The blog has been quiet and for that I apologise. But, I have finally finished my PGCE course after the most challenging year of my life. I really should write a blog…
The blog has been quiet and for that I apologise.
But, I have finally finished my PGCE course after the most challenging year of my life.
I really should write a blog about the PGCE course sometime - what an experience. It's crazy how some institutions operate.
Anyhow, the GREAT NEWS is that I’m back, and I’m more motivated than ever!
In September I officially start my journey to becoming an investing professional as I study an Msc in Finance and Business Analytics at the lovely Swansea University.
Now, let's get to the meat of the matter and the point of this post.
Some of you may be concerned at the heading of this post ‘A step away from Dividend Growth Investing’.
After all, I have stuck patiently by Dividend Investing for 4 years now. Noting it as a low-risk, steady investment strategy – but I’ve been convinced to branch out into some higher growth shares.
Here’s why I've branched out.
Over the weeks following the end of my PGCE course I took myself to reading as much as I could about investing.
I went back over the investors bible, The Intelligent Investor, delved deeply into the methods of the godfather of investing, Warren Buffett, by re-reading Warren Buffett and the Interpretation of Financial Statements and taking a close eye to the outstanding archive that CNBC has created covering Buffett in his own words.
Lastly, I challenged myself to read these two classics; Common Stocks and Uncommon Profits by Phillip.A.Fisher and One up on Wall Street by Peter Lynch. Books I had (stupidly) never read before. It was upon reading Common Stocks and Uncommon profits that I began on my journey of change.
This book changed my life.
Am I too young to focus solely on Dividend Investing?
It dawned upon me - as a 24 year old student I was investing into companies that have very high capex and operate in industries that were highly saturated, with little room for growth. It's important to note here that I'm not talking about capex used for investing, but capex that's required just for these companies to stand still.
I was putting money into National Grid a company that had absolutely no prospect of compounding my money at anything more than their admittedly generous annual dividend and snail-like 2% earnings growth - see my earlier post on National Grid shares for my previous rationale. National Grid spends millions on maintaining infrastructure but is regulated as to how much it can charge and thus how much profit it can make.
I also went head first into AT&T, a company that has leveraged itself massively and has decided to compete with other media giants head first through its acquisitions of Time Warner and Direct-TV. I see very little prospect of above-market returns here, even with a hefty 6% dividend. Again, the capex requirements here are huge and the market already saturated.
Now, there's nothing wrong with T and NG - these are solid picks for older investor approaching retirement. The dividends both look safe and will pay handsomely dividends to those who are willing to forgo share price growth.
Let me emphasise, I am not discouraging investments in such companies, I remain absolutely convinced of reliable dividend payouts from the majority of such low-growth companies, even where high levels of capital expenditures are needed.
But, it’s time to admit that I have been blinded by my obsession of ‘value’ in an investment. For so long I held off buying outstanding, high growth companies, such as Visa, Mastercard, Facebook and Nvidia simply because of their high p/e ratios.
In turn, I missed out on the glaring competitive advantages and ability to make above average returns these companies have.
Maybe it was my fault? Maybe I wasn’t valuing these companies appropriately? But, all looked expensive in relation to their 10 year p/e ratios and the market and all went on to raise emphatically in value, bar Facebook as a consequence of its recent, overdone in my opinion, 20% drop.
Here’s a hard learned lesson – an important one to any investor.
Looking at a company’s 10 year p/e ratio to try and determine value can hoodwink you into missing out on outstanding investments.
Surely I can't be alone in having dismissed outstanding companies with outstanding economic moats simply because they looked expensive relative to their 10 year p/e or because they had ratios upwards of 30 even 40.
Sure, it may assist you in painting a background of the company but it has absolutely no bearing on its current value.
It is very possible that a company’s future prospects have transformed dramatically and as a result the company deserves its high valuation.
Yep, this is in complete contrast to my previous approach to investing where I emphasised that one should only value a company on its current fundamentals, exclaiming that these along with the company’s history are the only facts that one can obtain about a company.
The now glaring problem with this stance is that companies change.
A company with an outstanding economic moat and enviable history of earnings growth may be about to face very predictable headwinds. For example, a pharmaceutical company that has just had a patent expire on its star product.
On the other hand, a company with a dreadful or subdued history may have just launched a star new product that will catapult it to a much higher valuation. Just look at Apple pre and post iPhone.
True. It is incredibly risky to try and predict a company’s future. After all, the future is always uncertain. But, one must remember that one can only ever lose 100% of one’s initial investment and that an investment’s upside is theoretically without limit.
So what’s changed?
I’m still a Dividend Growth Investor.
Dividend growth stocks offer enviable protection in economic downturns and instant returns via dividend for investors.
I am now tilting my portfolio more towards companies with higher growth prospects than my usual ultra conservative investments whilst also retaining many of my previous conservative investments for protection in a downturn.
I have updated my portfolio page to reflect my current portfolio holdings.
Remember to comment below and that I’m always available to answer any questions via firstname.lastname@example.org.