Wednesday, February 26, 2020

Regular Investing Beats Buying At The Bottom Every Time

I was not planning to buy any shares this week, after investing most of the funds and then some in February already. The drop today on coronavirus fears spreading around the world has provided some decent entry opportunities for some companies.

I won't have more cash to invest until early in the month of March. Therefore, if stocks go down further from here for the rest of the week, I will be sitting on the sidelines until Monday. As an investor, my analysis has shown me that it is best to put money to work whenever I have money to invest. I do not sit in cash, waiting to put money to work. I simply allocate the cash I can afford to invest in the best values of the moment. Sometimes this means I buy at the bottom, and sometimes it means buying at the top. In the long-run, these decisions cancel each other out.

I made a calculation where I compared two investors in the accumulation phase. The first investor invests $1,000/year at the beginning of each year between 1980 and 2019 in a diversified group of US stocks ( using VFINX historical data that accounts for dividend reinvestment once again). The first investor ends up with $544,037.82.

The second investor also puts $1,000/year, but manages to invest his annual contributions in the lowest point of the year. They end up with only $586,776.51, despite having perfect timing for 40 years in a row.

As you can see, consistent investing beats timing the markets in the long run for most investors.  While noone can pick the bottom in stocks consistently for 40 years in a row, everyone can learn to invest regularly, whenever they have money to invest.

In other words, time in the market beats timing the market.

I do not believe that you need to be great at picking bottoms, in order to succeed as an investor. My experience has proved to me that investing regularly in quality dividend paying companies, through the ups and downs of the market sentiment beats timing the markets and sitting in cash waiting for a crash. Slow and steady investing, regular investing is what truly matters. As a result, I have been investing whenever I have cash to put to work, and focus my attention on finding good businesses that I can own for years to come. All of the businesses I own pay me a dividend, which makes it very easy to hold on to my shares, since I am essentially paid to own them.

I personally do not know if the shares I own will go up in price or not. I focus on the dividend income, since it is more stable, and easier to predict than share prices. For example, I know that I will receive $3.80/share in dividend income from each share of Johnson & Johnson stock I own. In addition, I will likely receive a raise in April, just like in previous years. Check my analysis of Johnson & Johnson for more detail behind this dividend king.

However, I do not have a clue if the stock will go above $150/share or below $100/share. Noone else knows either. That's why I ignore share price fluctuations, unless they offer me a bargain I cannot refuse. But the point is that if you find a quality company with solid cashflows and defensible income and dividend stream, the goal is to buy it and hold it for years.

You can see that in the case of Johnson & Johnson, the share price has fluctuated greatly over the past 20 years. I ignore stock price fluctuations, unless the price offers me a bargain I cannot refuse. I focus on the steadily increasing dividend per share. Dividends are more stable than share prices, and more predictable and reliable too. Ultimately, as fundamentals improved over time, earnings and dividends kept gradually increasing. As a result, the share price ultimately followed upwards as well. An investor who focused on the rising dividend stream, could have ignored the fluctuations in the stock price. After all, it doesn't make much logical sense that the stock price of a great business like Johnson & Johnson could fluctuate so much, when the earnings and dividend streams are not that volatile. As an example, look at the fluctuation in 2018 from a high of $144/share to a low of $116/share. I find that focusing on fundamental factors like earnings growth, margin of safety of dividends and valuation to be more helpful to my investing than in focusing on stock price alone. I do focus on price in relation to value, mostly to look for opportunities to deploy my capital when it is available for investment.

I focus on the dividend income as an investor, and making sure it is sustainable and derived from solid fundamentals. I view investing as a process where I get to stack up future income streams, and reinvest dividends. Therefore, stock market declines are an opportunity to buy future income at a discount. So as investors in the accumulation phase, we should be cheering for declines.

I have a process to invest every month, and take full advantage of the power of compounding that way. My process also focuses on time in the market, rather than timing the market. And I invest for the long-run, and hope you are all able to follow me on this long-term journey!

Relevant Articles:

Price is what you pay, value is what you get
Dividend income is more stable than capital gains
Should I buy dividend stocks now, or accumulate cash waiting for lower prices?
Dividend Investors Should Ignore Market Fluctuations
Risk Management

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