I read a very interesting article that got me thinking about investing mistakes. The article; 50 Unfortunate Truths About Investing by Morgan Housel, had some points that really hit home. One that stuck with me was:
- As Erik Falkenstein says: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”
I can relate to this point, as over the past few years my investing knowledge has grown substantially. Some of the investments I made in the past I wouldn’t make today. My investing technique has changed and become more conservative. Now, I focus on dividend growth stocks and buying at a great price. In the past I didn’t fully understand the power of dividend growth companies, so the number of companies I’ll invest in has dropped considerably. I learnt a huge amount in the first few years of investing. During this period of starting out I totally agree that one of the best things beginner’s can do, is try and avoid mistakes.
How do you avoid mistakes?
Know yourself and then read a lot. It’s important to know how you’ll act in certain situations, and you’re risk tolerances early on. This combined with reading lots to learn as much as you can is a great way to avoid mistakes. Finding an investment plan that works for is a difficult thing for those just starting out, but some good first steps are to:
- Take some risk tolerance tests and try to determine a level of diversification that meets your risk tolerance.
- Figure out how much time you want to spend managing your portfolio. If you are interested in investing and enjoy learning about it, then managing you’re own portfolio could be the right choice for you. If you don’t have a lot of time and aren’t that interested in investing then you should consider a couch potato strategy or a fee-only advisor.
- Come up with a set a rules for when you should make changes to your portfolio (buy or sell a stock or ETF).
- Identify some good resources for when you need help.
Practice broker accounts that let you practice with fake money can be useful too. Even after taking these steps the odds are you will still make some mistakes, but you should be able to minimize and learn from them.
What do I do?
My investment plan involves buying quality dividend growth stocks at cheap prices and using their increasing stream of dividends to support retirement expenses. It took me a significant amount of time to find and develop this plan into what it has become today, so I encourage beginners to keep at it and to continue to learn as much as you can. For those that don’t have a huge interest in investing and are looking for a plan that is more hands off, then you should consider the couch potato strategy. This strategy involves determining your risk tolerance to come up with a target allocation of stocks and bonds. Using this target you buy a few index ETFs with low MER% ratios and then rebalance at a set interval (a common interval is annually). This strategy is great for those without a lot of time because once it is set-up it only requires a bit of time once a year. Another benefit is the returns for a couch potato strategy over a 5 or 10 year period will beat the vast majority of actively managed funds.
Some of my mistakes
I continued reading the article and one of the later points was:
- The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn’t — his are much bigger.
So on that note I’d like to go over a few of my mistakes. When I look at my portfolio some companies stick out. Blackberry (Click for a FREE trend analysis of TSE:BB) is an obvious one as it doesn’t pay a dividend and it’s price has tanked. I’ve already talked about my mistakes made with Blackberry, so I wanted to look at other companies. This is where I come to Sunlife (Click for a FREE trend analysis of TSE:SLF).
Sunlife hasn’t raised their dividend since 2008, and I’m not sure that they’ll start increasing their dividend any time soon. I bought Sunlife for $24 back in 2011, and its around $36 these days, so it’s not like it hasn’t been a good investment. The compound annual growth rate (CAGR) excluding dividends has been over 20% and my yield on cost is 6%. My investing strategy is mostly geared towards earning dividend income to support retirement expenses, so while the returns are good, the dividend income is slowly losing a battle to inflation. For someone who is trying to average 8% annual dividend growth this stock is not helping. Sure it’s been a good investment, but I wouldn’t really consider it a dividend growth company. I think eventually I will be selling Sunlife.
I wrote previously about when I’d consider selling a stock, and stalled dividend growth was one of the reasons. While this appears to be the case, I won’t be selling right away. As it stands right now, no stocks are below my entry price, with the exception of Potash Corporation of Saskatchewan. I already own a decent stake in Potash (Click for a FREE trend analysis of TSE:POT), so that doesn’t leave me with with any other options right now. Rather than just sell and keep the cash, I plan to sell when there is something else that I’d be interested in buying.
I’m not in a huge hurry to sell Sunlife, so if it turns out that I have cash saved up I’ll probably use the cash to buy more shares of whatever, before I sell Sunlife. My investing criteria is fairly conservative which means I spend a considerable amount of time waiting for prices to drop before I invest. This usually means I’ve saved up some cash which I’m usually happy to invest first.
Another company that I may consider selling is Intel (Click for a FREE trend analysis of INTC). There a lot of US companies with good dividend streaks, so I’m fairly strict with my US holdings. It’s been over a year since Intel increased its dividend, which is not a trend I like to see. I think they’ll announce an increase near the end of January 2014. Until then, I’m employing the wait and see approach.
What have some of your investing mistakes been?
Newsletter Sign-Up & Bonus
Have you enjoyed our content?
Then subscribe to our newsletter and you'll be emailed more great content from Dividend Growth Investing & Retirement (DGI&R).
BONUS: Subscribe today and you'll be emailed the most recent version of the Canadian Dividend All-Star List (CDASL).
The CDASL is an excel spreadsheet with an abundance of useful dividend screening information on Canadian companies that have increased their dividend for five or more years in a row.
The CDASL is one of the most popular resources that DGI&R offers so don't miss out!