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Our Research is Flawed!



September 07, 2009 – Comments (5) | RELATED TICKERS: DOV , CTL , PBI

At Wax Ink, we define investing as the art and science of managing capital at risk.

A few weeks ago, a friend of mine sent me a spreadsheet he had downloaded from The Drip Investing Resource Center. The spreadsheet was titled U.S. Dividend Champions. Opening it, I found the names of 109 companies, all of whom had increased their dividends year over year for at least the past 25 years, and in one case, year over year for the past 56 years!

In the accompanying e-mail, my friend explained that his financial advisor had sent him the spreadsheet link and explained that the advisor's firm was going to adjust his portfolio using the companies listed on the spreadsheet, and would I please look at these companies and see what I thought.

As I said, the spreadsheet I received contained the names of 109 companies, of which 19 companies held no investment interest for me from the start. These 19 companies were in the Banking Industry, the Insurance Industry, the REIT Industry, the Asset Management Industry, and the Financial Services Industry. In other words, and this is strictly my opinion, these companies were thieves left hiding after the recent financial sector meltdown.

Determining a Reasonable Value Estimate for 90 companies is not something I can do in an afternoon. At best, I can do four in a day. After that, my poor old addled brain just turns to vinegar.

In the end, of the 90 companies listed on the spreadsheet, 29 were in the Buy range, 2 were in the First Sell range, 10 were in the Close range, and 49 were in between the Buy and the Sell ranges.

When we invest, we are taking a risk. If we have done our due diligence and understand something about the company we are investing in, what we are actually doing is mitigating some of the risk we have decided we want to take.

But the main reason for our willingness to take the risk in the first place, greed aside, is that we believe there is a greater potential for the growth of our risk capital than there is for the loss of that same capital. But how can we know this?

The simple answer is, we can't.

The research we do at Wax Ink, is for our own investments, we simply share with you our results. While we read through a company's most recent SEC Form 10-K and SEC Form DEF 14A in an effort to get a better understanding of company finances and company management, we know that there is a good possibility our research could be flawed. It happens. It is simply part of the world of investment risk.

To help mitigate that risk we make a very simple assumption. We assume that the Reasonable Value Estimate we came up with as a value for the flawed. Yep, we start off assuming we have made an error.

To compensate for that error, we do several things; we discount our Reasonable Value Estimate by 50%, we fix our minimum hold period to 5 years, and we determine a price range over which we will add shares of stock to our portfolio, by determining what we call our Risk Adjusted Buy Target.

The idea is to add a few shares when the stock price reaches our Buy Target, and continue to add shares on pullbacks in price based on our Risk Adjusted Buy Target. In the event the price of a stock is at or below our Risk Adjusted Buy Target when we finish our research, we simply take a full percentage position in the stock. In other words, there is no dollar cost averaging in that situation.

Of the 90 companies on the spreadsheet that we reviewed 6 of the 29 companies whose prices were within our Buy Target Range, had prices at our below our Risk Adjusted Buy Target.

To recap, 32% of the companies we valued were within our Buy Target range, and of the companies within our Buy Target Range, 21% were with in our Risk Adjusted Buy Target range. In addition, 2% of the companies were within our First Sell range, 11% were within our Close Target range, and 54% were somewhere in between Buy and Sell.

For those of you interested, you can download the PDF version of the spreadsheet we reviewed by clicking on the link below. It contains our estimate of prices as well as links to each and every stock we built a worksheet for. We hope it helps.



5 Comments – Post Your Own

#1) On September 07, 2009 at 7:49 PM, anchak (99.89) wrote:

Nice list Wax! Thanks!

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#2) On September 08, 2009 at 3:06 AM, Tastylunch (28.61) wrote:

Yep, we start off assuming we have made an error.

I like this methodlogy. After all one cannot know all the variables even if you are Buffett. It pays to account for error.

I  tend to treat all my stock buy prospects as suspects.

 Thanks for the PDF  Wax

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#3) On September 08, 2009 at 4:41 AM, wax (< 20) wrote:

You are welcome for the list....hope it helps, and happy to make it available.


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#4) On September 08, 2009 at 4:49 AM, portefeuille (98.82) wrote:

I am "highly sceptical" of this "dividend investing" approach.

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#5) On September 08, 2009 at 5:07 AM, wax (< 20) wrote:


Dividend Reinvestment Plans have been around for a very long time.

Many years ago, the purchase of an "odd lot", something less than 100 shares, was very expensive, since back then, all of the recordkeeping was done by hand. 

The dividend concept, I think, was put forth as way for ordinary working people to invest/save their money, by allowing them to purchase less than 100 shares of stock in a company, and be able to do so at a reasonable price.

Reinvsting the dividend allowed the investor to add to their holdings for no cost, which over a lifetime of saving/investing amounted to a pretty tidy sum.

Today of course, there is electronic trading and the associated accounting can be done with the touch of a button almost instantly.

Buying a stock strictly because the company pays a dividend, or has increased its dividend every year since the dawn of time, is, to me, simply not a valid reason to purchase a stock.


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