There are two investment rules you cannot break if you are to run your own investments inside a self-managed super fund. The first is you need a great investment strategy and the second rule is you have to stick to your strategy unless your circumstances change.
Jack Bogle, the US legend of finance, who created a ‘little’ business called Vanguard, has often said: “Buy right and sit tight!” Stockbrokers hate this advice because it undermines how they make money – having clients that chop and change trying to buy right and ‘sell right’ – but that is a difficult game.
Lots of fund managers do this or try to do this and this is why the majority of them don’t beat the S&P/ASX 200 index.
A few weeks back, I supported an article by Peter Thornhill who argued Ken Henry was wrong trying to push people too heavily into bonds and out of stocks. Peter and I don’t like non-dividend paying stocks because we play safe with stocks a stick.
It means when cyclicals go mad along with the stock market, our returns will look conservative, but we are trying to take out the big swings in stocks that can decimate your capital and deliver a collapse of dividends.
A subscriber – M. Lai – disagreed with us saying that dividends fall too when a big market crash happens, but I say yes – but some don’t fall by much.
Thornhill’s retirement portfolio is all dividend stocks and he keeps a cash buffer for any bad year or two to make up for when dividends fall by a bit, but good companies’ dividends, especially if you hold 20-30 of them don’t fall by much.
Let’s look at CBA over 2000-2012, which had two market crashes – one from 2000-2002 and the global financial crisis from 2007-2009.
In 2001, the annual dividend was $1.33; 2002 was $1.43, then $1.51, $1.64, $1.89, $2.06, $2.37, $2.62, $2.66, $2.75, $3.02 and in 2011 it was $3.25. It always went up and Westpac had a similar story except for 2009.
Let’s look at Westpac from 2007-2011. Its dividend went like this: $1.31, $1.42, $1.16, $1.39 and in 2011 it was $1.56. Sure 2009 was disappointing, but there was a quick comeback.
In fact over the toughest years since the Great Depression, Westpac started paying dividends in 2007 or $1.31 and averaged a dividend of $1.37 over the five years.
Share prices vs dividends
The case is proven that good companies sustain good dividends and the dividends don’t collapse like share prices. Let’s look at Westpac’s share price over 2007-2011.
In 2007, Westpac’s average share price was $27 and the dividend was $1.31 or 5%. When the price fell to $17 on average, the dividend rose to $1.42 or 8.3%.
If someone had dollar-cost averaged and bought Westpac at $17, they would have offset a lot of their capital losses, but most people got scared and rushed to term deposits.
During that time, I was arguing that good stocks for long-term investors were great value. Media personalities interviewing me would then ask what stocks people should buy. I have to admit, I was not sure about many companies, but I always said to buy the banks, which were regarded as some of the safest in the world.
Buy right and stick tight, and let me add – don’t be afraid to buy when markets panic and all stocks – good and bad – fall. But you can wait for a turnaround in the trend of panic before jumping in. I must admit this is tricky, but as long as you are buying right, then it’s OK.
Worth a million
A New Yorker, Anne Scheiber, who retired from the Internal Revenue Service (IRS) in 1943, lived to 101 years of age mainly on social security and a small pension from her working days. She lived in a rent-controlled apartment in a bad part of town and went to the New York Public Library to read the Wall Street Journal. She had few material possessions and died pretty poor-looking.
However, when her will was read out, the Yeshiva University was left $22 million! History showed she had bought great American brand name companies, re-invested her dividends and her $5,000 savings she had when she left the IRS certainly snowballed!
Scheiber had a great investment strategy and she stuck to it.
This story is my Christmas gift to all of our subscribers. Have a great Christmas!
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.