How Many Stocks Do You Need For a Diversified Portfolio?

DiversificationI’m facing a difficult task today.  My goal is to try to convince you not to follow one of the most broadly accepted principles of investing: diversification.  Of course, since I’m not a widely respected academic or investment guru, I’ve got to rely on quotes from those who actually are.  Warren Buffett should suffice…

In his 1978 Berkshire Hathaway letter to shareholders, Mr. Buffett said, “We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.”

In other words, diversification doesn’t make any sense.  If the decision is between a company that we really love and one that we’re just ho-hum about, we’d rather invest 100% in the one that we really love rather than dilute our hand with mediocrity.

Warren also said, “Diversification is protection against ignorance.  It makes little sense if you know what you are doing.”  That one doesn’t need translation.  The greatest investor of all time is clearly not a fan of diversification for sake of diversification.

It doesn’t mean, however, that just anyone just go around investing their life savings in just two or three companies.  The key is the “if”.  IF you know what you are doing.  So how do you know if you know what you’re doing? Continue reading

Why Stock Market Corrections Are Irrelevant

Stock Market CorrectionSince the S&P 500 and other major stock market indices increased by 25%+ in 2013, many market prognosticators have been looking in their crystal balls and predicting that a market correction is imminent.  They cite many different reasons:

  1. Stocks are at an all-time high.  The last time they were at levels like this, we saw one of the largest market drops in most of our lifetimes (2008-09).
  2. Interest rates are so low.  When they inevitably increase, stocks and longer-duration bonds will surely take a major nosedive.
  3. The economy is still struggling to add jobs and grow fast enough to sustain the levels of earnings growth most are predicting.

I’m not here to refute or defend any of these arguments.  I’m here to throw in my two cents: WHO CARES?!

That’s right.  Who really cares about market corrections?  If you’re trying to time the market, you might.  But if you’re a smart investor, whether the market goes up, down, or sideways makes no real difference to you.   Continue reading

What Are Your Real Priorities In Life?

Priorities: What Are Yours?

I’ve been doing a lot of soul searching lately.  And I’ve realized that my priorities are way out of whack.  If you would have asked me what my priorities were a couple weeks ago, I would’ve given the “right” answers… (#1) God, (#2) family, (#3) friends… {insert more important things}… (#49) money.

If I really look deep down, however, I know my answer would have just been lip service.  If God was really my #1 priority, why was I having such difficulty finding time to study His word?  And have there been times when I’ve put my career ahead of my most important relationships?  You bet there have.

Of course, I’m human, but that excuse can only go so far.  At the end of the day, my true priorities will shine through.

A wise man once said, “If you want to see a man’s priorities, study his checkbook and his calendar.”  I believe if you looked at my bank account and calendar over the past several years, you would probably determine that my #1 priorities in life are:

(1) the accumulation of money and …

(2) learning more about how to more quickly, efficiently, and securely accomplish #1.

As vain as that probably sounds to read, imagine how extraordinarily vain I feel admitting that to you.  It’s pretty shameful, but I’m glad that God’s been helping me recognize this.

Left unchecked, our tendency to pursue success and happiness (in whatever forms we think we will find them) can lead us into misplaced priorities.  That’s where I was – chasing a fulfilling life through swelling my investment portfolio.

Sad, yeah?

To help me get my priorities in place, I decided to do a “priority audit”, which I would like to share with you today. Continue reading

Target (TGT): A 3.4% Dividend Yield… But Is It a Buy?

TargetLately, there has been lots of talk amongst dividend growth investors about Target Corporation.  Over the past year, TGT has underperformed the S&P 500 by nearly 34%.  In a world where it is difficult to find value, TGT’s 12-month performance is enticing.  Add on the now 3.4% dividend yield, 46 years of dividend growth, and a household brand name and we’ve got ourselves a very tantalizing offer.

Target vs. S&P 500

Target’s woes are very widely known and can be traced back to two primary issues: Continue reading

Today, Cisco Systems (CSCO)we’re going to talk about a company that I’m adding to my Dividend Growth Investing Watchlist for a potential future buy.  I’m going to go through the things I analyze when adding a position to my portfolio.  Since this is the first time I’ve done this, I will be a bit more descriptive than in future posts – so this will be a long post, but I decided it would be better to show more information than to omit pieces of the story.

Cisco Systems (CSCO) designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate (Google Finance).

1. DOES CSCO HAVE AN ECONOMIC MOAT?

Warren Buffett has famously made his fortune buying companies that possess what he calls “economic moats”.  He thinks of companies like a castle.  The bigger the castle (profits), the more competitors that are going to come try to break in and steal away market share.  If the company possesses some competitive advantage that prevents or slows down the competition, he would say that company has a moat.  The wider the moat and the more crocodiles that inhabit it, the longer that company will be able to enjoy its market share and the high profits that go along with it.

There are several financial ratios that help us determine whether or not a company possesses an economic moat.  As we move along here, keep in mind that there is more to determining whether a company has an economic moat than by flipping through its financial statements.  These numbers just indicate where to look and do not definitively mean that a company does (or does not) possess an economic moat.  They do help us maintain objectivity in our analysis and provide a base for further exploration and thought. Continue reading

Should You Always Be Fully Invested?

MythbustingIf you read around the internet, you’ll find that the vast majority of people will advise investors to have 100% of their money invested in either stocks or bonds all of the time. Should you always be fully invested?

If you are investing in individual businesses rather than a broad-market ETF, it doesn’t make sense for you to always be fully invested just for the sake of being fully invested. It is much better to sit in cash and wait patiently for an opportunity than to tie up capital earning sub-par returns.

Don’t just take my word for it. The world’s greatest investor himself advocates patience rather than action. Warren Buffet says,

“Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.”

To illustrate, let’s compare the investment results of two investors. Both investors plan to invest $5,000 per year over the next 20 years. The only difference is that Investor A is fully invested in the stock market 100% of the time. Investor B, on the other hand, decides that they will only purchase companies at prices that will deliver long-term returns of 12%. Continue reading

How To Make More Money Without Working For It

No Work!There are two ways to make money in life. You can either:

#1 work for it yourself

or…

#2 let someone (or something) else do the work for you

Most people focus their attention on #1. Growing up, we’re taught that the only way to earn income is by getting a job and working. If you want more money, you have to work more hours or move into a higher-paying job.

The problem is that you only have a limited amount of hours in the day. All those extra hours on the job mean less hours doing the things you’d rather be doing and less time with the people you love.

If only there was a way to duplicate yourself…

You may not be able to send two of you to work on Monday, but you can use your money to work for you. And, no offense, but your money can work a lot harder than you can! Read more…