Wednesday, September 9, 2015

Is time spent learning dividend investing worth it?

I believe that time spent learning the ropes behind dividend growth investing is worth it. In this article I will discuss why I believe that to be the case. As usual, I will use my experience as a successful dividend investor for this article. In my case, learning about investing has provided me with tangible benefits of being three years away from achieving financial independence, after starting my journey in the middle of 2007. I also have gained intangible benefits to learning such as using knowledge acquired in investing to advance in my work or to find a better paying job. An even better intangible benefit has been the ability to connect with other investors, through this online community called Dividend Growth Investor.

As a person I enjoy learning. When you learn a skill there is never a guarantee that you will earn anything from that knowledge. But there is never a guarantee for anything in life either.

The time you spend learning is not wasted – knowledge accumulates like compound interest. When I spent four years obtaining a college degree I didn’t know if I would find a job afterwards. I paid money to obtain that degree, spent time acquiring knowledge and worked hard to achieve and maintained a high GPA. At the same time I worked 40 - 60 hours/week at several minimum paying jobs in order to pay for my degree, and in order to avoid getting any debt in the process. Would I have been better off spending 40 - 60 hours/week only working those minimum paying jobs and investing the difference? No way I would have been better of this way – this is the reason I decided to study hard, so that I have the opportunity to earn more than a minimum wage salary. While I had no idea whether anyone would hire me after graduating, I decided to make a calculated bet, and take the plunge. This investment in knowledge paid off for me. I believe that it can help anyone who is willing to invest in themselves.


I view the acquisition of investment knowledge in a similar fashion to the knowledge acquisition I did during my college years. There is no guarantee that it will pay off immediately. However it provides the opportunity to better my life. My investment knowledge is my ticket towards wealth. If you dedicate for yourself to follow a system of consistently saving and investing that money to work hard for you in dividend stocks, you have a much better chance of retiring early. This is because you are in control of your own destiny, and not hoping that the government, an employer pension plan or a mutual fund manager would support you.

This do it yourself mentality has helped me pick companies that have been paying me higher dividends in every year I have held on to them. This do it yourself mentality has also helped me to learn about different industries, which has also made my skills more marketable to employers. The nicest thing about doing my own investing is that I can create my own integrated approach to personal finances. This means that I focus on investing, tax planning and cash flows at once. It is highly unlikely that I can find an adviser who is good at investing, tax planning, personal finance and deeply cares whether I succeed in my investment goals and objectives. I believe that by doing it on my own, I gain significant synergies in knowledge.  For example, I can extract more value from investments that are temporarily down in price by doing some tax-loss harvesting. Or I can use knowledge of my own personal financial situation and cash flow situation to potentially identify and purchase a temporarily marked down investment, even when I do not have cash on hand for a couple of weeks.

In addition, if I can continue being a successful investor, I can leverage that strong track record into a more lucrative opportunity down the road. For example, I could manage other people's money. I can do this because investing is a perfectly scalable activity. Once a basic skill set of managing money is acquired, it doesn't matter whether you manage $5,000 or $50 million, The skills you gain are helpful, because you can manage an increasing amount of funds without any extra incremental investing effort on your part. If you understand how a company like Ameriprise Financial (AMP) earns its profits, you find the company to be attractively valued today, and you believe it to have good prospects for further long-term earnings and dividend growth, you can easily deploy anywhere from $5,000 to $5 million with the click of one button.

Even if I change my mind about that, it is useful to learn about business at my day job and use that knowledge when identifying profitable investments. It is also helpful to analyze investments and use that knowledge in my business or work-related activities. I think that super investor Warren Buffett has said it best with this quote "I am a better investor because I am a businessman, and a better businessman because I am no investor.”

If you don’t know anything about investing, you are much more likely to panic when you hear bad news like we had throughout 2008 to 2009. You would have been very likely to panic during the fears of a government shutdown in 2012. If you do not know why you are invested in a mutual fund, then chances of you doing something silly increase exponentially. Many investors who never bother to learn about investing end up committing the cardinal sin of investing, and end up switching strategies frequently. Unfortunately, they end up investing into a strategy after a period of relative success, and then these investors end up abandoning this strategy at the first sign of trouble only after a brief period of time. If you keep buying high and selling low, you will never compound your money the way you should be. Therefore, spending time learning about investing can be helpful to you.

Even if you end up using an adviser to stop you from doing silly things with your money, you will end up paying dearly for that service. This is because an adviser can impose a fee of as much as 1% on assets under management every single year. In addition, they can end up investing your hard earned money into high-fee products such as annuities or mutual funds with a sales load. If I had absolutely no knowledge about investing, I would have likely used a financial adviser from a place like Edward Jones or Ameriprise Financial (AMP), and end up paying 1% - 2%/year in adviser fees and mutual fund fees. This is why I am so lucky that I chose to invest my own money using my dividend growth investment strategy. I am even more excited about the fact that I am spreading the knowledge to other like-minded individuals through my website.

Note: This article is already getting to be too long. This concludes the first part of this article. I will post the second part on Thursday. Please stay tuned.

Full Disclosure: Long AMP, JNJ, XOM, KO

Relevant Articles:

Dividend Investing Knowledge Accumulates Like Compound Interest
My dividend crossover point
Never Stop Learning and Improving
How long does it take to manage a dividend portfolio
Warren Buffett Investing Resource Page

9 comments:

  1. Ciao DGI,

    Totally agree with this marvelously written piece. I think that investing should be treated pretty much like we treat driving licences. I keep asking myself why I need to "learn" how to drive (it can be harmful to me and others if I can't do it properly) BUT our society (World scale here) doesn't treat investing in the same way. Potentially investing is more harmful, and I believe that it should be something mandatory in schools. When you get your licence you are free to do what you like... There are so many people out there (some of the friends I speak to for example) that do not have a clue at what they are talking about, they have ideas that are completely out of this world (financially speaking) and do not realise... People who are well taught, they have University degrees and good careers, so they think that they can tackle investing because they are "not stupid"... Well... I have degrees and such, but I am still learning about it and actually I think I know close to 10/15%...
    Ignorance on the other side is what the market leverage on to "make money", because tapping into fears and irrational decisions a lot of losses are made, and where you have losses you have someone else gains...

    Sorry for the rant, anyhow great piece as usual!

    ciao ciao

    Stal

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    Replies
    1. As a financial advisor and dividend investor for both myself and clients, I could not agree more and appreciate your blog posts. In addition I'm a refugee from one of the two national firms mentioned in this piece (now being independent to avoid the conflicts of interest). There is, and probably always will be, people who choose to hire out help (me) because of: fear, lack of confidence or lack of interest. The industry is flawed like I suppose all industries are. In a perfect world everyone would take responsibility for their own finances but they don't. I would be happy to find a new career under those circumstances. Anyone considering a financial advisor beware the "salesman" and find someone with the heart of a teacher who lets you decide. Thanks for providing this venue.

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    2. Buongiorno,

      Thanks for your comment. Unfortunately, many people do not know how to invest their money. To be successful in investing one needs to spend time to educate themselves – I doubt that mandatory classes will make a difference. The sad part is that most do not even understand basic personal finance of spending less than what your earn etc. I didn’t even touch upon this in my article, because I naively assume that people who come to this site already have their financial house in order. I often get comments that prove me wrong however. I am hopeful for these people that the Social Security system stays intact to provide for them in their old age.

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    3. DGI, the problem with most of people is not unwilling to educate themselves in investing, it's their "mindset" toward wealth. They do not believe investing from the start! None of investing stuff for them.

      Changing people's mindset is a lot HARDER than detailing your investment strategy (or any common strategy).

      Delete
  2. Yeah I wish I had learned more about investing before the great recession. I bailed and cashed out my 401k and paid the taxes. I would probably be sitting on 400k now if I had left it alone.

    ReplyDelete
    Replies
    1. The important thing is that you have learned your lesson and you are working towards your goals. As long as you keep learning, you will do well over time!

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  3. Where do you find the Dividend Growth Rate for a particular stock? I haven't seen it on Google or Yahoo Finance.

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  4. Thanks as usual for a unique and insightful article. Like you, I began my investment journey in 2007. That made for a terrifying start as I watched many of my early investments (BAC, GE, PFE) drop significantly in price and cut/eliminate dividends in 2008. Fortunately (luckily) my response was to just stop looking at my brokerage account for a few months so I never cashed out. By early 2009 I'd done enough research to jump back into the market and earnestly start building my portfolio. Since then, I've evolved into a mostly dividend growth and value investor. Time spent following my investments, making mistakes, and understanding some of the micro and macro forces that effect markets and individual stocks has been invaluable in my learning process. More than anything, I've started to develop the discipline to ignore market fluctuations buy quality at undervalued prices for the long-haul. If I had to sum everything I've learned in the last 8 years up, it would be that stocks go down and stocks go up, that the "highly unlikely" often happens, and that most people who make predictions are wrong most of the time. What's convinced more than anything about a dividend-centric approach though is to see my dividend income on some days overtake what I earn that day from my salary, absolutely regardless of whether the market is up or down for the day or for the year.

    Long: XOM, JNJ, KO

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