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An Update on the World's Best Investment StrategyBy
Wednesday, June 6, 2012
Few investment events this year were as "exciting" as the Facebook IPO.
As my colleague Steve Sjuggerud pointed out, it was a spectacle.
But the urge for this kind of "excitement" is one of the hallmarks of the average stock market loser.
Put bluntly, it's how bad investors view the market. They see it as a place for "exciting" action. But investing isn't about excitement. That's what Las Vegas casinos are for.
But as I told you in April, once you favor "boring" over "exciting," you're thinking more like a rich, successful investor. Let me show you what I mean...
We'll start with "exciting" investments, like initial public offerings... It wasn't just Facebook (NASDAQ: FB) in the last year. We also had Pandora, Groupon, and Zynga, as well.
Few events generate as much speculative excitement as IPOs... especially when a slew of them in a brand-new industry take place within a few months of one another. But a new business is usually risky and in danger of failure. The overwhelming majority of new businesses – particularly Internet startups – end in failure.
And these companies aren't off to a great start as a whole. Of the companies in the table below, only Facebook actually makes money. Losing money is a bad sign for investors. It makes it difficult (if not impossible) to assign any value to the businesses. And if you can't value a business, you can't invest in it.
Consider the following table... Had you allocated $60,000 evenly among those four "exciting" IPOs last year, you would be facing huge losses.
Altogether, this "exciting" portfolio of stocks is down 50% in under a year. Your $60,000 would be worth less than $30,000 today.
Now, take a look at the next table... Let's say, instead of buying shares of those IPOs, you had simply allocated that $60,000 portfolio evenly into four World Dominating Dividend Growers (WDDGs) when Pandora went public.
WDDGs are usually the No. 1 companies in their industries. For example, Wal-Mart is the No. 1 retail network and Intel is the No. 1 maker of semiconductors.
These companies have thick profit margins, fortress balance sheets, and pay out large and growing dividends. Because they are so good at what they do, and because of their dominant position in their industries, they are extremely resistant to outside competition. This allows their shareholders to safely compound their wealth over many years.
As you can see below, three of the four companies are showing healthy gains in less than one year. Johnson & Johnson is down slightly. But positions in Wal-Mart, Microsoft, and Intel have grown between 19% and 28%.
All told, "boring" WDDGs are up 13% in that time, outpacing the "exciting" IPOs by more than 60 percentage points. (The S&P is up 1.7% over the same period... much better than the IPO portfolio and much worse than the WDDGs.)
A $60,000 investment in these four WDDGs would be worth just under $68,000 today.
As far as I'm concerned, when you buy WDDGs like this available at great prices, there's no reason to fool around with super-risky, overvalued, unprofitable, brand-new businesses.
You need to take good care of your money. You need the safest, most "boring" businesses you can find. You need World Dominating Dividend Growers.
These companies sport relentless cash flows and ever-increasing dividends. They don't fluctuate. They're always there and always growing.
Yes, that's boring. But that's how you get rich in the stock market... not by getting lucky on one big hit.
Good investing,
Further Reading:
"If I could teach investors just one thing, it would be how to identify and value a World Dominating Dividend Grower business."
When you buy great businesses at great prices, you don't suffer the worry and stress most investors suffer each day.
If you want to see your income rise every year, relentless dividend-raisers are the kind of stocks you need to own.
Market NotesTHE IDEAS IN BRIAN HUNT'S MARKET NOTES ARE MOVING... If you've caught some of our e-mails recently, you know we've made a major addition to the DailyWealth family.
This new addition is called DailyWealth Trader. It's written by me (Brian Hunt) and my co-editor, Amber Lee Mason.
The goal of DailyWealth Trader is simple: Every day, we're going to show readers the world's best trading ideas... while also providing readers a tremendous education on how to use those ideas... all for an extremely low price.
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