Our Investment Digest and Dividend Digest Contributors are a smart, creative and diverse bunch. They represent over 200 unique points of view on the best way to invest your money. And over the years, I’ve heard some pretty unexpected advice from them. Today, I want to share 10 of the most surprising ideas they’ve shared with me.
1: Don’t Make Predictions!
Ron Rowland, Editor of All Star Investor, has learned that making predictions can cloud your judgment:
“I am neither a full-time bull nor a full-time bear. More importantly, I try to avoid making predictions about the market. I believe that people who are on the record for making a bullish or bearish prediction are likely to bias their recommendations to align with that prediction. So rather than wasting time trying to guess what the market might do, I try to focus on what it is doing, and try to align the models accordingly.”
2: Buy Stocks Like Washing Machines?
John Buckingham, chief investment officer at Al Frank Asset Management and editor of The Prudent Speculator, says investors should buy stocks more like they buy appliances or groceries:
“As value investors, we seek to buy stocks that are on sale, similar to what most folks do in their everyday lives. Whether it is a box of cereal, a washing machine or a new car, most of us prefer to pay as little as possible and we generally walk away if we think that the price is too rich. On the other hand, the stock market, as the old adage goes, is the only place where they hold a sale and few people show up.
“Though we find this puzzling, given that history shows value stocks outperform growth stocks, we are grateful that investors often overly punish companies for short-term transgressions while they drive ‘hot’ stocks to unreasonably high levels. It is this dynamic that allows us to implement our strategy as we are able to make a reasonable assessment of fair value based on a variety of historical valuation ‘norms’ for each company, its sector and the overall market. When a stock is priced at a significant discount to that determination of fair value, we buy. When it approaches fair value or when we find another stock with much better reward to risk potential, we sell.”
3: Being Contrarian Is Not the Same As Being Stubborn
Nate Pile, editor of Nate’s Notes, learned this lesson the hard way shortly after starting his newsletter:
“Another change that I made during the first few years of the newsletter that is still with me today is a greater willingness to ‘listen to the tape.’
“Like many individuals, I prided myself on my ‘strong contrarian streak,’ and given that Nate’s Notes has always taken a long-term view of investing, it seemed logical to me in the early days that if I loved a stock at $20 and it then slipped to $15, I ought to like it a whole lot more (and, in fact, this line of reasoning still seems logical to me today!).
“However, after ‘riding stocks down’ far more often than I care to remember–even after noting to myself ‘oh boy, here we go again’ when experience was telling me an extended slide was about to get underway – it finally dawned on me that rather than buy more shares every time a stock dipped, I would be better off letting it slide for as long as the market would allow it to slide… and to not start buying again until the trend had finally run out of steam and reversed itself.
“By making this change in my approach to investing, not only did the newsletter’s returns improve even further (because we stopped losing as much during downturns in the market), but my confidence in myself also started to grow to the point that I knew publishing the newsletter was going to be a sustainable business after all.”
4: Focus On Your Winners!
Roger Conrad, Editor of Capitalist Times, says investors often focus most of their energy in the wrong place:
“Practice diversification and balance, now more than ever. That means being willing to take a profit in big winners that have gone up so much that they’re out of balance with the rest of your portfolio. It’s normal that investors generally focus on falling stocks as the greatest threat to their portfolios. But ironically, the further a stock falls, the less damage it can do to you. But the stocks that have risen the most are most vulnerable to disappointment, and if they’re out of balance with the rest of your holdings, your overall portfolio will suffer commensurately.
“Note that I’m not a fan of averaging down in falling stocks either. Investors’ emotions tend to rise as they increase their bets on a stock. And while most fallen stocks do recover, some don’t. And for most people, the more money they have invested, the harder it is to cut and run.”
5: Buy Underperforming Stocks
George Putnam III, Editor of The Turnaround Letter, doesn’t buy stocks that are going up. Instead, he focuses on the market laggards:
“It is very tempting for investors—particularly those who may have been out of the market for a while—to chase hot stocks that have been running up.
“Inevitably, those stocks will stop running up and return to earth, causing a lot of pain for investors who chased them up. It may seem counterintuitive, but I believe that the best way to make money in the long run is to buy stocks that have been underperforming. If the company has a good core business and its problems can be fixed, the stock will eventually appreciate very nicely.”
6: There’s No Magic Bullet
Neil Macneale, Editor of 2 for 1 Stock Split Newsletter, dispensed this piece of tough love when I interviewed him last year:
“Many, if not most, newsletter readers are looking for a magic bullet, a path to instant riches and they are constantly trying new letters after being disappointed their current guru hasn’t delivered. I say to these folks, ‘Pick a letter with a very long track record you can live with, and then commit to a program you understand and will stay with through both ups and downs.’ If an investor finds this just too hard to accomplish, then they should buy a good broad market index fund and forget about individual stocks.”
7: Get Rid Of Your iPhone
Benj Gallander, who is the co-editor, with Ben Stadelmann, of Contra the Heard, finds that some technological distance helps him stay contrarian:
“I do my best to avoid the noise in the market. Given what I do, I am one of the least connected people I know. No blackberry or iPhone and perhaps I have used my cell phone 20 minutes in the past year. Given that in a normal year I don’t make more than a dozen trades, it is not necessary for me to be connected. And history shows that active traders do not do as well as we more patient types.”
8: Get Out Of The Market
Joseph Cotton, editor of Cotton’s Technically Speaking, said one of the most important things for investors to do is simply to get out of the market when conditions are unfavorable:
“When the market is vulnerable, and moving down, just step aside and go to the sidelines, and wait to see what transpires before getting back in. Stock commissions are so low that you can do just that.”
9: Growth And Income Go Hand-In-Hand
Roger Conrad, Editor of Conrad’s Utility Investor, shared this piece of contrarian wisdom for income-focused investors:
“I guess what really appealed to me about utilities was the fact that they run big systems that are so fundamental to a functioning economy, and they really do touch everything. Despite their reputation, they’re never boring. In fact, making good sector investing decisions depends on staying on top of a wide range of issues from the environment to federal, state, local and even global politics.
“The best utility stocks also offer growth. When I started in this business, inflation was a real worry for investors. But I noticed that even for dividend-paying stocks, growth could offset the impact. Consequently, every income investment I’ve recommend ever since has had a growth component attached, just as utility stocks do.
“That’s not a conventional philosophy. In fact, most brokers and advisors seem to act like growth and income are two separate objectives. I don’t think you can have one for very long without the other. And fortunately, I’ve been able to find a large number of yield paying investments over the years that have that growth component, whether it be growing earnings or being priced in a currency like the Canadian dollar that keeps pace with inflationary pressures.”
10: Die Broke!
Finally, Bob Brinker, editor of The Brinker Fixed Income Advisor, shared three pieces of unconventional advice for income investors when I interviewed him last year:
“It is a struggle for many retirees to generate the income they need. In the end, each investor needs to balance their need for yield versus their risk tolerance. It makes no sense to me when I see investors who have plenty of money take unnecessary risk. If you can provide an income that meets your lifestyle in U.S. Treasuries and CDs, do it! Do not take risk just to earn more money that you do not need. Only take on added risk if you need to in order to generate additional income.
“Another important point I emphasize is to focus on real return, not nominal return. Earning 7% in a 4% inflation environment is not better, in real terms, than earning 4% in a 1% inflation environment.
“A final important point is to consider spending your principal–that is, not passing along your fortune to your heirs. Instead, allow yourself to have your portfolio shrink in the very late stages of life. This is often referred to as ‘dying broke.’ The benefits of your investment portfolio quickly vanish at the end of your life–so use your money while you can. You cannot take it with you.”
Wishing you success in your investing and beyond,
Chloe Lutts Jensen
Editor of Investment of the Week
P.S. If you’re looking for returns of 37%, 38% or even 47%, look no further. Dividend-producing investments we recommended in Dick Davis Dividend Digest produced these total returns in just the first six months of 2013.
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