Wednesday, March 30, 2022

Do not time the market

"Timing the market is a fool's game, whereas time in the market is your greatest natural advantage." 

- Nick Murray

I am a firm believer in the concept of buy and hold investing. I invest regularly every single month, in a group of attractively valued companies. I do not accumulate cash, waiting for a crash, nor do I get in and out of stocks based on moving averages or even valuation targets. Once I buy a company, I hold it, and reinvest dividends, for as long as it doesn't cut or eliminate the dividend. I simply follow my own strategy, through thick or thin.

Many investors seem to believe that they can score extra points by timing the market. In my opinion, they are needlessly complicating investing. 

In order to be successful with market timing, you need to make two correct decisions:

1. When to get out 

2. When to get back in

I believe that this is impossible to do. Hence, it's best to just buy and hold.

I've interacted with countless investors who missed most of the bull market of the past 14 - 15 years.

The story usually goes like this:

They sold after a decline in the stock market, and then stayed in cash for years.

The first question I always get is: "Do you think the market is too high"

It is a shame to get out of stocks because "they are too high". Or because you are afraid of stock market fluctuations. 

It's always sad to see this happen. I once spoke to a gentleman who sold in 2009, and never got back in. They locked in losses, and missed out on a lot of appreciation and dividends.

Of course, if you witnessed 2000-2010, you were trained that once S&P 500 reaches 1,500 points, we are due for a 50% decline. However, the issue is that over the long-run, US stocks tend to rise due to growth in earnings, revenues, dividends. Even if stocks stay flat, investors would generate returns through dividends and their reinvestment.

A good cure for market timing is to create your own investment system. It can help reduce guesswork, and keep you invested.

In my case, I invest every month in several quality companies with long streaks of annual dividend increases. I then stay invested for as long as these companies do not cut dividends. I reinvest those dividends, and hold these shares. It is best to avoid trading in and out of positions, and selling for some "reason", which usually happens to be fear, or exaggerating on a recent event. Other reasons could include greed, by selling a perfectly good companies because the valuation went a little too high, and reinvesting into a higher yielding stock that is a higher risk stock. I am very diversified, which helps me sleep well at night.

In other cases, folks tend to buy ETFs, which may cost a little in fees, but automates the investing process. The behavioral aspect is always the hard part with ETFs, because there are so many of them, which makes a lot of perfectionists out there tinker with their portfolios, until they try to find the perfect ETF ( Note: It doesn't exist)

In general, investors make money by buying equities, and holding on to them. While share prices are volatile in the short-run and can result in unrealized losses in a given day, week, month or even year, it is unlikely that over the course of a decade or two there will be losses. This of course works for diversified portfolios of course.

Stocks go up in the long run, because they are ownership pieces of real businesses. Over time, these businesses earn more money, and reinvest a portion to grow the business. They end up generating more than they know what to do with, on aggregate, and send those excess profits to shareholders. All of this tends to grow the values of those businesses as well. It is a true virtuous cycle, which lets the long-term investor take full advantage of the power of compounding. 

This is my favorite chart. In the long-run, US stocks have built a lot of wealth for patient long-term investors. It was never easy, and not always a straight line up. However, patience for US investors has been historically well rewarded. Market timing on the other hand has not been well rewarded.

Source: Stocks for the Long Run

Another favorite statistic I have has to do with staying fully invested, versus missing the best days. If you try to time the short-term movement of security prices, you risk the chance of missing out on the best days. This reduces your future returns significantly.

Source: Putnam

The best and worst days are usually clustered together. If you jump in and out of stocks due to fear and greed that short-term fluctuations cause for you, you risk the chance of missing out on returns, compounding losses, and paying taxes, commissions and fees on top of that. You do not want to be compounding losses.

There’s no need to time the market when you have such a high chance of success through a long-term buy and hold. 

I also wanted to share this amazing video of Peter Lynch, on how to handle stock market volatility.

"Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years. So I think — the market is about 3,800 today, or 3,700 — I'm pretty convinced the next 3,800 points will be up; it won't be down. The next 500 points, the next 600 points — I don’t know which way they’ll go. So, the market ought to double in the next eight or nine years. They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it."

As my friend Chris D’Agnes says, "Don’t just do something, stand there."

This Buffett quote sums up my approach to just sitting there:

"Lethargy bordering on sloth remains the cornerstone of our investment style"

Thank you for reading!

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Monday, March 28, 2022

Warren Buffett's Investment in GEICO

Warren Buffett needs no introduction. If you have read "The Snowball", you would know that he was entrepreneurial and focused on investments and making money from an early age.

Back when he was 20, he set a goal to work for Ben Graham. He learned everything there is about him, and his investment style. He had noticed that Ben Graham sat on the board of GEICO, and had a significant ownership of the company.

This is why Buffett ended up taking a train to GEICO's headquarters on a weekend, in order to learn more about the company and its operations. He was only 21 years old at the time. He ended up knocking on the door, until the Janitor let him in and introduced him to the company's CEO. The CEO managed to explain the whole business model, the competitive advantages of the business. This conversation planted the seeds behind Buffett's future endeavors in Insurance, which ultimately led to his investment in Berkshire Hathaway, and transforming it to what it is today.

After the conversation, and reviewing filings and reports, Warren Buffett wrote this analysis of GEICO at the young age of 21. This is very impressive, given his young age. You can read it as PDF from here: The Security I Like Best

Source: The Security I Like Best

This is a good lesson in learning. When you write something down, this forces you to think hard about the topic at heart. By trying to distill your thoughts and teach others, you end up improving your communication skills and create a piece of research that is well supported with facts and strong arguments. This strengthens the research, because your thinking is clearer.

He invested $10,000 in the stock, and made a 50% profit in a single year. He did sell the stock however, and reinvested the proceeds elsewhere. That stock became a 130 bagger over the next 20 years. It would have turned that $10,000 into $1.30 million.

If Buffett had not sold the stock, it would have compounded to over $1.30million by 1972.

He was ultimately involved with saving GEICO in the 1970s, when the company had troubles. This investment led him to owning a big chunk of the car insurer. Berkshire invested $45.7 million in GEICO in 1976, and owned about a third of the stock.

The company ultimately rebounded its business, and returned to profitability. GEICO was a dividend achiever, which regularly raised dividends and repurchased shares. As a result of these share repurchases, Buffett's stake in the business increased at the expense of the remaining shareholders. He ultimately had a 50% ownership by 1995, which is when he decided to acquire the rest of GEICO.

Notice that GEICO was a member of the Dividend Achievers List, with a 16 year track record of annual dividend increases as of 1994. Berkshire was about to acquire it by 1995.

A few other Berkshire Hathaway acquisitions that were dividend achievers include General Re, Flight Safety & Wesco.

I find this article particularly fascinating, because it shows a few lessons. Notably, the importance of writing down your thesis, in order to improve investment methodology over time. This also helps in order to make sure you have done the work, in order to reach to a logical conclusion, and not wait for stock tips from others. Of course, it is fascinating to read something that a 21 year old Buffett has written up. It was obvious, in hindsight, that he had bright future ahead of him.

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Wednesday, March 23, 2022

How Anne Scheiber Made $22 Million Investing in Dividend Growth Stocks

Anne Scheiber worked as an auditor for the IRS. She retired at the age of 51 in 1944, and focused on managing her portfolio for the next 51 years of her life.

I wanted to share with you the story of Anne Scheiber, who died at the age of 101 with a portfolio of dividend stocks worth over $22 million. That portfolio was generating over $750,000 in annual dividend income at the time of her death. Anne Scheiber is one of the most successful dividend investors of all time.

I believe that this story can be inspirational to many. After reviewing it, I can tell you that I understand the blueprint for financial success. One can easily see the steps taken to achieve financial independence, so that they can mold their lifestyle in a way, shape or form that they desire.

There are several lessons that we can all learn from:

1. Invest in leading brands in leading industries
2. Invest in companies with growing earnings
3. Capitalize on your interests to uncover investment opportunities
4. Invest regularly
5. Reinvest your dividends
6. Never sell your stocks
7. Keep informed on current or future investments
8. Invest in a tax efficient manner
9. Give something back to society
10. Be frugal

This set of core principles can help anyone who commits to it to end up with a million dollar dividend portfolio.

Anne was raised by her mother, after her father had passed away after losing money on real-estate investments. She had started working as a bookkeeper at the age of 15, and started working at the IRS 27 years later. At the time, families prioritized higher education for theirs sons. This meant that Anne had to persevere and go to school on her own dime. She invested in herself and graduated from night school, and ultimately passed the Bar. Despite being very well qualified, and despite her excellent job performance, she realized that as a Jewish woman she will not advance much professionally. Because of the discrimination at the time, she was never promoted and never earned more than $3,150/year after 19 years at the IRS. She had a difficult life all her life, where she had to fend for herself, which probably led her to determine that the best way to achieve a mark on this world was through investing. She knew, decades before her death, that her nest egg should be earmarked for charity.

“She’d say, ‘Someday, when I’m long dead, there will be some women who won’t have to fend for themselves.’

Anne Scheiber may not have earned a high salary, or earned promotions, but she learned a lot at her job. She learned that the rich tend to invest in appreciating assets that paid cash flows. If you spend any time reviewing tax returns, you will soon realize that wealthy people tend to own a lot of stocks that pay dividends, real estate that pays rent and businesses that generate income for their owners. This was the a-ha moment that inspired Anne to build her wealth through blue chip investing. The lesson she learned poring over other people's tax returns was that the surest way to get rich in America was to invest in stocks.

According to some stories, her portfolio was valued at $5,000 at the time of her retirement. Other stories discuss older tax returns from the 1930s that showed annual dividend income of $900, which also increased over time. It is possible that her portfolio at the time of retirement in 1944 was close to $18,000 - $20,000, implying a dividend yield of 4.50% - 5%. Never the less, I still find it impressive that she left $22 million to charity at the time of her death 51 years after retirement. All of this initial capital was a result of her savings from a long professional career, at a time when few Americans owned stock. It is even more impressive, given the fact that she lost money investing in the stock market, after a brokerage firm through which it did her business collapsed in the 1930s, taking her money with it. This was before SIPC insurance protections. However, Anne Scheiber bounced back and kept at investing for the rest of her life.

According to her attorney, she had a very high savings rate, which is how she was able to accumulate her starting capital to build her nest egg. She saved something like 80% of her salary, which is impressive.

Her largest positions from 1995 are listed below:

Her portfolio included stakes in over 100 companies, most of them well known names such as Coca-Cola, PepisCo, Schering-Plough, Bristol-Myers, etc. She bought companies in industries what she understood, such as pharmaceuticals, beverages and entertainment.

Anne focused on companies with leading brands that grow earnings over time. This ensured that the business can pay more in dividends and increase intrinsic value.

Her strategy was buying in stock regularly, and holding for decades. This let her take full advantage of the power of compounding. She never sold, because she hated paying commissions. This was another smart move, which let her take full advantage of any outsized gains. Letting winners run for decades is what separates the best investors in the world from those who have mediocre investment careers. Very few people have the patience these days to hold on to stocks for months, let alone decades. But this patience is a trait that separates winners from losers, because it gives companies time to compound profits, dividends and intrinsic values. As you and I are well aware, sometimes companies go nowhere for a while, which causes many investors to give up and sell, right before things start turning around. By becoming a patient long-term investor, you are well positioned to take advantage of the few outsized winners in your well diversified portfolio.

Being a patient long-term buy and hold investor is beneficial during bear markets, when share prices fall by 50% or more. Many get scared by these temporary quotation losses, and sell in a panic. Smart investors hold on tight, and even add to their positions if they have capital available for deployment.
When you never sell your stock, you also never have to pay taxes on long-term capital gains. If you leave your portfolio to charity, there is no estate tax either. I am pretty sure that Anne enjoyed knowing that IRS will see a small fraction of her estate in the form of taxes.

Finally, she reinvested her dividends, which helped further compound her capital and income. In the 1980s, she started investing her sizeable dividend income into municipal bonds, which paid 8% annual tax free interest. Her annual investment income of $750,000 was a mixture of dividends and earnings.

Since Anne didn’t get promotions and raises, she ended up cutting expenses to the bone. She understood the simple math behind early retirement. When I read comments about Anne, they all focus on her extraordinary frugality. She lived in her rent-controlled apartment for 51 years after retirement, wore old clothes, and scrimped on spending for food. Her entertainment involved going to the movies, reading stock reports and researching companies and reading. She never married or had children. While it is a little extreme even to my tastes, I do think that you can learn from everyone and try to apply those lessons to your own life.

When I read about her story, I learn that long-term investing in leading companies that grow earnings is paramount to success. I learned that buying these companies over time, and building a solid diversified portfolio can help soften the blows of the ones that fail. But it also provides the opportunity to discover the next great company as well. Diversification and long-term investing work wonders for those who are patient enough to compound their money for decades. I also like the idea that investing is the only field where if you are good, your race or gender or nationality do not matter, as it is a true meritocracy. And if you keep your money invested long enough, you will be able to end with a lot of money at the end of your life. I also keep learning that many successful investors tend to live to an old age. Perhaps that’s because investing in stocks is a very stimulating activity, because it requires constant research, learning new facts and ideas and discarding old facts and ideas that do not work or are flat out wrong.

A lot of the negative comments towards Anne generally come from people who do not understand the power of compounding and getting rich late in life.

As I mentioned above, Anne was very frugal, and she managed to save 80% of her salary to end up with her investable nest egg. She had to fend for herself all her life, so that little nest egg was her way of regaining her independence from a world that discriminated against her. It was to allow her to live her life on her own terms, which is admirable. If she lived today, she would have likely found a lot of friends in the FIRE community. Her nest egg provided some F.U. money to her, away from a judgmental society and bosses.

It is likely that she compounded money at roughly 14% - 15%/year for a long period of time. As I discussed with the story of Ronald Read, when you compound money for a long period of time, and you compound it at a high rate of return, the initial amount you had is really small relative to the amount end up with.

I ran a simple calculation where I compounded $20,000 at a flat 15% compounded rate of return for 50 years. I also assumed that her portfoolio yielded a flat 3%, just for illustration purposes. In reality, dividend yields were closer to 4% - 5% at the beginning of her journey in the 1940s, and went all the way down to 2% - 3% in the 1990s. She did start reinvesting dividends into municipal bonds in the 1980s, but my calculation is not accounting for it, since it is for illustrative purposes, trying to help you understand the nature of compound returns. You can download my calculations from here. This is a summary of compounding:

This means she had $20,000 in 1944, and earned $600 in annual dividend income
Her portfolio grew to $80,900 by 1954, and earned $2,427 in annual dividend income
Her portfolio was worth $327,330 by 1964, and earned $9,820 in annual dividend income
Her portfolio grew to $1.324,000 by 1974, and generated an annual income of $39,700
By 1984, her portfolio was worth $5,357,000, generating $160,700 in dividends
By 1994/1995, her portfolio was worth $22,000,000, generating $750,000 in dividends

So if we assume she started with $20,000 in 1944, that money may have generated something like $1,000 in annual dividend income for Anne. If she really saved 80% of her salary of $3,150 in 1944, that dividend income was enough for her to live off. But that also meant she had to be frugal to survive. I am not sure if she had a pension or Social Security check, but that was likely to be a small amount that was not accessible until the age of 62.

I am going to make the assumption that she compounded her money at roughly 15%/year, starting from a base of $20,000 in 1944. It is possible that her actual returns were closer to 12%/year, and that she started from a higher base when she retired, due to her high level of savings. It is also possible that she saved money from her pension or social security as well, and added to her investments. Unfortunately, with most of these stories, we do not get the complete accounting, just bits and pieces from which to connect the dots.

If she really compounded money at 15%/year however, that means her nest egg doubled every 5 years or so. Of course, compounded stock market returns are not a linear 15% - sometimes the returns at the beginning of the journey are higher than the returns at the end of the journey. I would assume that Anne’s nest egg didn’t even start producing enough dividends to replace fully her salary until a decade into her retirement. By that time her frugal habits had already been established and she was in her 60s. The average life expectancy for a female in 1943 was 64 years, and by 1960 this had increased to 73 years.

If she had lived to the age of 65 or 70, her nest egg would have been high at around a quarter of a million, but not high enough to even write about.

I would assume that she didn’t even become a millionaire until the early 1970s, when she hit 80. After the 1972- 1974 bear market, she may have lost the millionaire status, only to regain it by the 1980s bull market. It is just pure mathematical fact that if you start with a decent amount of money, compound it at a decent rate of return and you compound it for a long period of time, you will end up with a lot of money. Probably more money than what you know what to do with. But if you have $22 million at the time of your death at 101, that doesn’t mean you had that $22 million when you retired at 51. You probably only had around $20,000 or so. This is a lot of money, especially given that the dollar in 1944 bought more than the dollar in 2020. But it is nothing earth-shattering either.

It is fascinating to me that a lot of people fail to understand the role of compounding for long periods of time, and getting really rich in life. Yet, they are happy to read about Warren Buffett, and praise him. Yet, both Buffett and Anne Scheiber probably had similar money personalities that liked doing what they liked doing, and kept doing it for long periods of time.

To put things in perspective, Warren Buffett was worth around $400 million at the age of 52. At the age of 90 he is worth $78.40 billion. He did have a lot of money at the age of 52, and compounded it at a very high rate of return for almost 40 years.

Anne's insight that the easiest way to get rich in America is through stock ownership is widely supported by research and data that is available to us today. There was little research in the past about the advantages of equity ownership, and this research was not as popular as today.

If you put $1 in US stocks in 1802, and compounded at 8.10% annualized return for the next 211 years, you would have ended up with $13.50 million by 2013. If someone placed a small amount of money in stocks so long ago, and never spent it, they would be very rich. Or rather their descendants.

This brings me to another concept. While a typical career lasts 30 – 40 years, a typical retirement could also last 30 – 40 years. That nest egg has to provide for a retired couple, one of which will likely outlive the other. If we really think about it however, many parents want to provide a solid base for their adult children and even grandchildren. As a result, a typical retiree may have to plan for more than 30 – 40 years. They may have to think about a bullet proof strategy that would deliver dividends for 50 years or more. That may be even more imperative, if you plan to live money in a trust for the use of a charitable cause. Most charitable causes require support in perpetuity.

Today, we learned the story of Anne Scheiber. She was a frugal investor, who built an impressive portfolio worth $22 million and generating $750,000 through a combination of:

- Frugality to save her initial investable capital
- Regular investing over time in companies she understood
- Buying strong brands names that grew earnings and dividends
- Staying the course for the long run, and ignoring stock market fluctuations
- Patiently compounding capital and income for 50 - 60 years

Thank you for reading!

Relevant Articles:

Profiles of Successful Dividend Investors
The Simple Math Behind Early Retirement
This Is How This Successful Dividend Investor Turned $1,000 Into $2 Million
The Most Successful Dividend Investors of all time
How to Become a Millionaire
The million dollar dividend portfolio for retirement

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