Author Archives: amateurinvestor

Amateur Investor trails S&P500 for 2022, beats over longer terms.

March 24, 2023.

Amateur Investor’s longer term, 5 and 10 year performance is approximately twice that of the broad stock market index. However, the more recent 1 year return is approximately 31.6% worse. Therefore, AI did not escape the bear market of 2022.

Average Annualized Returns for Amateur Investor portfolio, as of 12-31-2022, with comparisons.

1y(%)3y (%)5y(%)10y(%)
Amateur Investor-25.66.916.719.3
S&P 500-
Vanguard Long Term
Treasury Index Fund

Our longer term, 5 and 10 year performance, is approximately twice that of the broad market index.  However the more recent 1 year return is approximately 31.6% worse. 

The broad market decline which occurred in 2022 is associated with several related changes in the US and global economy. These include: government policies regarding the “energy transition” intended to “renewable” energy sources, intended to “reverse climate change” which increase the price of normally used energy sources (coal, oil gas); disruptions to trade caused by the war in Ukraine.  These changes caused inflation and hindered economic growth. Excess government fiscal stimulus spending exacerbated inflation.  In an effort to reverse this, the Federal Reserve began raising the Federal Reserve Funds Rate in March 2022.  Increasing interest rates are intended to further slow the economy.  This prospect can threaten the growth of companies’ earnings.

The rise of Treasury rates naturally also more directly affected Treasury Bond prices.  I included the performance of a long term treasury bond index in the above table showing portfolio performance. When one is apprehensive because of a market decline, one might be tempted to seek safety in bonds, especially in the perceived stability of U.S. Treasury Bonds.  But bonds do not necessarily provide a safe haven in terms of return on investment in the short run.

How might we have mitigated our losses in the bear market? By being more aware of current macro economic changes, and responding to them by including in the portfolio, companies in sectors which are responsive to diverse macroeconomic factors. Specifically, companies which benefit from the same changes which threaten other companies, as well as companies which are relatively unaffected. Nevertheless, given that growth stock prices will inevitably fluctuate, our companies are still extremely profitable, dominate their markets, and continue to innovate in order to continue their growth and dominance. More on the value and productive method of diversification, in a future post.

Amateur Investor holdings, by percentage, as of 12-31-2022:

Microsoft (MSFT): 52.79%

Visa (V): 28.74%

Adobe (ADBE): 17.75%

Mercado Libre (MELI): 0.44%

Please welcome Mercado Libre as a new arrival to the portfolio. Mercado Libre is an ecommerce company operating in Latin America. It is by far the dominant market leader in the region. Latin America has an internet penetration rate in the 70s%, and fast growing. MELI provides a suite of ecommerce related solutions: Mercado Libre Marketplace (online retail platform), Mercado Envios (shipping and logistics), Classified Ads services, Advertising services, and Mercado Pago (diverse payment solutions). I began by investing an almost irrationally small amount on August 4, 2022, at $1037.82 per share. This is simply a mark of the anxiety I usually have around a brand new investment.

Amateur Investor underperforms S&P slightly in 2021

Happy New Year!  Amateur Investor focused long equity portfolio returned 24% in 2021, compared with 26.89% for the S&P 500 Index.  Following usual annual custom, I compare Amateur Investor returns for 1, 3, 5 and 10 year periods, with those of an S&P 500 index fund. This year I chose the Vanguard 500 Index Fund Admiral Shares (VFIAX), a widely held low fee S&P 500 index fund managed by Vanguard.

Amateur Investor returns (as of December 31, 2021) for:

1 year: 24%

3year: 37.3%

5 year: 32%

10 year: 24.4%

VFIAX returns:

1 year: 28.66%

3 year: 26.03%

5 year 18.43%

10 year: 16%

Although Amateur Investor underperformed the S&P 500 index by almost 3% points of return, and VFIAX by almost 5% points, Amateur Investor beat the index handily for 3, 5 and 10 year periods.

For 2021, Visa corporation stock ended the year essentially flat, down 0.92% for 2021. MSFT was  up 50.5%, ADBE up 12.85%

As of December 31, 2021, my holdings were, in the following proportions:

MSFT: 53.0%

V: 24.33%

ADBE: 22.38%

Cash: 0.28%

During 2021, new funds were invested in the portfolio, equally invested in each of MSFT, V and ADBE.

Amateurinvestor performance more than double S&P index fund in 2020

Portfolio average annual return with trailing 1, 3, 5 and 10 year returns are as follows.

1 year: 37.4%

3 year: 33%

5 year: 27.3%

10 year: 24.5%

They are compared with returns of VFINX, a widely held S&P index fund from Vanguard. VFINX trailing returns are as follows.

1 year: 18.37%

3 year: 14.14%

5 year: 15.18%

10 year: 13.85%

The portfolio holdings, by percentage, as of 12-31-2020 were as follows.

Adobe: 22%

Microsoft: 50.85%

Visa: 26.75%

Cash: 0.39%

2020 was marked by the Covid pandemic. Because of the expected economic burden, one would expect the market to have responded negatively initially, as it did. However a pandemic is an example of the type of crisis which would be expected to be transient, and therefore might provide an opportunity to buy good companies at a relatively low price. The market would be expected to return to trend once the crisis was seen to be abating.

However that is not why Amateurinvestor outperformed the broad market yet again. I am virtually fully invested all the time, so had little new cash to invest. The reality is that Visa, Microsoft and Adobe play indispensable roles in the digitization of economic activity on this planet. And the pandemic compelled an acceleration of the secular growth of digital transformation, therefore these three indispensable companies continue to grow.

Amateurinvestor beats S&P by 20 percentage points in 2019

For 2019, Amateurinvestor portfolio performance, average annualized return:

1 year: 51.6%

3 year: 33%

5 year: 25%

10 year: 22.3%

For comparison, the performance of the Vanguard 500 Index Fund Admiral (VFIAX), as proxy for the S&P 500 index, annualized return before taxes:

1 year: 31.46%

3 year: 15.23%

5 year 11.66%

10 year 13.52%

As of 12-31-2019, my holdings were, in the following proportions:

Microsoft (MSFT): 50.7%

Visa (V): 30.7%

Adobe (ADBE) 18.26%

Cash: 0.27%

How was this stellar return achieved?  over time, i have experimented in investing a small amount in other companies in an attempt to diversify in order to reduce risk. Over time, i have realized that there is no rational reason to divert funds away from the very few companies companies which provide the strongest durable competitive advantage, and have the research and development and business expertise and experience to profitably extend their competitive advantage to the evolving market.

my companies all provide services which are central and indispensable in the modern evolving and expanding digital economy.


Amateurinvestor beats S & P by 21% in 2018.

I must first apologize for letting my blog writing lapse earlier this year. I was preoccupied by some personal affairs.  I thank you for your continued support.

My portfolio total return performance beat the broad market index as of 12-31-2018 as follows:

Amateurinvestor 1 yr: 16.7%, 3 yr.: 19.1%, 5 yr: 19.2%, 10 yr: 22.6%

S & P: 1 yr – 4.38%, 3 yr: 9.2%, 5 yr: 8.49%, 10 yr: 13.12%

Amateurinvestor  outperformance relative to S & P:

1 yr: 21.08%, 3 yr: 9.9%, 5 yr: 10.71%, 10 yr: 9.48%

That is, my performance is more than double that of S&P for 1, 3 and 5 years, and handily beat it for 10 years.

As for portfolio holdings, I was compelled  to distribute some of the portfolio during the year.

I reduced holdings of CNI to a token amount. Canadian National Railroad, while a solid business with a sustainable competitive advantage, simply does not have the growth rate comparable to the other stars, MSFT, ADBE and VISA, primarily because its market is not growing at the same rate. I kept a token amount because it is a solid business with inimitable competitive advantage, with the thought that in future I will invest in this only when the stock is truly depressed.  I realize that would not be rational if the growth rate of the others continues to exceed.

The businesses of Visa, Microsoft and Adobe remain strong with bright futures. It is a testimony to the design of my portfolio, which is built exclusively with companies which possess an unassailable competitive advantage, that even while too preoccupied with personal matters to keep completely up to date on company news, and minimal trading, I still outperformed the broad market  index, while thousands of professional money managers and traders labored furiously to achieve a worse outcome.

Briefly, as businesses digitize their marketing information and creative content and related analytics, Adobe will continue to thrive as it has dominance in these areas.  As businesses move their information to the cloud, Microsoft will continue to be essential to business on this planet.  Even if there is a slowdown in spending, the market for visa will grow as the cash economy is progressively digitized.  None of these businesses will be fundamentally hurt by a slowdown in global growth, should this occur.

I look forward to this year with renewed energy and spirits.

Amateurinvestor beats S&P in 2017

In 2017, Amateurinvestor portfolio soundly beat the S & P 10, 5 3 and 1 year returns, as shown in the table below.

Fund/index Expense ratio (%) 10y (%) 5y (%) 3y (%) 1 (%)
Amateur Investor   17.9 21.4 21.5 35.6
S & P Index   6.9 13.2 9.65 20.16


Holdings of each stock at 2017 year end are as follows:

ADBE: 7.7%

CNI: 5.1%

MSFT: 46.1%

SBUX: 12.6%

V: 27%

Performance of my stocks for 10, 5 3 and 1 year in the market, end of 2017, shown in the table below.

    ARR %    
stock 1y 3y 5y 10y
ADBE  74.97 35.77 36.8 15.8
CNI  25.7 8.38 14 14.67
MSFT 40.5 24.7 27.7 10.48
SBUX 7.97 14.6 17.6 21.04
V 46 21 na na

Note Starbucks (SBUX) has slowed its growth as it failed to meet earnings targets predicted by management, although earnings were still adequate for the present, just not fulfilling the past sunny promises. This is a common growth stock story and this is why we pay more attention to past achievement rather than rosy predictions.  It is also why we buy cautiously at high valuations.

Microsoft (MSFT) was range bound from late 2000 until late 2013. In that decade MSFT proceeded to dominate one historical stage of its market, consumer and business server software, with revenue increasing from $23B in 2000  to 77.8B in 2013. However under the non-engineer  Ballmer, MSFT did not reliably expand its dominance to newly emerging markets such as mobile and search.  In late 2013 under new CEO engineer Nadella, MSFT has accelerated its growth into the public/hybrid cloud on which business will depend in the future, returned to its historical focus of making its software available as a standard on all platforms.  The stock has accelerated, with the realization that even with the investment required to establish public cloud infrastructure, margins will remain high, and that the historical dominance in business server software will translate into a preferred competitive position in the hybrid/public cloud  for the business market.

VISA (V) has been a pioneer company with the  steadily strengthening competitive advantage of its global Visanet for multiple decades. It came out of the gate running as a public company March 2008, and has steadily grown into an expanding addressable market, while actively establishing standards which enable the  digital payments market.

Canadian National Railroad (CNI) stock price and to some extent revenue was affected by the fall in oil prices in 2015, but this did not materially affect the strength of its business.  meanwhile, its ports are expanding container volume capacity.

Adobe Inc. (ADBE) has continued to dominate the graphic arts digital content business and become a dominant force in digital marketing of this content.  Its partnership with MSFT gives it a stronger global reach.

It is satisfying to find that an Amateur can achieve these definitely satisfactory returns. Young or old new investors can do likewise, provided they do the adequate reading and think critically. Investment can be fascinating in what it teaches you about human nature in history and today, and what you need to learn about  prospective companies or those you buy.  The investor’s assets work and grow for him or her.




Snap Inc., Not an Investment.

Snap Inc, “the camera company” IPO’d on March 2, 2017. Snapchat is popular and useful to those who use it.  It is a prominent player in the currently expanding market in visual media on social media. Therefore, admirers of Snap products might be attracted to the Snap Inc IPO as an investment.

Does Snap meet criteria of an Amateur Investor investment?  Let’s go through them.  The first criterion of an Amateur Investor investment is the presence of a sustainable competitive advantage, such that the company sells a product that is indispensable to its users.  It is virtually certain that in 10 years the company will still be dominant in the market for its product.

Will Snap be dominant in its market in 10 years?  Let’s back up and ask a simpler question.  Will Snap exist in 10 years?  Hmm… Why not back up again and ask a different question.  Did Snap exist 10 years ago?  Of course, the answer is no.  How could we get an idea as to whether similar companies had sustainable competitive advantages?  Oops, I guess the word “had” kind of gives it away.  As chronicled in this lovely Wall Street Journal article (I recommend subscribing to and reading the Wall Street Journal, especially Business section, because its articles are simply narratives based on facts, unlike articles in some other high profile newspapers (I won’t mention the New York Times)), a number of social media wonder stocks have climbed to the height of stardom and then fizzled when least expected, not necessarily even going out with a bang.  For example, Twitter has over 319 million users, but its market value has fallen by more than half since its 2013 IPO.  Friendster back in the first decade of the 2000s had 75 million users before fading. Other somewhat less successful social networks are mentioned in the article. There is evidence that Snap does not dominate its market and is not indispensable, in that Instagram’s launch of Stories, a feature similar to snapchat, resulted in a significant slowing of Snapchat’s growth.

The second criterion for an Amateur Investor investment is that the company adapts by evolving its competitive advantage into evolving new markets.  Since Snap does not have a competitive advantage, it does not meet this criterion.

The third criterion addresses devotion to shareholders, for instance by making sure shareholders have voting power commensurate with their stock ownership, obtaining a good return on investment in acquisitions, avoiding stock dilution and so on.  In fact, the shares floated in the IPO on March 2nd do not have any voting power at all.  They are Class A shares, with no voting power.  After the IPO, close to 90% of the shareholder voting power is held by the two cofounders, Evan Spiegel and Robert Murphy. They hold all the Class C shares, which have 10 votes per share.  I didn’t even bother to look up who owns the Class B shares, which have 1 vote per share. Because Amateur investors would not be able to get ahold of those anyway.  Why does this matter?  Say in a few years (or months?) Snap decides to acquire another asset, say another company. In order to raise the necessary cash, it floats a large amount of Class A shares (only about 25% of these were sold in the IPO), thereby diluting the shares in the market and causing the price to fall.  Suppose many stock holders disagree with the wisdom of this acquisition.  What can they do? Can they vote against it as in a normal company? No, there is nothing they can do.  The founding company owners are already wealthy, they are not affected.

The fourth criterion for one of my investments is that the company must be at least 10 years old.  The fifth, that the investment is worthwhile based on the company’s past achievements, not just its hoped for future attainments.  The Sixth criterion addressed good return on investment, including low debt level, growing free cash flow, high gross margin, high ROI.  Snap has no earnings, in fact its losses of over half a $ billion exceeded its revenue of about $400 million.

In a nutshell, it is not possible to be sure whether Snap will still be going strong in 10 years.  It might, but then again, it might not.  It has no earnings.  Why take a chance speculating with your hard-earned money by buying this new company, when instead you could buy a company which you could be sure would grow and continue to be extremely strong and successful for the foreseeable future?

For inexperienced investors that feel they want to try buying something they like, I must agree that gaining some experience in the stock market, if it is with a very small amount of money that you can afford to lose, might be a way of stimulating and motivating the emotional learning process needed to learn about proper investing.  There are people who say you should not invest at all except with money that you can afford to lose.  But we Amateurs know that is nonsense.   Investment, as Benjamin Graham stated, is a purchase that upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. There are various approaches to investing that could satisfy this definition, depending chiefly on what you, the individual investor, judge to be an “adequate”, satisfactory return.

In the Amateur Investor approach to investing, you must simply learn several important realities about businesses, the most important having to do with competitive advantage, of a durable nature.  You are looking for the company of which in 10 years it will be said “in 10 years this company will still be growing and dominating its market, and evolving and adapting to continue extending this dominance into the changing market.”

Portfolio Performance for 2016: underperformed, but businesses doing well

Performance of my portfolio for 2016 was only 7.4%, underperforming S&P which made 9.54%. 

On 12-31-16 the relative proportions of holdings were


MSFT 49.9%

V 22.7%

SBUX 15.2%

CNI 5.59%

ADBE 4.98%

Cash 1.43%


No stock trades were made this year.

Beginning with Q2 2016 dividends were credited to cash instead of reinvested, to build a reserve for future purchase of stocks when they should reach an attractive low price. 

The performance of my stocks in the market was as follows:


MSFT    +14.65%

V           +1.36%

SBUX     -6.1%

CNI        +22.67%

ADBE    +9.59%


Possible causes of the relatively low performance are as follows. 

In the market volatility in September 2015 and January 2016, the S&P fell 10% from its peak of 2126 on July 17 2015 to 1921 on September 4, 2015, before climbing again to a peak of 2099 in November 6, then falling 12% to 1864 on February 12, 2016.  Unfortunately, I had no cash ready to invest in order to take advantage of the attractive low prices which appeared during the dip.  That is one reason that my performance was lower than it should be.  To address this, as mentioned above I began setting aside dividends to build a cash balance to fund acquisitions at attractive prices, whenever these should appear.

Another reason was that SBUX and VISA had suboptimal years in performance, although not as businesses.  SBUX missed revenue expectations for the first threequarters of 2016, then beat in Q4.  It beat earnings in Q1, met in-line in Q2 and 3, and barely beat in Q4.  The stock price more of less followed these results.

During 2016 Starbucks began developing its strategy of “premiumization” of the Starbucks experience, with the Roastery flagships stores and the Reserve category of Starbucks stores.  The various initiatives to expand the Channel Development segment continued.  The Full year 2016 revenue rose 11% and non-GAAP EPS 17% yoy, so hardly a poor showing.  The trailing PE is currently about 30, which is approximately average for recent 10 years. The continued evolution of SBUX to strengthen its competitive advantage and adapt to new markets is intact.

VISA acquired VISA Europe on June 21, 2016, for €12.2 billion ($13.9 billion) and €5.3 billion ($6.1 billion) in preferred stock, convertible to VISA Class A stock, with an additional €1.0 billion, plus 4% compound annual interest, to be paid on June 21, 2019.  To pay for this, VISA in December 2015 issued $16 billion of senior notes with maturities ranging between two and 30 years. The acquisition was expected to be dilutive to earnings in 2016 in the low single digit range. 

Stock dilution is being offset as the $16B debt issuance is being used partly to increase stock buy backs.  The acquisition should be accretive in low single digits in 2017 excluding integration costs, and accretive in high single digit range by 2020.  The increased earnings are partly from increased efficiency:  increased scale, cost cutting efficiencies realized by integration of the businesses, and benefits related to Visa Europe’s transition from a member-owned association to a for-profit enterprise. VISA Inc. will be positioned to take on the estimated 37%, or USD $3.3 trillion, of personal cash and check spending in Europe. Europe has been an early adopter of mobile payments using NFC, expected to grow.  Visa Inc. has aggressively launched new mobile payment partnerships, platforms and products that will enable faster growth and adoption of mobile payments in Europe. This includes new tokenization services, support for digital wallets and wearables, strategic investments in other enabling technologies, ecommerce (such as VISA Checkout) and P2P payment capabilities, as well as the opening of several global innovation centers. 

VISA will be able to present a seamless experience and global capabilities to its European and international clients.  Hence the evolution of VISA Inc. to strengthen its competitive advantage as digital payments global market leader, and adapt to serve evolving markets, is intact.


VISA Q1 2017 Earnings, harvesting market growth, ploughing and sowing for the future

2-4-2017.  VISA Q1 2017 (2-2-2017) earnings call was led by Alfred Kelly Jr., who became CEO, replacing Charlie Scharf on 12-1-2016.  Al Kelly graduated from Catholic, Christian Brothers affiliated Iona College, in Westchester, NY, with undergraduate and MBA degrees. He worked in the Reagan White House as manager of information systems (using DOS, or Windows 2.0?) from 1985 to 1987, then held a range of important roles at American Express for the next 23 years.  He has been on the VISA Board of Directors since 2014 and therefore played a role in approving the current strategy. 

In the earnings call, Kelly noted that VISA strategy will remain as is, in a seamless transition with the previous CEO. He noted VISA has a talented leadership team; strong relationships with issuers clients, acquirer clients and merchant clients. It is important to learn about and address their business needs while reducing friction in and enabling digital payments. VISA is in an industry with strong growth. In developing markets, middle classes and governments are demanding payment digitization. In developed markets, ecommerce and mobile payments are displacing checks and cash. VISA is a leader in payments technology and constantly supports innovation in ecommerce and novel forms of payment digitization.

I will address the overall strategy of VISA, which describes how VISA fills a key criterion of an Eternal Company investment: the ability to extend its competitive advance into evolving new markets, in a separate post.

Following is a summary of Q1 2017 financial results.  Rev and EPS exceeded expectations as accelerating business more than offset exchange rate shifts.  GAAP Q1 rev up 25%, EPS 7%. Adjusting for the non cash gain in Q1 2016 from writing off the VISA Europe put, adjusted EPS up 23%.  Payment volume growth increased 1-2 % in most geo regions. Cross border payment growth accelerated 2% from 10-12% globally excluding VISA Europe. Including VISA Europe impact, they accelerated 10%.  Process transaction growth accelerated 15 from 12-13% driven by India and US.

Did not issue 2$ Billion in debt as panned to finance VISA Europe acquisition as well as other costs. VISA has 8$ Billion offshore, will await Trump plan for corporate tax reform which may well allow cash efficient cash repatriation. Until then, used commercial paper issuance to fund stock buyback and operating cash needs.

The only region with reduction in growth was Latin America, due to Brazil. 

The integration of VISA Europe is proceeding and will continue throughout 2017. Europe represents meaningful growth opportunities, with large opportunities to displace cash.  Plan to advance digital payments by rolling out tokenization, VISA Checkout, and supporting digital wallets.   VISA continued to focus on local market priorities alongside client engagement. The vast majority of VISA payments volume in Europe remain under contract and is therefore protected in the short term.

The deliberate process of consultation of VISA Europe staff was completed later than expected. New hiring, investment to integrate technology with that of the international VISA system are adding expenses as planned.   As cost reductions are realized and Europe clients access global VISA capabilities,  earnings will accrete and value will be realized for shareholders, as planned since the takeover was announced.  Equity dilution related to the purchase is being offset by accelerated share buybacks. 

In India, Aggressive demonetization measures pushed by the government resulted in doubled transaction volumes but little revenue growth. Responsive to request by the Indian Government, VISA charged no fees for processing through 12-31-2016.  VISA regards this as an opportunity to expand the network and acceptance internationally, focusing on building customer awareness and merchant acceptance 

Kelly articulated “So.. when you consider the economics of the investment we will make in India, plus conservative pricing, it will not drive much profit this year. But this is a great year to make sure we do everything we can in one of the two largest population countries in the world to get as good a position as we can to help us over the next decade. “

I would like to make two observations on this lovely sentence.

1. It prioritizes strengthening the company competitive advance for the long term over short  term profits

2. the nature of the VISA business supports long term investments such as the one mentioned because of its competitive advantage.  The VISA services introduced into the developing India market will still be indispensable in 10 y.  As long as VISA continues to support successful innovations in payments, while nurturing and strengthening its network security and reach, it will undoubtedly maintain its relevance and dominance in the market. 




A sensible policy for cashing and saving dividends to invest in volatile high growth stocks at infrequently occurring low prices

1/18/2017 16:56

In the market volatility in September 2015 and January 2016, the S&P fell 10% from its peak of 2126 on July 17 2015 to 1921 on September 4, 2015, before climbing again to a peak of 2099 in November 6, then falling 12%  to 1864 on February 12, 2016.  I did not have a source of cash with which to take advantage of some really attractive bottom prices in stocks, specifically ADBE.  I resolved to find a way to take advantage of the low prices which appear in market dips, as purchases made in teeth of market terror are key to producing the most outstanding returns.

The purchase additional stocks for the portfolio must be funded either from the sale of current holdings or from cash kept for the purpose (I do not consider the use of debt to be a sound option).

There are various arguments against the sale of current holdings to simultaneously fund new purchases.  The decision to buy is driven by the identification of a prospective purchase that is currently found at an attractive, low price, or where business prospects for the company appear to be more promising in the immediate future.  Meanwhile, to optimize return, the company that is sold to fund the purchase would be judged to have less promising prospects and hence likely to fall in price, either because it is currently judged to be overvalued,  or because business prospects appear uncertain in the near future.  But there is no particular reason that the advent of an attractively low price in the target purchase would coincide in time with an attractively high selling price in another holding.  Rather, one may be faced with the prospect of selling a stock at a merely reasonable price to enable the purchase of a stock which is found to be hopefully at a nadir.  Unfortunately, the decision can potentially be wrong on both sides, that is, the price of the target purchase may subsequently fall even more, while the sold stock may subsequently continue to rise.

A variation of this strategy is to sell a stock that seems overvalued, or is expected to fall in stock price, in order to build up a cash reserve to fund purchases of a stock in the future, rather than simultaneously.  The problem with this strategy is that it  based as it is on prediction of the future, a sketchy enterprise at best. 

Indeed, the problem with any approach based on predicting the future of stock prices is that stock prices do not necessarily reflect current business events in the company in question at all.  They may rather reflect the market’s shifting reaction to those events, in turn driven by entirely distinct and distantly related social or economic forces.  Because of this, a stock that seems overvalued, and thus a likely candidate for harvest, may continue to rise into regions of continued overvaluation if social or economic sentiment looks favorably upon it, against conventional rational business expectations.  In this case, the sale price would be regretfully too low, too soon. Or in fact one may decide the stock should after all have been held for the long term.  Conversely, the tide of market sentiment may tumble a stock even though the company is prosperous, producing regret that one did not harvest at the previous peak.

One characteristic of my investing approach is the attempt to recognize and understand the emotional currents underlying  investing decisions.  By doing so, one can steer a course that is free of emotional hazards to sound investing decisions.  In the present case, awareness (perhaps not fully conscious) of the shakiness of one’s predictions about future prices is likely to cause anxiety which interferes with rational trading decisions.

One cannot change a future outcome that one does not control, either before it happens, or after it has happened.  But since no one else can either, failure to do so does not impair one’s performance relative to other investors, that is, relative to the market.  What one can do is first, avoid the chances of making an error, while maximizing the chances of better results, and second, minimize the emotional influences which interfere with sound investing decisions. 

A different strategy is to build up cash reserves to fund stock purchase.  In the absence of new cash, the only possible source of these is stock dividends credited to cash instead of reinvested.   These have a few advantages as a source of cash.  First, the cash is contributed regularly, at a range of different stock prices, so that no bet is made that a particular price would have been the optimal selling price.   Thus, one avoids the chance of making a large error in choosing a sale price which may turn out later to have been the wrong one.  no specific decision must be made to sell a treasured holding, with the accompanying distress.  This will minimize the emotional turmoil which leads to hasty, ill thought out decisions.

There are thoughts pro and con this strategy.  Crediting dividends to cash means they will not participate in the hopefully continued rise in the stocks they were contributed from.  In order to make this strategy worthwhile, one needs to buy new investments at a low enough price, or to achieve a high enough return on investment, so that this will compensate for the time of missed returns before the cash was invested.

Purchasing at a discount from the long term stock growth rate is crucial to maximize the chance of a good outcome.  If the stock fits criteria for the portfolio, none of which depend on short term market action, then its long term growth rate should approximate that of the portfolio.  The cash that is held pending the new stock purchase has a return of 0%.  Let us assume that the stock to be purchased would have a certain price at the time of purchase, if the stock was adhering continually to the long term portfolio growth rate ( R ), and call this P (r).  Let us assume that at the time of purchase, the stock has fallen so that it is discounted in price P (r).   In order for the cash invested in the new purchase to attain the portfolio ( R ), then the discount from P (r) at which the new stock must be purchased must equal the time the cash was held, in years, t (cash), multiplied by ( R ).  The illustration below shows this for a stock bought with cash that has been held for one year.


For cash held for less than a year, then the discount from P (r) would need to be relatively less, while still enabling the stock to attain the same portfolio ( R ).  One source of error in purchasing stocks, especially volatile high growth stocks, is failing to patiently wait for an adequately low price.  In my proposed strategy of using accumulating cashed dividends to fund new stock purchases, the fact that the cash balance builds up slowly as dividends are contributed, is an incentive to wait for an adequately low price so as to generate returns at least equal to ( R ).  This is because frequently making small investments which use up the accumulating cash, if made at a discount to P (r) which is less than t (cash) times ( R ), will result in subpar long term returns.

There remains one question: if the stated goal of a rational policy of accumulating cashed dividends and reinvesting them, is to merely match the long term growth rate of the portfolio that would be attained if the dividends had been automatically reinvested in their respective stocks in the first place, then what is the point of hoarding the dividend cash in the first place?

The reason is as follows:  some stocks seem to have a higher expected growth rate because of the strength of their business and market expansion.  However once this is well recognized by the market, the stock in question becomes chronically highly priced, and is rarely available at an attractive price.  However, these stocks can yield great returns if they can indeed be found cheaply.  And, inevitably they sooner or later do fall in price.  In fact, when a company from which the market has high expectations (ADBE), meets a setback, it is generally swiftly punished and its stock falls more than would be the case for a company with a solid business but from whom the market has more conventional expectations (Philip Morris International).  This type of company might be termed a Volatile High Growth Stock. The above strategy of accumulating cashed dividends to take advantage of these infrequent opportunities can then in fact lead to overall increased returns.

Again the promise of higher returns by a high growth stock is only likely to be fulfilled if the purchase price is low enough.  On this inarguable basis,  a sound strategy might be to buy the target stock with half of the available cash when it reaches a % discount from the previous 52 week peak, that is equal to the 10 year growth rate for the portfolio ( R ).  Should the target stock fall to 2 x ( R ) from the same previous peak price, then the remainder of available cash will be invested in it.

This strategy may not be perfect, for example it may result in only half of the available cash being invested in the target stock at an attractive price. On the other hand, it preserves the chance for purchase of at least some of the target stock at the truly great price of a 30% discount to previous peak. This approach should at least preserve the average portfolio growth rate from damage caused by ill-advised purchases.  Meanwhile, If the target stock is one with growth rate relatively higher than the average for the portfolio, this should raise the portfolio performance.