There are thousands of strategies for investing in the stock market. The one common factor between all of strategies in improving your odds of success is to maintain a proper check of your emotions. In order to be successful, investors have to chose a strategy with a positive expectancy of success that fits their individual situation and stick to that strategy through thick and thin. The truth is that even if you have the best strategy in the world, you can still lose money if you do not have the mental strength to stick to your guns when things get rough. The rough and ugly situations usually occur with an unpredictable frequency. They are typically short-term in nature, or affect just a tiny portion of investor’s assets if they are permanent. However these situations are guaranteed to make most investors critically reassess their positions, while leading to panic for those who are relatively inexperienced in the game.
If you have a strategy that has the positive expectancy of generating good long-term results, then the goal is to stick through thick and thin and stay the course no matter what happens out there. A strategy of regular dollar cost averaging in quality dividend stocks, strategic dividend reinvestment and portfolio diversification is important. It provides an important edge for the investor against the constant noise that stock prices, market pundits and everyone else out there produces to distract you from achieving your long-term goals. This noise is out there not to guide you, but to be used to your advantage.
A large portion of the noise includes people’s opinions on various companies and industries. I usually ignore those in my investment process. For example, in the past week financial publication Barron’s ran a very biased and critical article on Kinder Morgan Inc (KMI) and Kinder Morgan Energy Partners (KMP). Many investors who had not done their research had obviously panicked, which was evidenced by the steep declines in Kinder Morgan Partners and Kinder Morgan Inc. These panicked investors failed to understand that nothing new was presented in that biased Barron’s article. For many long-term dividend investors however, the noise behind Barron’s article and Hedgeye’s previous attacks has been an opportunity to acquire ownership in this solid energy company in the US. Smart investors knew that Barron’s articles should typically be viewed from the standpoint of a true contrarian.
When I read Barron’s article, I asked myself if it added any new information to the table. The truth was that nothing had changed, other than the fact that the share and unit prices were stagnant. This had made many investors nervous, but the reality is that growth prospects are still intact. Many of those scared investors might have merely chased the high yield on Kinder Morgan entities, without understanding much behind the mechanics of partnership agreements, incentive distributions rights and differences between general and limited partners. Since they didn’t understand what they got themselves into in the first place, they panicked at the first signs of “trouble”. I put trouble in quotation marks, because Barron’s article was just that – an opinion of someone, that didn’t really add anything new to the table.
After reading the Barron’s article, I also asked myself whether anything materially had changed in the way KMI or KMP perform their business over the past 1 - 2 years. The only items that can change my assessment of a company are material statements of fact. That could be things in annual company reports, quarterly company reports or company press releases. It is true that expected distribution growth in Kinder Morgan Partners has declined to about 5%/year. However, if you can get a current yield of 7% that can grow at 5%, you can generate pretty nice total returns over time. I also liked the fact that Richard Kinder was the CEO who had his entire net worth invested in Kinder Morgan. This is the type of CEO I want running the businesses I have ownership stakes in. If Kinder Morgan was a house of cards, then Richard Kinder would lose everything – his credibility and his money. I have bet a large portion of my portfolio that he won’t lose either over the next 20 years.
I never pay attention to opinions of random people either offline or on the internet, because I can never check their credibility, bias, motives etc. I do not pay attention to stock price fluctuations, as I have mentioned multiple times on my site, except as a way to search for underloved and undervalued securities. The only way to stick to your guns through thick and thin is to spend time doing research yourself, and keep an open mind in order to learn about investments all the time. If the Barron’s article was the first time I had heard that Kinder Morgan Inc obtains incremental distributable cash flow exceeding certain targets from Kinder Morgan Partners, then that research was not very good in the first place. One should not be investing if they do not have a systematic way of analyzing securities. One has to start slow, and educate themselves while putting small amounts of money to work initially. It takes time, effort and patience to accumulate the necessary knowledge to make yourself a successful investor. But if you dedicate some time every week to it, you increase your chances of success, while reducing risks of total failure.
I have seen certain groups taking short positions against certain companies, and trying to produce panic, in order to profit from these events. I have seen this with Digital Realty Trust (DLR) in 2013, where those so called “smart hedge fund money” had used circular logic to confuse investors. Examples include their manipulation of terms such as maintenance expenses with maintenance capex. I refuted those points and others in an earlier post. Again, when investors had not done a good job in thoroughly analyzing a company, they get scared away from random noise from parties that might have questionable motives.
It is interesting that on paper, everyone is a contrarian and wants to buy cheap and sell dear. In reality, when things are really difficult, everyone starts crying out loud and looks for the exits. In reality, these are the rare opportunities to step in and capitalize on the fears of the amateurs. Not all of your bets will work out, but over a long investing career, chances are that the shrewd investor will come out ahead.
I have seen this with my investment in Target (TGT) this year, which has touched a nerve with a lot of investors out there. It is a common mistake to take some small missteps that a company has achieved and blow them out of proportion. I know that Target will be out there in 20 years, which is why current valuations make sense for my portfolio. If the stock goes further down in 2014, I would keep dollar cost averaging my way into it.
Full Disclosure: Long KMR, KMI,DLR, TGT
- The Importance of Corporate Governance for Successful Dividend Investing
- How to buy when there is blood on the streets
- Two Dividend Machines I Purchased Last Week
- Kinder Morgan Partners – One Company three ways to invest in it
- Dividend Investing Is Not As Risky As It Is Portrayed
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