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Chapter 14: “What’s Wrong (and What’s Right) about DIY Investing?”

by Orion on February 14th, 2012

My apologies to the “Older Guy” for taking so long to post this chapter. I admit it has been collecting cyber dust for a bit now while I have been distracted by my hectic life…

While those of us that have graduated to independent investing in good dividend stocks tend to pat ourselves on the back for escaping the Mutual Fund trap, it is always important to remind ourselves of the inherent danger that comes with such freedom. Hence the continued need to follow the “due diligence” that the OG has been preaching. That is not to say that mistakes are always avoidable — even the best investors will freely admit to making mistakes from time to time — but with some time and patience, we can learn to minimize our losses and maximize our successes.

Here is Chapter 14 of the OG’s investment series on the OVAL blog:

Chapter 14 “What’s Wrong (and What’s Right) about DIY Investing?”

So far in this investment blog we’ve mainly focused on what’s right.   For if you’ve followed through the previous 13 chapters you should now understand that there is a huge difference between investing in GICs, government bonds, mutual fund (even ETFs) — and good individual dividend stocks.  To me, the former is ‘wrong’, and the latter is ‘right’.  Yet, too few appreciate it.

If you limit yourselves to GICs and government bonds – you will be safe, sleep well, and can virtually forget the matter of investing.  But, unless you have a good work pension, you’ll likely end up poor.  Similarly, if you invest in mutual funds you won’t be safe, and will likely lose money, or make very little.  And with all these lesser options you should know that it will take you many decades to build a sufficient portfolio to pay you as little as $1,000 per month.

As an example, it would take $600,000 in GICs or government bonds at a net 2% to yield just $1,000 per month.  With mutual funds, after fees, I netted just 2% per year over 25 years. ETFs are an improvement over mutual funds, but few of them net more than 3-4% — and only if bought at a good price when the market is down.

Yet, a good dividend stock investment of $240,000 at a net 5% will yield $1,000 per month. (And while this is entirely possible, this blog aims for you to make more…)

So, while keeping in mind that our DIY objective is to invest in good dividend stocks, for this chapter let’s focus on ‘how not to invest’.  In other words, what have we done wrong?

Certainly we can blame the media and the investment houses for sustaining their businesses by confusing us, actually misleading us, and by overcharging us.  But we can also blame ourselves for our greed (in trying to buy the home run stock), our naivety (believing the experts), our uninformed practices (such as trading too often), and investing with a lack of due diligence (laziness).   It’s only human nature.

Starting with myself, I’d say that my biggest mistake as I began directing my own investments in early ’09 was in trading too often – in a rising market.  So, I’d buy a stock, keep it long enough to think I’d made a good profit (say 15-20%), and then sell it.  Being a ‘natural bear’, I always expected the second shoe to drop.  Meanwhile the market continued to rise for more than two years and my ‘profits’ were eroded.  Not only that, but in the process I sold some really good stocks, like Telus, which went on to make very good capital gains.  Now they’re simply too expensive to buy back.

But with time, effort, and my participation in the Share Club, I understand that a rising share price is (besides a potential capital gain) a ‘margin of safety’, and that if I am lucky and astute enough to buy a good stock at a good price — I should keep it.  Other friends, such as Senior Citizen have enough shares to sell a portion for capital gain, and keep the remainder for dividend income.  That’s fine, as it hedges the market, but I’m not that wealthy.

A very welcome development in my understanding was that good companies (ie, those with good products, revenues, payout ratios, and assets-to-liabilities) are virtually as safe as government bonds and GICs.  Yet they pay so much more!  When I finally ‘got it’ I could relax about investing.  I could ignore the market hype: the fear, the false euphoria – the noise and volatility.  No longer would I sell a good company because I feared the impending crash.  I slept better.  And I felt confident enough to write this blog.

Of course I’ve made other mistakes which I’ll be happy to tell you about — but I think I’ll stop here and turn the commentary over to you.  I’m sure we have lots to talk about.

What have been some of your mistakes?

OG

Please Note: the OG has hinted that this may be the last chapter he writes for this blog, so if you have appreciated these posts and got anything out of them, now would be the time to let him know.

From → investing

30 Comments
  1. l also will answer any questions,sc.l have made many mistakes before l learned how to properly invest.l no longer invest in tech,since good companies become poor investments suddenly,eg. rim.l also do not sell good companies when l have made a good buck.l bought pot for $21, many years ago and sold it for $69. a share a couple of years later.l held on to a few shares but over the next 10 years pot split several times so that 1 share became 36 shares.l knew it was an excellent company but l followed the montra that said lock in your profits.The origional investment of $21000. would be worth over 1.5 million today.The point l am trying to make is that you will make mistakes but you learn from them and hopefully og and l(sc) can show you from our mistakes,so that you do not make them also.Even if you do make blunders you will recover from them.l still make mistakes,eg yellow pages which cost me 1000s.

    sc

  2. Orion permalink

    Yes, though I don’t buy pot myself, I understand it has got a lot more expensive over the years. My old man once told me that they used to sell “nickel bags” back in the 60’s…

    Just joking, of course. Thanks OG and SC for your helpful advice and candid reflections. As always it is much appreciated.

  3. (Ignoring your impertinence, Orion… but thanks for kicking off chapter 14. I like the graphic.)

    I made a similar mistake with Pot(ash)Corp, SC. Having looked at the 5 yr charts, in early ‘09 I bought a lot — expecting a good gain down the road. As it was an expensive stock, around $100 at the time, I became quite nervous when it stayed stagnant at about that level for a year or so. In the meantime I began to understand more about the value of regular income from dividend stocks. So as soon as POT reached $105 I sold it.

    Of course, POT did go on to reach about $168, and later split 3 for 1 (If you look at the 5 yr charts for POT now, you’ll see a reduced and modified valuation which reflects the new split share price value). Like you, SC, I missed the big payoff.

    But you say, so it goes… It’s a part of our learning. Technically, I didn’t lose. But now my focus continues to be 90% on the dividend paying stocks. At my age I can forgo the angst and uncertainty of investing heavily in commodity-based stocks.

    OG

  4. John Boy permalink

    OG and SC

    A couple of my errors have to do with not buying enough shares of a company to take advantage of the DRIP discount. As you have both pointed out in recent chapters, upon investing for that DRIP discount you must first be aware of whether the dividend is paid monthly or quarterly. If it’s monthly, multiply the dividend paid times the number of shares you wish to buy — and weigh that against the share price. Add some measure of safety in case the share price goes up.

    This happened to me with Altagas. Initially I bought enough to get the discount. But as I checked January’s statement I found that the share price had exceeded my dividend payment for the month. Now I have to buy more at a higher share price just to keep up the DRIP program.

    (I did the same with Crescent Point, earlier.)

    John Boy

  5. That happens when a company has strong growth.You learn from your mistakes,but also realize that you did nothing wrong.The market is unpredictable and you learn to adjust to it.l have made the same blunder myself in the past.

    sc

  6. Rena Fey permalink

    Thanks for the opportunity, OG and SC,

    I know that this is like going over things we’ve already discussed, but for those who haven’t read earlier chapters my worst mistake was in trusting financial advisers and investing in mutual funds for so many years.

    Even when I got a FA who would actually invest in individual dividend stocks he (his company) took a full 2% in purchase fees, plus annual management fees. I once bought $10,000 of Great West Life stock and was charged $207. Now, with a discount brokerage, that same purchase would cost me a mere $9.95. What a difference in the investment industry to cut out the middle man!

    Here’s to DIY investing.

    Rena Fey

  7. Good feedback, Rena Fey and John Boy. As SC says, “We can learn from each others’ mistakes”.

    Before I tell you more of my mistakes, I’ll tell you about a recent success which arising from investing in dividend stocks. The corollary is that this particular company, Corby Distilleries (CDL.A), is a small cap Cnd company. I invested in it because the bigger blue chip companies were overpriced, and CDL.A has good fundamentals.

    Anyway, I invested in it at $15.66 on a deep dip in June ‘11. It promptly raised its qtly dividend fr .14 to .15 in November. Then, low and behold, it paid a $1.85 special dividend per share in December. Thus on 200 shrs, for a stock which pays 3.69%, I received an additional $370 — equivalent to more than three times the annual dividend!

    Now the stock is at $16.25, a 3.75% gain. So, altogether: regular dividend, special dividend, and captial gain, I’ve made about 19% in CDL.A in 8 mos — without worry, and being able to sleep at nite.

    That’s exactly the kind of bonus that individual dividend stocks will pay, as compared to an ETF comprised of dividend paying stocks.

    OG

  8. Kam Bred permalink

    Thanks to OG for the great chapters (of a future book? :) Thanks to SC for sharing his experience. And finally, thanks to Orion and OVAL for the venue.

    My biggest mistake has been my lack of patience. Starting out I was more focussed on ‘jumping in’ rather than getting familiar with the market. As such a couple of my early 2011 purchases like ECA were made too early in the decline and are still waiting to recover. Fortunately the advise to buy large cap dividend payers allows me to relax and not worry about the current price. This education did allow me to make some nice purchases during the lows of Aug-Oct.

    • Orion permalink

      You’re very welcome Mr. Kam Bred. Thanks for reading and thanks for you comments.

      I would echo Rena’s comments about Mutual Funds and Financial Advisors being my biggest mistakes.

      So far in my self directed investing career, I have been fairly conservative and patient, buying only dividend paying companies with good fundamentals.

      In the few cases that I have sold a company I was worried about, I essentially broke even on capital gains, but still had collected dividends for the time I had them.

      I am sitting on a few companies who’s stock values are still down, but I’m collecting dividends while they are low.

      I’m sure a few will really drop some day and I’ll take some capital losses, but I suspect my biggest mistakes down the road may be simply missing out on some good buys because I’m not watching closely enough.

      …but life is busy, and my investments are pretty secure and paying good dividends. Maybe some day I’ll have more time to pay closer attention. In the meantime, I’m very happy with my approach overall.

  9. Hi Kam Bred,

    Your story sounds a bit like mine. Patience is a hard one to learn. Yet looking at the 5 or 10 year charts and knowing that there will be deep dips, and buying in increments (“nibbling” as SC says) helps. I also feel that writing this blog and going to my ShareClub meetings helps, because it gives me an outlet for my interest — without resorting to buying.

    As for a future book… “Article One: DIY Investing — A Twist of Fate” is being launched as we ’speak’ in the Thunder Bay Seniors demi-tab newspaper. An online version can be found at http://www.tbayseniors.com.

    OG

  10. An update to my last comment: The first article for the Seniors paper will appear ’sometime soon’ according to Keith Nymark, the editor and publisher.

    OG

  11. Doris permalink

    OG,

    Being new at this I have hardly had time to make mistakes — but I have learned a lot by reading earlier chapters and comments on this blog. From your experiences I hope to avoid many serious pitfalls.

    One of the best pieces of advice was in the how-to’s of opening up an online brokerage account, specifically the matter of moving investments “in kind”, rather than cashing them out at ridiculous redemption fees. Then, using the online brokerage web site it was easy to follow the prices of my transferred holdings, and sell them at reduced fees, and at good selling prices.

    Thanks for all that.

    All the best in future endeavours.

    (I’m presuming that even if you discontinue publishing new chapters, the blog will remain on the Oval Site for future reading.)

    Doris

  12. Hi Doris,

    I’ve talked to Orion and he assures me that this blog, the investment portion his Oval web site, will remain intact for posterity.

    As well, a current reflection for all of you who watch and wonder ‘what next’ with the market: the Baltic Dry Index is at a low which is comparable to the lowest point registered at the time of the ‘08 market crash. If this keeps you focused on your ongoing due diligence, it should. As the BDI measures volumes of globally shipped goods, it’s a very broad economic indicator — and the indication isn’t good.

    To appreciate the highest level registered over the last 5 years, compared to the low: on May 15/08 the BDI was at 11,793 — more than 17 times the 663 reading it reached only 7 mos later, on Dec 5/08. It fell that far and that fast!

    Now it’s back to a low of 763, having reached only as high as 4,507 (on Nov 20/09) since the crash.

    Given the high sovereign debt in Europe and the US, as well as the lack of employment recovery I would suggest that there’s still only ‘faint hope’ of any quick recovery. 70% of the US market is a direct reflection of domestic spending, and people without jobs can’t spend money — unless it’s with a credit card…

    Anyway, cash is still king. Keep lots. Teach your kids to be savers, not spenders. And for the patient investor — the deals will come. Stay safe with the dividend aristocrats you’ve bought at discount prices; it’s the best path through these uncertain times.

    Finally, be generous with your friends and family as they are your best and deepest personal investments.

    OG

  13. Oh yah, and did I say: while ’staying safe’ with your dividend aristocrats, at least continue to monitor the financial news for those holdings. You know by now how to do that…

    And when there’s a significant price downturn (a deep dip)to one of those holdings, check their financial statements (as we have learned under ‘due diligence’). If you note a more gradual downward price trend that extends through 2 or 3 qtrs, check the ratios of assets to liabilities, the net income (profit), and the earnings per share compared to dividend payout. Then, if necessary — reconsider that holding. Over time ‘things change’ within the economy and within management. Some of our dividend aristocrats may fail…

    But most often a price decline is only the market itself — and a dividend aristocrat should be able to survive significant downturns. And sometimes the problem is seasonal, as some companies do well at certain times of the year, but not others. You should know that about your companies — because you ‘own’ them, don’t you.

    Another thing, which should be obvious, is to continue to reconcile your monthly statments: are your regular dividends being tallied; are your DRIPs reinvesting; is the reinvestment discount being implimented; are your running totals being carried forward accurately?

    And finally, regarding security: change your online passwords regularly, do your investing and banking in the ‘private browsing’ mode — and do systems security checks regularly.

    That’s it. All the best. Thanks to all of you who have participated. Special thanks to Senior Citizen, and special thanks to Orion. I know it’s been a learning experience for me — and I’ve enjoyed it. Hope it’s been good for you, too.

    OG

  14. John Boy permalink

    Say it isn’t so! The end to ‘our’ blog? Can I accept what I cannot change? I’m not so sure. For me, the blog has been many leaps forward in my learning. Not only that, but it’s been fun to share the experience with a few like-minded people.

    I guess I’ll just have to seek out a share club, or maybe start one with a few friends. That’s what I’ll do.

    Thanks, OG, SC, and Orion. I’ll certainly miss you.

    Best Regards,

    John Boy

  15. lf you still have questions sc will still be watching the blog to help.OG will also be checking the blog to see if our help is needed.

    sc

  16. John Boy permalink

    Thanks SC. I’ll be there too.

    OG

  17. Well, I’m tuning in a little late again and I’m sad to read that OG is stepping down. I’ve really enjoyed reading OG, SC, John Boy, Rena Fey, Orion, and other commentators. Oval Investing has been my secret support system in taking control of my savings.

    Up until the time I started to follow this blog all my savings were in mutual funds. With the help of Oval Investing, I said good-bye to my advisor, opened up a BMO on-line investment account, sold all my mutual funds and continue to invest (ever so slowly) in Blue Chip companies.

    I’m too new to DIY investing to share my mistakes. To date, I’ve made the usual: listening to a financial advisor for 15 years too long and not buying enough to take advantage of the DRIP. My best move was buying ENB when it split last July, but I was too overly cautious with just how much I bought.

    So, I’ll plod along and check in from time to time. Thank you so much for sharing OG and SC. I’m grateful. I needed a little push and lots of “plain talk” from a community of players like yourselves to get this far.

  18. I do have a helpful tip for those who need some convincing to switch to DIY investing.

    When I moved my RRSP savings and mutual funds to a BMO RRSP on-line investing account, I kept one $12K mutual fund because it had a rear end cost and was not due until February 2012.

    In July 2011, I bought $3K worth of ENB after a 2 for 1 split and placed this $3K investment beside the $12K mutual fund and watched over 8 months how the two performed.

    I recently sold the $12K mutual fund for a gain of just under $100. The $3K in ENB has an unrealized gain of just under $750. Rather remarkable don’t you think when we are talking about an investment that is four times less than the $12K in mutual funds.

    Needless to say, I’m looking to reinvest the $12K not in mutual funds but in Blue Chip performers like ENB. This time around my strategy is to spend the full $12K over a six-month period in 3 Blue Chip companies at increments of 50 shares a purchase. I’m hoping that by spreading out my purchasing I can take advantage of the dollar cost averaging approach and perhaps another dip in the market come summer.

    ENB remains one of the Blue Chip companies I will continue to invest in. I estimate that I need to purchase another 150 shares to take advantage of the DRIP. My caution about purchasing this amount outright is that the analyst reports are suggesting that the stock is a little overpriced at the moment.

    Comments are welcome :-)

    • Very good to hear from you WP. And thanks for the kudos to all the participants. That was the purpose: to do it together.

      Also good to hear that you are now fully into DIY investing.

      With regard to your caution, I understand. It feels unreal (like a Monopoly game) when you first purchase stock in the thousands of dollars. But you’ll get used to it after awhile. Look how well you did when you bought ENB. Your confidence should carry you. And funny enough, investing in dividend aristocrats isn’t that hard — though I always do some due diligence when I do buy in.

      For example, I check the last available quarterly statements and scan the Balance Sheet for the “working capital ratio”( total assets to total liabilities), and the Income Sheet for net income (profit), and the ratio of earnings per share (EPS) to dividends paid out. I try to note any trends over the 5 qtrs usually seen. I use Google Finance.

      Best of Luck, WP.

      OG

  19. John Boy permalink

    Hey, good to hear your voice OG. And “hi” WP.

    I have a question for SC. It seems that the market might do it’s usual summer correction some time in the next month or two. And now, as I read the Globe’s premarket blog, I see that markets are down, worrying about a general strike in Spain against austerity.

    If the markets do decline sharply what stocks, either specific or within a given sector, would you be looking to buy?

    Thanks,

    John Boy

  20. Some of the stocks l would look at are emera,fortis,
    encana,bns,bmo.Right now emera is paying about 4% dividend plus a 5% discount when you reinvest the dividend,fortis is around 4% plus a 2% discountbns is around 4% plus a 2% discount,bmo 5% plus a 3% discount.Encana pays a 4% dividend with no discount but it has alot of potential for capital gains in the next couple of years.Some othr companies that you can look at are npi,vsn and liq.The only problem with these 3 is that fact that they pay their distributions monthly,forcing you yo but aroud 300 shares to be able to get the5% discount when you reinvest the dividend to buy whole share.These 3 companies pay 6 to7% in a dividend plus the discount.Rio can is an income trust with a monthly payout,but since it is a reit,it should be in anrrsp or tfsa to get around the tax on interest which payout from reits are classified as,plus the 5% that riocan pays out they have a 4% discount

    sc

  21. riocan only has a3% discount.Sorry for the mistake.

    sc

  22. Thanks for that, SC. I think you’ve answered questions for both WP and John Boy.

    FYI, the Investment Reporter, available in the Thunder Bay Brodie library has their list of “very conservative” stocks with their DRIP discounts published in their Dec 16/11 issue. Besides what SC has suggested you might consider: Manulife @ about 4%, plus a 3% disc; Shaw Communications @ about 4.5% plus a 2% disc; Sun Life @ about 6.5% plus a 2% disc; Transalta @ about 5.5% plus a 3% disc. To that I would add Altagas @ about 4% plus a 5% disc.

    Quite the potential portfolio, considering SC and the above from the Investment Reporter!

    OG

  23. Doris permalink

    You guys are the greatest. How about just carrying on. You don’t have to feel burdened by it, but this has all been very helpful to me. As WP says I appreciate the plain talk from a community of players. Nicely done.

    Thanks,

    Doris

  24. AS og and l sc have said,if you haqve questions just ask,we will do our best to answer them.One point l think you should be aware of pertaining to discounts on reinvesting dividends.Companies can cancel the discounts at any time.Royal bank,na, telus all cancelled their discount last year in a 1 month period.Cibc just sent me a letter this week to let me know that their discount will end after this dividend.That is why l say take advantage of these discounts while they are available.

    sc

  25. I’ve just had an em question from Kam Bred noting the price drop in TransAlta. As well, I note the Globe article by John Heinzl posted Mar 27/12.

    Heinzl explains the 16% decline in share price as due to two factors: 1) the shut downs at their two Sundance power stations, the consequent non-payment of fuel prices due to TransCanada Pipeline Corp.– and possible multi-million dollar fines that might arise, and 2)declining profits at their Centralia plant in Australia. He goes on to quote two analysts with opposite recommendations: sell for one, and buy for the other. Heinzl continues to ride the fence by saying that TA could either lose share price if they lose the court case waged by TCC, or “pop up” in price if they win. Worst case scenario is that they cancel their DRIP and/or dividend and the share price tumbles. Besides the alarm, no convincing arguements, really.

    But let’s face it — there is risk of some loss of dividends, and/or share price. But how much, and for how long?

    Consider this: Transalta is the biggest power generator in Alta, and Alta is booming! It’s market cap (all outstanding shares times price) is over 4B$, and their total assets are more than twice that, at over 9B$. If you look at their financials TA has maintained a very constant spread of total assets over total liabilities. Even fines as much as $300M could be made up within a quarter or two at this company’s cash flow rates.

    Now I’m not suggesting that everything is rosy with TA. I’m only saying that there is no need to panic. TA has been around for a hundred years and the economy of Alta is going to sustain it for a long time yet. Even if it is fined, and even if the share price drops for awhile, TA has maintained its dividend for many, many years. I don’t think it’s going to risk cutting it now.

    Any further thoughts on the matter, SC?

    OG

  26. l have owned this company for over 30 years.lt is part of the infrastructure of the province.The province cannot due without power of which ta is the main supplier.They may stop there discount,but if they dropped the dividend or lowered it,the stock would fall dramatically,making it an excellent buy.ln good times and bad times companies like ta still make money.

    sc

    • John Boy permalink

      Hi OG,and SC,

      I’d like to add some specific references to the financials to support what you say about TA.

      The Income Statement shows that Total Revenue was up from the last two qtrs, with a $72M increase in the last qtr, and only a $40M increase in expenses. Total Assets increased by $51M, and generally over the last year Total Assets have exceeded Total Liabilities by over $3B.

      Yes, net income, or profit, was down almost half for the quarter, from $54M to $28M, but that was probably due to the Sundance shutdowns and the Centralia plant shortfall, as Heinzl says. What he doesn’t say, though, is that these are the blips of a huge business.

      They say that investors most often over-react to worry. I think that this is the current case with TransAlta.

      John Boy

  27. Further on TA… Since its price declined my DRIP is able to buy more TA shares — at discount, and without purchase fees.

    That’s quite satisfying.

    OG

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