Why Investing New Capital During All-Time Market Highs Doesn’t Scare Me

marketcrashIs The Stock Market Overvalued?

Over the last five years, the S&P 500 index is up 107.37%.

And over this same time period, the Dow Jones Industrial Average is up 93.13%.

Meteoric. We’re basically looking at the most robust stock market in the world doubling in five years’ time frame. Are the sum of these companies worth double what they were five years ago? Were these companies worth half back in 2009?

Impossible to say, but I know that valuations of the broader market are getting a bit stretched here. As I previously mentioned, the Shiller P/E ratio stands above 26 right now – well above the long-term average of 16.5. Make what you want of that, but I believe that spells pricey stocks in general. If you don’t like Shiller’s cyclically adjusted 10-year P/E ratio, you can also use the S&P 500’s own TTM P/E ratio. This metric is at 19, which is significantly higher than the average of 15 going back more than 100 years.

I Invest In Individual Businesses, Not The Entire Stock Market

Does this mean the stock market is going to correct or crash? Who knows. Luckily, I don’t need to know or care.

I invest in individual companies one company at a time. As such, I value a specific company on a quantitative fundamental and a subjective qualitative basis. I then come to a reasonable valuation range on a business and invest when the following occur:

1. The business passes my analysis, and appears to be viable, sound, and growing.

2. The business’s valuation makes sense, indicating fair value or undervaluation within range of my reasonable estimate.

3. I have fresh capital available.

4. I have room in my portfolio for this business, meaning the weighting will make sense after a new investment.

Notice that I don’t worry about where the stock market is at. The market could jump 20% from here and my system of analyzing businesses and investing in said businesses won’t change a bit. If such a market move were to occur I might have a hard time finding any single business worthy of fresh capital because they’re all individually expensive at that point – a rising tide lifts all boats – but the broader stock market still has no direct effect on my decision to invest fresh capital.

Why I’m Not Worried About Investing Fresh Capital Right Now

However, I can see why individual investors are scared to invest fresh capital when the market appears broadly overvalued and ripe for a correction. Who wants to invest thousands of hard-earned dollars only to watch your new investment tumble in value? Not me. And I’m guessing not you.

But I’ll tell you right now why investing new capital right now (even with a historically expensive market) doesn’t scare me one bit.

Right now I have a portfolio valued at over $160,000, using current market values of all the individual equity stakes. And while some of these businesses, and my stake in them, may be admittedly overvalued, this is the current value of the portfolio.

So that means I have over $160,000 of my wealth at stake in the stock market.

As pertinent background information, I typically invest anywhere from $1,000 to $2,000 at a time in the stock market. I invest this kind of capital almost every single month (missing only two months in the last four years), with most of my individual purchases settling in the $1,400 range. That means every time I invest in a business I’m putting over $1,000 of my capital at risk in the market.

Now, compare this to the six figures I already have at risk.

If the market corrects 10% the day after I invest $1,400 of fresh capital I could slam my head into a wall and get all upset. But maybe that’ll loosen some common sense inside of me. Because I’d then see a 10% unrealized loss on $1,400 is only $140, while a 10% unrealized loss on $160,000 is $16,000 – assuming my equity investments fall by the same amount in aggregate as the general market.

If I were to be scared to invest $1,400 of hard-earned capital right now, then I should certainly be very afraid of having six figures exposed to the market.

I try to keep perspective here. Imagine being Warren Buffett when a major correction hits. Berkshire Hathaway Inc. (BRK.B) has an investment portfolio worth over $100 billion right now. A 10% correction means a throat-lump-inducing unrealized capital loss of over $10 billion. $10 billion, folks. Certainly I’m not going to worry about $16,000.

And keep in mind these are all unrealized losses. If the market corrects tomorrow and my portfolio value declines by a significant amount, that simply means that my fresh capital can go that much further, buying more shares for the same amount of money. And more shares means more dividend income. And more dividend income means my reinvested dividends buy more shares. The snowball rolls faster, and I’m that much closer to financial independence.

Meanwhile, the unrealized losses mean nothing unless I sell. My net worth will be worth less on paper, but who cares? I don’t buy stuff down at the local Net Worth Store. I buy stuff with cash, which is supplied via dividend income. The greater the dividend income, the more stuff I can eventually buy. And by stuff, I mean time.

The Long Game

Furthermore, one must consider their time horizon.

If my investment horizon was a year or less then market gyrations would probably concern me. But I don’t invest for the next year. As a 32 year-old, strapping young man, I’m investing for the next four or five decades of my life. What do 10% or 20% corrections matter when I’m thinking about the percentage gains in terms of hundreds over the long haul? Does it matter all that much if The Coca-Cola Company (KO) goes from $41 to $39 over the next month? Or $41 to $43 for that matter? Not really, because I’m thinking about KO 40 years from now when it’s priced at $1,000 per share.

I sometimes go and take a look at the S&P 500 chart over the last 100 years and what I find is that you don’t see 10% corrections. You can barely even detect major market moves like the 1987 crash. Over the long haul these things really don’t matter. What does matter, however, is your ability to stick to a plan and be consistent. Worrying about timing the market is a sucker’s game, because you’ll be spending your time worrying about something you can’t control. I spend time worrying about things I can control, like saving capital to invest, honing my valuation skills, reading annual reports, and reinvesting my dividend income.

See, the broader market’s ups and downs have nothing to do with how many bottles of Dasani water Coca-Cola might sell over the next decade or how many Big Macs McDonald’s Corporation (MCD) sells over the next 20 years. The former has pretty much nothing to do with my passive income and the growth of it, while the latter examples have a lot of correlation. You only have so much time in a day. Using this valuable resource worrying about timing the market will only serve to impede your progress.

Conclusion

I’m currently building some fresh capital for my next purchase over the coming weeks. And I’m not worried at all about where the broader stock market is valued at. Sure, the valuation on the entire market doesn’t look good. But I’ve always said the stock market is just like any other market or store, and there is cheaper and more expensive merchandise alike within that store. Staying cautious is of course very important, but I’d advise focusing your time on individual businesses that have attractive valuations relative to underlying operations, their own historical valuation, and the market at large.

I can’t control the market. I can’t control what’s going to happen tomorrow. But if a correction of 10% or more occurs I’ll be comforted knowing that the fresh capital I’m investing is impacted much less than the portfolio I’ve already spent more than four years building, Furthermore, I’ll also keep perspective on my time frame, as I won’t remember this 10% correction two or three decades from now when stock prices are significantly higher due to growth in businesses across all sectors and countries. And I’ll also be very happy to know that cheaper stock prices brings me much closer to my ultimate goal of financial independence whereby my passive dividend income exceeds my expenses.

Full Disclosure: Long KO and MCD.

How about you? Does investing right now scare you? 

Thanks for reading.

Photo Credit: David Castillo Dominici/FreeDigitalPhotos.net

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77 Comments

  1. A quick note from TheTorch: the larger cap companies sometimes will increase their divs to attract investors in a serious pull back of 10 percent…so IMO pullbacks are just great stocks that went on sale…providing you invested in quality stocks…keep up the great articles.

  2. Hi Dividend Mantra,

    This is a great point to have brother to remind all of us long-term investors that stock price fluctuations are nothing to be afraid of. On the contrary, a 20% drop will be quite welcoming to a lot of dividend investors. Since we get cash every month in the form of dividends, this would buy much more stock during a correction. You are correct that if you invest for the next 30 – 40 years, it doesn’t matter whether KO is at 37 or $41.. The thing of course is that few people have the emotional tenacity to hold through thick and thin. But luckily, our readers are such people.

    I do believe the US businesses will earn more, pay more in dividends, and be more valuable in 30 – 40 years. After that, it is the problem of whoever inherits my dividend portfolio 😉

    Best Regards,

    Dividend Growth Investor

  3. Dividend Mantra,

    It’s best to invest in stocks that pay a dividend. Dividends are part of the total return and the more dividends paid to you the greater your overall return. Dividends can be used for variety of things including reinvestment. If you don’t then you won’t realize a return until you sell. With a detailed reading of the fundamentals telling you how strong or weak a company is, it goes along way to limit losses. Unfortunately, most investors do not do enough research when they buy stocks.

    From your portfolio update a week ago, it shows you have done excellent research into stocks that you purchased. As you get even better at this over time, your charge to financial independence will come really quick.

    I like when the dividend income “snowball” increases with every purchase and dividend raise..

  4. DM,

    No. I’m not scared either.

    I plan to live off dividend & interest income leaving principle untouched during retirement years. Therefore portfolio value doesn’t matter because I refuse to sell assets for living expenses. That right there is the beauty of dividend growth and income investing!

    Net worth, total return, portfolio value. I don’t bother tracking any of those numbers because they are meaningless to someone like me who rejects the 4% rule (or some variation). Nothing more than feel good numbers for people following a different strategy.

    So yeah a correction doesn’t scare me one bit, but I can completely understand why those planning to sell assets in retirement would be nervous at the moment. I get it. I was a total return investor at one point…

    Prices can go up or down, I really don’t care. I do care, however, that the businesses I own are doing well operationally.

    Anyways the DOW is up 2.1% this year…

    Long: dividend income

  5. Like you I’m not concerned about the markets being at all-time highs since I invest in individual companies, but it sure is making it difficult to find solid valuations in the companies I want to invest in. Which is unfortunately a by-product of the markets being quite high. I’m sitting on way more cash than I’d like to be so I’m about to start investing some capital even though it’s not going to be at ideal valuations. I think we all got spoiled with the better valuations from the last few years, I know I feel that way now. As long-term investors though the important thing is that the valuations in quality companies are good, they don’t have to be great.

  6. I admit, I’m a little reluctant to put Capital to work at such rich multiples. I have a ton of cash on the sidelines which also makes me nervous, especially as I’d like. to retire asap w a passive income stream. I followed your lead in purchasing. 300 shares of ACRP and also bought 100 shares of ESV (both on Friday). I’m also eyeing JPM and Noble. Jason, why aren’t the high quality, high yielding oil drillers on your watch list? Thanks, DD

  7. A little, but it just makes me look harder to find valuable companies. I have generally focused on a “contrarian” strategy… basically using sharp pullbacks in companies I understand as the right time to evaluate and invest (if I disagree with the pullback).

    I tend to invest in dividend-paying companies, just because the dividend pays me to wait even if the turnaround/business recovery takes some time. Also, I have two ways to win, either the stock price appreciates OR the dividend starts growing. Usually, it’s some of both, but either is acceptable. 🙂

    Currently considering positions in TGT and WFM.

    Happy hunting!

  8. A great reminder of what’s important in dividend growth investing. I understand what you are describing, but I feel the emotional tug of price lurking in the background. Posts like these get me back on track to focus on the quality of a company and the valuation of its stock.

  9. I’m one of those cautious types 32 year olds who invest for the long term but is also sensitive about the price stock and look for broad market pullbacks in stocks or sectors to buy shares in companies that are off their 52 wk highs.

    My reasoning is that I like to get a better deal on the yield on cost + potential for capital appreciation as the share price recovers. This also induces a sense of safety as you assume that there is less downside risk.

    I got some good deals when I tried to stick to such a plan for a fairly good yield on cost along with share price appreciation when I bought during fear or market dips for stocks like SBUX (which I sold later as it got terribly overvalued for me), DIS, COP, PSX, AAPL, OHI, MCD, WAG, CVS, SDRL and now FDO (got a jolt this week when Icahn revealed that he has a 9% stake). I recently started a position ARCP as it reach 52 wk lows. I don’t know how that buy will turn out but I think I have less downside risk if sentiment stays negative and I’ve also got a better yield on cost. I think my goal is to not only get growing income but also capital appreciation so I guess I look at total return with safety for principal and all these factors play into it.

    I don’t like to be in a position where I don’t have cash if there is a broad market dip/correction as need atleast a month of cash savings from my regular job to invest around 1.5% of portfolio’s value so it’s hard to have a sizable cash position to grab some deals when they suddenly appear so my current short term goal is to stay invested, reinvest dividends and build a cash position of upto 10% to invest incase there is a correction as we’re in toppy markets. I could be wrong but I don’t mind because if the market goes higher, my portfolio is going higher and I’m reinvesting dividends while I’m saving cash from my regular job to hit the 10% level.

    I think one of the main influence in being cautious is my wife who is apprehensive about stock markets so while there could a 40% bear market and I wouldn’t budge and will buy if I find deals, my wife would loose confidence and get emotionally troubled that I’m “loosing” money even though I haven’t realized any loss. So she kind’a adds balance to my decisions (plays the role of the public watchdog in the house).

    IMHO, it makes sense to invest in risky market tops if you are regularly investing for the next 10 to 20 years so you can dollar cost average during significant bear markets that bring down the share price (we’ve had two in the last 15 years). But if you are a retired investor or close to retirement with a short duration left for living off income, then that’s a risky gamble as you will not have money to invest and dollar cost average.

  10. TheTorch,

    Hmm, I’ve never actually seen that or experienced that personally. Do you have any examples where a company increased its dividend “off schedule” as a direct result of a market pullback? I’ve never heard of it.

    Cheers!

  11. DGI,

    Tenacity to hold through thick and thin is imperative to success with this strategy. And either you have that capability or you don’t. But I suspect, as you do, that most people reading our blogs do.

    Thanks for stopping by!

    Best wishes.

  12. IP,

    You’re preaching to the choir in regards to dividends, my friend. 🙂

    And snowballing is the name of the game. I want to one day build myself a mountain of snow so big I can ski on that thing!

    Best regards.

  13. CI,

    We couldn’t be more on the same page, my friend.

    And I also agree that as long as the businesses I’m invested in are doing well operationally and still paying and raising dividends that’s all that really matters to me. What Mr. Market says those business stakes are worth at any given time matters not to me and my goals.

    Long dividend income, indeed! 🙂

    Take care.

  14. JC,

    I hear you. Like I wrote in the post, a rising tide lifts all boats. Unfortunately, an expensive stock market means prices on most stocks are high. But I think there is still pockets of value out there, and that’s what I’m busy concentrating on.

    I do hope we get some cheaper prices at some point here. My capital is more limited than ever! 🙂

    I’m excited to see what you do with that ample cash load of your own.

    Best wishes.

  15. DD,

    Thanks for stopping by.

    I actually took a look at ESV just earlier today. The recent growth in both profits and the dividend has been most impressive recently. Their balance sheet is pretty solid compared to some peers, and the yield is outstanding.

    However, I see a few red flags. First, the day rates on their rigs are going down due to oversupply in the market. Second, and more importantly, the FCF situation is poor. The dividend isn’t currently covered by free cash flow and hasn’t been for years. I honestly don’t see how they can continue to pay out that massive dividend, let alone continue to increase it. It appears to be a risky play, especially with trends in the industry. Again, great growth and the balance sheet is solid. But the free cash flow is troubling due to their high capex.

    I hope that helps!

    Take care.

  16. Ravi,

    Interesting choices there. I like TGT as I’m an investor, but WFM certainly has some attractive qualities as well. What do you think of the share dilution – anything you’re concerned about? I’m also wondering about competition in this space perhaps eating into their margins.

    Dividends do indeed pay you to wait, and I’m currently waiting for financial independence. 🙂

    Best regards.

  17. Greg,

    It’s tough to not let Mr. Market tug you around a bit. I’m guilty of it from time to time myself. Money is something people get very emotional about, so seeing it sway to and fro can do crazy things.

    But I just continue to focus on the rising dividend income. Knowing that I’m making slow and steady progress toward financial independence reduces a lot of the emotion.

    Best of luck staying steady! 🙂

    Take care.

  18. George,

    I’m with you. I also don’t like to be without a ton of cash during a market pullback. But that kind of thinking would have had me building up cash for the last 18 or so months.

    Now, it depends on what kind of regular capital you have. And your time frame, as I discussed, also matters quite a bit. I agree with you that if you’re closer to retirement you’d want to be a bit more cautious, but focusing on the rising dividend income, no matter how far along you are, certainly smooths things out and creates a situation where your cash flow against expenses is what’s really important – not the broader market’s valuation.

    Thanks for sharing. And I hope we do get some cheaper prices!

    Cheers.

  19. Dividend Mantra,

    I totally agree I am not too worried about the market highs. A bear market will fluctuate my portfolio values, but its the income that is more important to me in the long run. After such a deep recession and this snapback I hope we have seen the worse of dividend cuts. The only thing that stands in the way sometimes is finding enough capital to put to work. I will continue to select individual dividend stocks opportunistically as I see fit when I have the chance. Reinvest the dividends mainly via DRIP in the meantime to automatically increase my next payments each month/quarter

    Great perspective on this post and examples!

  20. Great post, as always! I guess the test would come if your shares rose significantly, would there be any temptation to sell some for a big profit? I think I might be tempted to, even if it wasn’t part of the plan!

  21. This blog is fantastic and I have it bookmarked and its one of the first pages I read on my morning routine in front of the computer :). I have just had a few thoughts lately.

    You started investing when the markets where going up after the 08 recession, if I remember it correctly, so you have basically only invested in a market that had treated you very good. The same goes for me. But I can honestly say that if I had 160.000$ invested and that shrunk by 16.000$ over night, I wouldn’t be cold as ice about it. I would never ever sell anything, but taking a hit of 16.000$ which is like 1/3 of a years salary for me, it sure would affect my mood for a few days, but I would never alter my gameplan.

    Are you really sure that taking a 10% decrease in your portfolio won’t affect you? You seem to be quite happy about reaching 160,000$ (which you should be 🙂 ) and having a 10,000 investment in JNJ, what is there to say that having one of those radically change in a short period of time, won’t change your attitude? Having your portfolio stagnate for 2-3 years in a row? This is something the two of us never has experienced so can we really be sure that it won’t affect us? Its easy to say how we should act before something happens, but when it happens, people often forget all about it and make irrational decisions. I hope I am not one of them, and I am sure you aren’t either.

    I guess what I am trying to say is, can we really tell what we are going to do when the crisis hits next time, when we have no experience whatsoever with crisis before?

  22. I am scared and I have to admit I have been for a little while now. My time is to precious to spend it worrying about my portfolio and I have therefore decided to keep my equity exposure pretty low (10%) for the time being. This is market timing, I know, and it sucks. But it does make me sleep better at night and that is good enough for me.

    I am ready to press the button and will do so once the stocks on my watchlist will be 10%+ cheaper than they are now. Waiting is tough, but I rather pay the price of not having a 2-3% dividend than a 20% decline in overall portfolio value. I do not want to experience a Japan scenario and the whole money printing business of the FED, ECB, BoE & BoJ scares me a lot.

    Finally, this is my big advantage over a professional money manager – I do not have to buy at these levels and I can wait enjoying other things in life in the meantime.

    Sunny greetings from Europe and enjoy the World Cup (=soccer).

  23. Still learning from you guy! We are happy you are doing well! Hope to see you in the future.
    -Ron and Jason

  24. Dear Jason,

    For your timeframe you are completely right. Timing the market for a dividend growth investor is useless, negative and as you say a sucker’s game.

    As to me, my problem is slightly different as my time horizon is between 5 to 10 years, then probably more.
    I live on my money and sustain a small family. I have no fresh capital to invest, except the growing dividends.

    I know in advance that a substantial market correction will be very painful on paper, but not for the dividends growing more every year. To neutralize a bit these nasty corrections, I am now invested since some months in dividend stocks, growing or not, in emerging markets, the like Brazil with Petrobras PBR, Compania Energetica de Minas CIG, etc. I invest also in cheap markets , the like Turkey (TUR) and in cheap or fair valued European stocks, the likes Volkswagen, Audi, Nestlé, etc.

    for the time being I am doing ok.

    Hold on and do not sell your farm as Warren said.

    Keep on the good work !

  25. Its really a good point that you are making. If we are afraid of having a unrealized loss of $140 for a $1400 investment, we should really not be invested in the market with several thousand dollars in our portfolio. Though the counter argument for this would be that the existing portfolio has a cost basis that is less and therefore, the 10% that is being lost is just part of the unrealized profits, the new 140 that is lost is part of the invested capital and also the fact that one could accumulate more stocks for the same amount of capital. Maybe that is what is making people wait on the sidelines.
    But again, like you said, if someone is investing for the long haul, these shouldn’t really matter. Consistent investing is the key I guess. I missed investing during much between 2011-2013 and realized my mistake when I started reading blogs like yours and other dividend growth related investing blogs. If only I didn’t stop investing during those years, I could have accumulated lot of great companies. But better late than never 🙂

  26. TGT – I like the company (actually worked for the company a few years ago), and believe they have a good team in place. My true LT concern is the macro trend of mass-market appeal (especially in retail). I think big box stores in general will have to shrink in order to compensate for higher operating costs (real estate, utilities, min. wage, etc) and improve margins. Probably a good time to buy as a 10+ yr holder, but I try not to think that far in advance. I don’t think I get paid enough to wait as a function of the risk here. I hope I’m wrong, and you are richly rewarded! 🙂

    WFM – My real concern is if they degrade the experience in order to chase growth (i.e. sacrifice margins too much for growth). They’ll have to do this some to fend off competition. Like AAPL, I think expectations were too high and it killed the stock, but I think they have a good chance of growing into the valuation over time. As for share dilution, I think this is a risk management feels is appropriate in order to scale quickly enough. If they wait too long, someone else will come in. Their experience isn’t too tough to replicate (Trader Joe’s, Sprouts, etc have had similar success), but being first to market has a premium because most consumers are creatures of habit… especially when it comes to food. Definitely a risky play, and probably not worth it at $65+, but more compelling in the low $40s.

    All factors considered… I see more upside than downside; however, I’m only willing to fund new purchases right now from sale of existing holding(s), and that’s been the tough part. Top picks for cutbacks to reinvest right now are MO, and AAPL… though I do want to remain long in some amount for both.

    Trying to rebuild some cash reserves as I’d like to have ample cash in the event of a tenant move out/re-lease/general liquidity. It fails the investment efficiency test, but passes the “sleep at night” test, so we’ll see. Once I hit $15k liquid savings ($7k more from today), I’ll be mostly satisfied. Then I’ll have better cash flow to invest in everything under the sun!

  27. Great point. No matter the valuation, risk/reward, or any other factors, ALL investments should pass the “sleep at night” test.

    It’s the only one that really counts at the end of the day.

    Plus, after 20 years of saving and investing, the “saving” part of the equation will be much more important than how much you earn on your investments.

  28. Hi DM,

    nice write up. I’m not scared to buy today or tomorrow. The only problem I see is that we get less money printing stocks for the same amount of money. Should the markets go down I will still have a cash reserve of 10 000 EUR to buy more stocks. Just like Warren Buffett I like to keep some cash in my brokerage account.

    Cheers,
    G

  29. DM,

    After having lived through the 2000-2002 and 2007-2009 bear markets, I don’t worry as much as I did in the past. When you look at the S&P 500 it was 1500 back in 2000 then proceed to lose half its value, go back to 1500, lose half its value again, and now is at 1900. The market gains during the past 15 years after adjusting for inflation is essentially zero. Dividends may have given you a slight return, but not much to speak of. As an investor, I dollar cost averaged through the ups and downs and while some years it appeared I lost ALL of my contributions plus some, the compounding effect never stopped. When the markets rebounded it was like a sling shot being released!

    With that said, you have to stay unemotional throughout the process. Unfortunately for many It is much easier said than done especially as you near retirement.

    MDP

  30. Keep preaching it, DM. For long term dividend growth investors the goal is to accumulate as many shares as possible in quality companies.

  31. I like TGT, IBM, BAX and PG right now. The problem is the lack of fresh capital ……

  32. The market is an interesting animal. The market could be overvalued. It could also be poised to run up another 20%. Stay the course always works over the long haul. Thanks for the update and perspective.

  33. SWAN,

    So many stocks, so little capital. I agree that it’s tough to always find the capital to invest. For the most part, one’s ability to save will have a bigger impact on their long-term success than their ability to get big returns, so I continue to focus on finding that capital. 🙂

    Automatically increasing your payments the next month/quarter by way of reinvestment is the name of the game, my friend. Success begets success.

    Best wishes!

  34. Nicola,

    Well, I encourage selling a stock if it becomes grossly overvalued. So a big run on a stock that was already expensive could push it into that area where gross overvaluation might be apparent. Of course, one then has to find somewhere else to go with the capital, and that’s tough when most stocks are expensive. Just like buying, I consider selling on an individual basis. I can only think of one time I sold because of gross overvaluation – UNS. And it ran much higher still from there, so sometimes you’re better off just doing nothing at all. It just depends.

    I don’t know if that was a good answer. Basically, I don’t consider selling for profit. I do, however, consider selling based on individual merit, just the same as buying.

    Cheers!

  35. Johan,

    That’s a great question there!

    I’ll admit that there is no way to tell how I’ll respond to a major correction. Of course, it’s easy to postulate, but only a real-life test will prove out my predictions one way or another.

    Now, I won’t say that I’ll be cold as ice if/when I see a $16,000 reduction in my portfolio value. I think anyone is emotionally affected by that, even if just a little bit. However, I’m confident that it won’t alter my strategy. Like I said, in the long run $16,000 is relatively little money. If seeing an unrealized loss of $16,000 scares me out of the market then I should have never been in it in the first place. And I’ll take comfort knowing that if I do see my portfolio decline by $16,000 that there are other investors (like W.B.) seeing unrealized (or realized) losses much, much larger than that. 🙂

    Of course, I continue to blog for the foreseeable future. So if we do get a major correction at some point you’ll be able to stop by and see exactly how I’m doing.

    Best wishes!

  36. Juanito,

    Hey, sleeping well at night is very important. And sometimes that sleep comes at a cost. I don’t think you’re making a bad choice there. I simply try to provide inspiration to both sleep well at night and maximize growing dividend income at the same time; however, sometimes the two are mutually exclusive, depending on market conditions, your risk tolerance, time horizon, and emotional stability.

    And I hear you on the printing of money. It’s a bit crazy right now, but that’s the world we live in. I can’t control money printing, so it would be a waste of my time to worry about it. I choose to focus on what I can control.

    Thanks for stopping by from Europe. And I wish you both good sleep and growing dividend income. 🙂

    Take care.

  37. Everyday Freethought,

    I don’t use the P/E as my only valuation tool, but in general I use a TTM P/E ratio of 20 as my upper range. However, some stocks with especially strong growth prospects and/or low capital needs may demand a higher P/E ratio. Visa might be a good example of that.

    Take care.

  38. Jason,

    Hey, bud! Thanks for stopping by.

    Hope all is well at the dealership there. I still have that picture of you on my phone as a reminder of what that job is like! Haha. That way if I think about going back into the business I just look at that picture.

    Tell everyone I said hello.

    Take care.

  39. Aspenhawk,

    Great points there. Your time horizon is different from my own, so I suspect you’d want to be a bit more cautious. However, it’s fantastic that you focus on the rising dividend income. Cheaper stocks only provide you higher yield, which propels you to your goals even faster. I hope to join you as a shareholder in Nestlé at some point.

    Don’t sell the farm, indeed!! 🙂

    Best regards.

  40. DGJourney,

    Investing for the long term is key. Trying to jump in and out based on macroeconomics or media fodder is just a fool’s game, in my opinion. For instance, there have been many out there calling for a major pullback for more than a year now. Holding cash during this entire time would not have served you well. And I don’t mean you would have missed out on rising stock prices which provided unrealized capital gains, but rather you missed out on rising dividend income that could have permanently changed your wealth. And now you’re looking at even less opportunity with which to grow your passive income.

    There’s never a perfect moment to invest, nor is there ever a perfect company. I try to take the best of what I have and focus on what I can control.

    Better late than never, indeed. And look at all the success you’ve had thus far. Just imagine what a cheaper market could do for you. Stick with your plan. 🙂

    Best wishes.

  41. Geblin,

    I hear you. More expensive stocks means we’re getting less passive income for the same amount of money.

    But as I pointed out, try to think less about a stock at $40 vs. $38 and more about that same stock possibly being $1,000. In the meanwhile, focus on the best businesses you can find at the best possible prices and build your snowball. Your future self will thank you! 🙂

    Thanks for stopping by!

    Take care.

  42. MDP,

    It’s definitely easier said than done in regards to staying unemotional throughout the ups and downs of the market. And as someone else mentioned, I’ve never actually been through a major correction from a peak. So we’ll see how things go. 🙂

    I’m glad to read you’ve been through some of these major peaks and troughs and came out ahead on the other side. The boat may rock, but I’d rather stay on the boat than take my chances by jumping off the side.

    Cheers.

  43. andyschabo,

    Thanks for the support. I plan to keep preaching as long as I can. 🙂

    And you’re right: Acquiring as many shares as possible in great businesses that pay and raise dividends is really the name of the game. The rest is just noise.

    Cheers.

  44. Paul,

    I like your choices. I think all are pretty decent buys right now. I’m currently also looking at BAX right now. Excited to put some fresh capital to work this month, but I share your problem. My capital is more limited than ever right now, but I’ll continue to do my best. 🙂

    Best regards.

  45. Wade,

    You’ve got it. There’s no crystal ball, and no way to know what’s going to happen from here. Therefore, staying the course and sticking to your long-term plan is the only way to go. Letting the market jerk you around is a surefire way to fail.

    Cheers!

  46. SFL,

    Then you’re already doing fantastic. Saving as much as possible is something you can control, and I also believe being a fantastic saver is much more important than being a fantastic investor.

    Thanks for stopping by!

    Take care.

  47. Indeed. Bulls make money. Bears make money. Pigs get slaughtered.

    Don’t stand on the sidelines waiting for Mr. Market to play nicely.

    You won’t always have a 2009-2012 to invest, so sometimes we have to accept higher prices for what we want.

    Hopefully, over time, the good buying opportunities will outweigh the pricier purchases and we’ll come out ahead.

  48. I now think about dividends as income when I invest. I don’t intend to ever sell stocks I purchase so capital appreciation is meaningless to me. The companies I buy need to be around for my lifetime.

    It is a market of stocks, not a stock market…… There are some deals that can still be found out there. GSK, IBM, WFC, PM, WU, BP & PETS are all fairly valued or undervalued at the moment.

    I am currently loading up on GSK:
    GSK will have over a 5% yield this year and GSK will have a 5th “bonus” dividend in 2015. I like GSK as it is capital efficient. TTM net income is 5318 vs cap ex of 1733 = capital efficiency ratio of 306%. GSK has a nice side business: a consumer staple division. I challenge anyone to find a consumer staple company trading at a 15 P/E along with the reliable vaccine business. The doctor bribery scandal has kept GSK cheap, it will blow over and GSK will remain a great business. People need their medications regardless of the economy.

  49. Another great post Jason,

    Long term investments strategies always work, and timing the market is impossible. I have been keep hearing about correction & crash for more than a year now, but nothing happened so far.

    Like you said, lets save and invest in dividend growth stocks for long run, and collect growing dividend income forever.

    Cheers,

  50. frank,

    I agree with some of your picks there. In particular, IBM, WFC, PM, and BP appear to be solid bets right now based on fundamentals.

    I’ve never actually looked at GSK. I’ve usually stayed away from purer pharma plays, preferring more diversified health care companies like JNJ (and what used to be ABT). But I may have to take a look, although it’s not a typical dividend growth stock.

    Best wishes!

  51. Finance Journey,

    Thanks! Glad you enjoyed it.

    Collecting rising dividend income certainly makes it easier to withstand Mr. Market’s bi-polar mood swings. And that dividend income is what I focus on. Like I said, I don’t buy stuff down at the Net Worth Store. Market value of my portfolio really has nothing to do with my ability to become financially independent, so why worry about it? 🙂

    Cheers!

  52. Thanks Jason, I spoke to the head ESV investor relations after your caution about cash flow v dividend payments. He said that for the last several years ESV has funded annual dividend payments through operating cash flow and available cash. He also stressed that ESV has a conservative balance sheet with a debt to capital ratio of 27%, the lowest among offshore drilling peers. Finally he said that the company’s $10 billion backlog of order provides visibility unto future earnings and cash flow. I hope i’m not being led astray, but, anyway my position is only 1 percent of equity holdings.

  53. Hi DM,

    I suppose fearing buying stocks in a high priced market is like being worried to go outside in case it might rain. Worst case is you might get wet, but you’ll dry off eventually.

    Well-managed companies are always working every day to improve profits and return shareholder value. Consider companies such as JNJ & KMB which still managed to increase dividend payments through all the crashes of the last 40-50 years.

    Now I’ve never been knowingly vested in the stock market in a downturn but I don’t worry about ‘unrealized’ gains since I don’t plan to realize them. I think when you buy a good quality dividend stock you’re really buying its current yield and its opportunity for future growth; its market price is just affecting its yield at the time of purchase.

    Keep on rolling the snowball and inspiring us by writing about it!

  54. Hi Jason,

    I’m not scared neither to buy stocks even if the market is at all time highs. In fact I recently bought 25 shares of Tim Hortons and today I bought 110 shares of ARCP. But… ARCP trades at 52 weeks low and THI was trading at “fair” price based on Morningstar rating and based on the 5 years averages of various ratios and the dividend yield… I think that both are good investments for a long term investor. And like you said, 30 years down the road I won’t care to have paid 39$ or 41$ per share… As long as my shares will be worth more than what I initially paid.

    But… 3 months down the road I might eat my socks if my stocks are worth 30% less than what I paid for them.. Who knows? It’s important to sleep well at night and knowing that your stocks are worth at least the same price you paid for them definitely helps! Dips help investors achieve that and might also help achieve a higher total return..

    Now, as a long term investor, as long as you can find value, you should invest. And, like you often pointed out on your blog, having a method, save a lot and be consistent is what’s most important.

    Unfortunately, dips makes our work easier… And since our available capital is limited, I think one should always keep some cash aside to seize the kind of opportunities that a dip can offer…

    So, I currently keep a couple grands aside in case the “sell in may and go away” effects happens once again this year.

    Thank you

  55. DD,

    “…and available cash”. That should tell you all you need to know.

    Per Morningstar, cash and cash equivalents have been steadily declining over the last five years. Down from over $1 billion in 2009 to just $166 million as of 2013. A troubling trend when FCF cannot sustain the dividend.

    The backlog is impressive, and as I understand their fleet is solid. The debt situation is fine. This is all true. But this just isn’t a stable dividend growth stock like many of the ones I talk about. As long as you understand the risk/reward relationship with this company then you’ll be fine. Nothing wrong with taking on risk, and I take some on from time to time as well, like with ARCP and TIS. Just be aware.

    Cheers!

  56. Dividend Life,

    Absolutely. I use the broader market’s valuation as a “check on the weather”, if you will. And so you know if a storm is coming or not. But if a storm comes you’ll get wet, and it may be windy and noisy and dark. But it will eventually pass.

    I’m with you. I don’t plan to realize many of the capital gains I’m standing on, so why should it bother me when they fluctuate up or down? If it’s truly the dividend income I’m after then I should be welcoming the next storm. I’ll get my umbrella ready! 🙂

    Take care.

  57. Allan,

    I think it makes sense to have a little dry powder on the side. I’ve always had at least a few grand sitting around, and that acts as an emergency fund. And I consider a fire sale in the stock market as an “emergency”. I’m a capitalist through and through. 🙂

    If stocks are worth 30% less than you paid for them then you should REALLY love the sticker price at that point. Just time to buy more!

    Keep up the great work. And glad to have you as a fellow ARCP shareholder. I predict continued volatility with that one, but the portfolio is solid. Not a big fan of the recent moves regarding Red Lobster, however.

    Cheers!

  58. It’s so true that over the long haul any chart gets “smoothed” out and major rises or falls barely show up as you mentioned the 1987 crash. As you say “stick to a plan” as I did during 2008/9. I have mentioned before how my entire portfolio was deep in the red but I stuck to my monthly plan and continued to invest. Most people panic when seeing red and don’t fully understand the concept of “unrealized” losses. They might see red and hit the sell button. Of course, at that moment “unrealized” becomes “realized” and losses are locked in. Thanks for sharing.

  59. Yeah. The Red Lobster move almost kept me on the sidelines. I ate there more than 8 years ago for the last time… I’m not a fan… And I don’t know a lot of people who are…

    But, Red Lobster is the tenant. And with real estate there are 3 important things : location, location, location. And now ARCP owns 500 new good locations.

    They might be leased to an unstable business (tenant) and in the short or medium term, they might lose some cash flow and have to handle the costs of maintaining empty properties but great locations always bring tenants in the end.

    With real estate even more than with stocks, we need a very long term view.

  60. Great post, Jason! I’ve thought about this a lot lately as I’ve considered what to add to my portfolio each month. I’m in complete agreement with you, but let’s see how good I’m feeling when the inevitable correction comes! I made a huge mistake 2008 when I freaked out and stopped investing for a year (ouch!), but I’d like to think I’m a wiser investor now.

  61. While we are straight index investors, the rationale is the same. Buy regularly during the good times and the bad. Then hold.

  62. DivHut,

    You nailed it there. Seeing red and panicking is the exact opposite of what you should do, assuming we’re talking about great investments. Locking in losses every time asset prices correct or fall is a surefire way to never succeed in building wealth. It’s unfortunate that most people let their emotions get the best of them.

    Congrats for sticking to your plan. You’re now much, much better off because of it. Keep up the great work!!

    Cheers.

  63. Addison,

    I suspect we’ll both get a chance here at some point to test our mettle. 🙂

    I haven’t been through a major correction, so this blog will show exactly how I do. I’m sure I’ll continue to make mistakes along the way, but like you I hope I’m a wiser investor than I was when I first started.

    Thanks for stopping by!

    Best regards.

  64. donebyforty,

    You’ve got it. No matter what you’re investing in, the key is to accumulate great assets that produce income and hold through ups and downs.

    Cheers!

  65. While I wouldn’t describe my feelings as “scared” with regards to the money I’ve already invested, I am very hesitant to spend more money right now. All the “noise” giving conflicting reports about the situation we are in (Best description I read so far was “the most unwanted bullmarket ever”) isn’t helping – “we’re nearing the top”, “no, we’ve got a year of growth left”, “no, sell now, the end-times are upon us!!1”.

    I’ve decided to just sit on my money for now. If (or rather, when) there’s a crash, then I can spend more money and buy more of the stock I want. If it doesn’t happen soon enough, the money will start burning it’s way outside anyway.

  66. I know this isn’t your investment style or thinking really, but to me, a 10%, $140 loss on a $1,400 investment is equal to 3 years of dividends at 3%. To me, that is fairly significant loss.

  67. MT,

    We all have different risk tolerances, and our time horizons are different as well. I consider myself as someone who doesn’t fear risk like many others, while at the same time my time horizon is quite long. As such, I suppose the stock market’s volatility just doesn’t bother me that much.

    But you’ll be in a great position if we do indeed get a major correction. That cash will come in handy at that point, and definitely burn its way outside. 🙂

    Take care.

  68. Dan,

    It really depends on your perspective.

    I’m not trying to trivialize $140, because that’s still a lot of money to me too. However, it’s not a “loss” unless you sell. It’s simply a fluctuating number once you invest in the stock market. Focusing on the downside will only prevent you from focusing on the upside. And I tried to lay out the case for the upside.

    Best of luck!

    Cheers.

  69. I used to look for sales while shopping at regular stores and now I do same with my stocks. It actually the best strategy so far. 🙂 Usually if I can score a good stock close to 52 weeks lowest price, after couple of weeks or months of low price, eventually stock would go up… and it’s even better if it is a dividend stock.

  70. Hey Jason,

    All valid points. Had a quick question on a related topic. What’s your opinion on staying fully invested or sitting on cash.

    Personally, my strategy entails sitting on enough capital to make a few purchases. I’m doing this in case there is a 10% correction and I want to lower my cost average for companies I already own or initiate positions in some new companies.

    But, at the same time, I hate not having all my cash working for me when the market is cruising to new highs like it is right now. Thoughts?

    Thanks, Sam

  71. Happy,

    It’s always wonderful to see merchandise on sale, but it’s especially so when it’s stocks we’re talking about. 🙂

    Getting dividend stocks on sale means you’re not only paying a great price for a great business, but you’re also receiving a higher yield on your investment. And more yield means more income, which means you’re becoming financially independent that much faster.

    Cheers!

  72. Sam,

    Well, I’m typically fully invested. I usually have very little cash on the side. And this is simply because I lack faith in my ability to time the stock market. So I put my faith in my ability to analyze individual companies.

    I may not have any idea what the stock market is going to do over the next 30 days, but I do have confidence that, for instance, MCD is going to sell more Big Macs and fries for the foreseeable future.

    Besides, I’m after building dividend income. And dividend income doesn’t get built with cash sitting around.

    Cheers!

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