income stream grows.

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#4) On July 09, 2012 at 2:23 AM, XMFConnor (97.77) wrote:

I can't really agree with this. Sure, patience is a valuable thing for any investor, but I'm not sure that follows to your conclusion that it is your biggest edge and that you should invest in dividend paying stocks.

The biggest edge in my mind for the individual investor is the ability to invest in smaller stocks with zero analysts covering them. Dig into micro-caps with a value-based perspective, and you can achieve extraordinary returns with less risk-- the holy grail of investing.

There is considerable evidence that small-cap, value stocks outperform every other combination (large cap growth, small cap growth, etc). Is there any evidence pointing to outperformance of dividend paying stocks? If so, how does it compare to small cap value? 

 

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#5) On July 09, 2012 at 3:57 AM, marc5477 (30.62) wrote:

Ok so from someone who actually made $3m the last 4 years starting with only $50k in 2008 Ill give you my opinion. You certainly dont need to be faster but intelligence is the key to everything. Being able to crunch numbers accurately and properly and knowing enough about life, economics, people, politics, world perceptions and finance makes all the difference. You dont need to figure it out instantly in the same day but if you can predict accurately using your knowledge and number crunching ability you will beat the market 90% of the time. Oh you also need balls or guts if youre female. The 2 keys in my opinion are in this order, Intelligence then courage to do something you never tried before and to be able to go against the crowd.

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