Wednesday, September 24, 2014

Never Stop Learning and Improving

Some of my readers know that I own a lot of stocks. I even dedicated a whole article on the topic.

Readers also know that I have more than one brokerage account. I also dedicated another article on the topic here.

What can I say - I try a lot of different things. I think I do all of that because I like tinkering, and testing in real time what happens, and see how I react to it. Investing is all about having a method, and then trying to improve it, drop things that don't work. The lessons from all that have been invaluable, and have shattered my beliefs time and again. But as a result, I have become much more successful.

One account I own has exclusively low yield, high growth securities in the initial stage of dividend growth. An example includes the company Visa (V). From time to time, I also do something else, like participate in merger arbitrage, or buy a really under loved and undervalued security like I did with Gazprom in 2013 and early 2014. This portfolio has a myriad of small positions, which could mushroom to very big opportunities, particularly if they grow at mid-to-high teens for long periods of time. I believe it is important to try and monitor the dividend growth universe for the next big dividend growth story.

Another account is used exclusively for selling long-term puts. Check this article on selling puts if you are unsure what this means or how I approach that strategy. The account can have up to 25% of value in naked long-term puts I have sold. Meaning if account value was $100,000, I have sold puts on securities I like. If those puts are exercised at the same time, I would have to buy $25,000 worth of securities. Usually this would occur at lower prices, and into the future, matching expected inflows with future outflows. Too bad most long-term puts expire in Jan 2015 or Jan 2016. There aren't any long-dated put options on companies I am interested in going beyond that yet (unless you want to invest in ETFs like SPY, which goes as far out as December 2016). The main portfolio is fully invested, and the options expirations are layered into the future, so that they do not occur at the same time. This means that the $100,000 is invested in dividend paying stocks, and in addition, I have sold puts which would trigger a purchase of $25,000 worth of stocks, if puts are exercised. The put selling is a way to mostly try and buy certain companies at a discount, and generate some float in the process. I only do companies now, although for a while I sold puts on S&P 500. A recent example is the sale of puts on Hershey, which would result in an entry price of approximately $84/share, provided that the stock price is below $90 by January 2016.

Another account has up to 15% of value on margin. Check this article on leveraged dividend investing. Meaning if account is $100,000, I have bought 15,000 worth of securities on margin. I have figured out that this margin would be paid off by my dividend income within 3- 4 years. At the current time, the interest rate is a paltry 1.09% - 1,59%/year. Actually, several of the purchases I have made in 2014 occurred in this account at Interactive Brokers. I am also considering moving some of the options selling to this account as well, given the low commissions and super low margin rates I enjoy at this broker. However, I might need to beef up the equity there first before I combine both activities. I find investing using borrowed money to be a very interesting exercise, which could be disastrous however. This is why I am only doing this with one of the accounts, because the risks are high. However, I strongly doubt that it is that risky to buy shares on margin today, which would be paid off by my dividends alone in three to four years, while paying a very low margin rate.

A third account has some CD’s, which will likely expire in 2015. I had high hopes of putting approximately 20% of my portfolio in treasury bonds, and CD’s, but the low interest rate environment means this would be unlikely. This account used to be very high in 2007 and 2008, but has been steadily decreasing since 2008. I used to own a ladder of CD's, which have been expiring since 2008. I also owned some Treasury Bonds at one time a few years ago, but I sold them all in 2010. As those remaining CD's have expired, I allocated the proceeds into dividend paying stocks.

Another account simply collects all dividend, interest and other portfolio income received. It then distributes the cash to the account which I am trying to build up. I do not automatically reinvest dividends, but allocate them in the best values at the moment. This is honestly a very important account.

Over time, the activities in those portfolios have added to cash flow, and provided extra power to deploy in dividend paying securities.

I am not going to even list the retirement account such as 401 (k), which lets me defer taxes today, and which I hope to convert to a Roth IRA tax free when or if I drop out of the rat race, and reduce my effective taxable income to the lowest brackets possible. Nor am I going to discuss the SEP IRA, Roth IRA, Rollover IRA or Employer Stock I hold. The retirement accounts are mostly a cash outflow right now, since they are being built out and limited by the maximum contributions by our friends at the IRS. The employer stock plan provides the opportunity to buy shares at a discount, which are then hedged, and sold at the first possible opportunity. Small investors have opportunities to generate "alpha" all the time, particularly those employed at companies with benefits.

All of these accounts holds a purpose, despite the fact that the picture looks complicated on the surface. The retirement accounts are essentially taking care of themselves, and so are most of the other accounts I hold that are fully built up. A lot of the work involves having a list of holdings in a spreadsheet, and then monitoring the actual holdings and overall allocation to those. The rest is covered in my monitoring process, which involves researching companies to invest, looking at dividend increases, checking material company information such as quarterly or annual financials as well as other major items such as mergers and acquisitions. Those might or might not be driven by tax inversions.

At tax time, each brokerage account generates a 1099 that is just inputted into the tax form, and it is sent out to our friends at the IRS.

I often get asked why don't I simply buy 20 dividend stocks, and concentrate myself to those. The things is, if I had limited myself to a set number of companies, without looking for my own strategy that fit my way of investing, I would not have been as successful as I have been today. Investing environments change, which is why you need to be adaptable to the situation, and not impose your own set of values on the environment. If you place self-imposed limits on your growth as an investor, you are wasting your potential.

Full Disclosure: Long V

Relevant Articles:

Why do I own so many individual dividend paying stocks?
Dividend Portfolios – concentrate or diversify?
My Retirement Strategy for Tax-Free Income
Stress Testing Your Dividend Portfolio
How to become a successful dividend investor


28 comments:

  1. What exactly is the point of this article, except to say 'look at how well I seem to be doing with all my many, many investments....?" Not your usual caliber of thoughtful, helpful articles. So, you're allowed to brag once in a while, but please return soon to your usual persona. Thank you.

    ReplyDelete
  2. Makes me think that you're either single or a totally hands-off family man. Stop and smell some roses.

    ReplyDelete
    Replies
    1. Maybe I am crazy but I too spend at least an hour a day on stock research and I have a life

      Delete
  3. First Anonymous,

    Did you even read the article? If you did, did you pay attention to it? I am actually really dissapointed by your comment, because to me it shows lack of desire to succeed. When I read something, I always think how it can help my situation and improve it. To be successful, grab nuggets of gold, or ignore things that don't look feasible. Why can't you do the same, but rather decide to complain?

    The main promise is in the title.

    Here is the beginning "What can I say - I try a lot of different things. I think I do all of that because I like tinkering, and testing in real time what happens, and see how I react to it. Investing is all about having a method, and then trying to improve it, drop things that don't work. The lessons from all that have been invaluable, and have shattered my beliefs time and again. But as a result, I have become much more successful."

    Read this also

    "I often get asked why don't I simply buy 20 dividend stocks, and concentrate myself to those. The things is, if I had limited myself to a set number of companies, without looking for my own strategy that fit my way of investing, I would not have been as successful as I have been today. Investing environments change, which is why you need to be adaptable to the situation, and not impose your own set of values on the environment. If you place self-imposed limits on your growth as an investor, you are wasting your potential."

    ReplyDelete
  4. Second Anonymous,

    Your comment is pretty absurd. Your personal attack shows you are not the type of person I want reading my site. How about you try to think critically for a change?

    I spend my time trying to achieve FI, so that I can spend more time with the people I love. All the investing discussed is a means to achieve the goals. Why is it so difficult to comprehend this?

    Actually, it does not take that much time to check on investments. It can take less than 10 - 15 hours/week, which is the amount of time most people rather spend on mindlessly checking facebook, or watching crappy reality TV. You have the time to spend to be successful, but if you choose to waste it, and not be efficient about it, that is your problem not mine. Do not project your own failures onto me.

    ReplyDelete
  5. Sir...
    I have no idea how old you are or how much you have invested in the stock market and to tell you the truth, that's pretty irrelavant. What I like is how you continually try new strategies and then continually learn and adjust to your successes and/or failures. It shows both a desire to learn and a desire to succeed. I like your articles and I wish you the best. Keep putting out these articles. I learn something from everyone of them.
    Respectfully
    Dennis McCain

    ReplyDelete
    Replies
    1. Thanks Dennis and Suzanne!

      I actually learn a lot by interacting with other investors on this site, so the learning is mutual.

      DGI

      Delete
  6. I love this post! I love reading about your process. Your diligence and attention to detail is so inspiring, as is your willingness to share your process. All I can say is, please, keep writing, please please. I am incredibly grateful for your output.
    J

    ReplyDelete
    Replies
    1. The thing is to keep learning as much as possible, and find strategy that works for you. Then rinse ,repeat, improve, learn, and enjoy life!

      Delete
  7. Quote from your post:

    "I would not have been as successful as I have been today."

    To me, the word success is relative. I am wondering if you have some sort of benchmark in order to gauge success? I know ultimately that success for you is having a dividend portfolio that sustains your desired lifestyle free from working for someone else.

    ReplyDelete
    Replies
    1. Yep, when the dividend income exceeds expenses, I am reaching my goals. This is financial success. If stocks increase EPS and DPS, you do well.

      Delete
  8. don't let these loser comments get you down DGI. Keep up the good work. thanks for all the articles.

    ReplyDelete
    Replies
    1. Ha they are not keeping me down. when you get a flock of naysayers, you know you are doing something right. Noone can silence me with their negativity!

      Delete
  9. Well. I for one enjoy reading everything you have to offer on your site and I don't take it as you are showing off but rather showing that, hey this method works. Keep.up the great work DGI. Congrats Suzanme

    ReplyDelete
  10. DGI, do you have a DGI app so that I do not have to type in address all the time? I can't find one on your site.

    ReplyDelete
    Replies
    1. Nope. The worst thing I ever did was get a smartphone - so much time wasted on those "apps", it is not even funny. The second dumbest thing I did was sign up for Twitter - long term investors are at a disadvantage on Twitter

      Delete
    2. I have very few apps on my phone
      Only important apps get put on my phone and I was hoping your site had one.

      Delete
  11. Great article. Myself am thinking of switching to interactive brokers as I am starting to use more margin and options trading. The big banks are simply charging too much.

    ReplyDelete
    Replies
    1. I love everything about IBKR. You can do so many things, you have such a great level of access and reporting at such low commissions, I am actually dissapointed in myself I didn't open an account there earlier.

      If you are a beginner investor however, I would not start there.

      Delete
  12. DGI,
    You are one ambitious dude! If I ever decide to trade options (and I might after I retire) I might have to ask you for some training.

    Please keep writing for those of us who love your work.
    Thanks,
    KeithX

    ReplyDelete
    Replies
    1. Hi Keith,

      Thanks for reading. I would say options are a more advanced topic, since they add in extra risk and at the same time opportunity. Hence, I would do more reading before starting out.

      Best Regards,

      DGI

      Delete
  13. Unlike Anon 1 and 2, I like this article, DGI. It shows some of the variable ways of slowly obtaining wealth. If they can't see it as being helpful, perhaps they are beyond help.

    Have a great one and looking forward to your next article 8)

    Daddio

    ReplyDelete
  14. I agree with @KeithX, great article and any more you may have lined up regarding options would be appreciated. Seems selling puts would be a great strategy for picking up blue chips with a long-term mindset; interested in knowing more about your experience with them. Keep up the great work, been reading your site for a while and have learned a lot.

    ReplyDelete
  15. Wow, this is really impressive! As someone who's just begun to move beyond just going long stocks, it's great that there's a whole new world of investing out there that intelligent investors can use to become successful. Got to hit to books to learn about options and margins, so I can possibly use them one day.

    ReplyDelete
  16. @DGI, I have learnt so much from you over the last few years and your helping many people achieve FI with your detailed analysis. Please don't spend your time replying to the wasters in life. Just say "not worth replying to" next time. Jon from the UK

    ReplyDelete
  17. Wow the market is starting to look beautiful.

    ReplyDelete
  18. Hi DGI. I am so glad to read your various strategies. They are certainly open-minded.

    What broker are you using for your margin account? My accounts margin interest rate is very high at 6%+.

    Thanks. -- MU

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

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