When I look at investing in a company, I think of the KISS principle.
A design/engineering principle noted by the US Navy in 1960, it’s an acronym that originally stood for: Keep it simple, stupid. You can use another variation of it that is perhaps less offensive, like keep it simple and straightforward. But the point remains that, in investing, simple is oftentimes better.
And simplicity, or a greater degree of it, is what I love so much about dividend growth investing. You’re basically boiling down the thousands of publicly traded stocks into a much more manageable list of a few hundred. Even better, that process screens out most of the junk, because you simply can’t increase dividends for decades on end without generating profit/cash flow growth in kind.
So I don’t need to worry about whether or not a startup out of California is going to design the next app or sensor that’s going to take off. And I needn’t concern myself with if/when 3D printing will become a much larger industry and/or which companies will dominate (and which will fail). I just need to make sure I feel comfortable with the odds that people will continue buying, say, toothpaste for the next few decades.
What’s The Story?
Before I even look at a company’s financial metrics or other fundamentals, I like to ask myself what a company is all about.
What’s their story? What do they do? How do they do it? Is it something I can easily understand?
Even better, I like to make sure I can condense a company’s story down into one or two short sentences.
I’ll give you a few examples.
The Coca-Cola Co. (KO): Manufactures and markets a variety of sparking and still beverages across the world.
Easy, right? We can all understand humanity’s need to drink fluids of some sort. And one can look at Coke’s broad portfolio of beverages and see something for everyone – orange juice, soft drinks, water, tea, coffee, etc. That kind of business model is extremely simple to understand at its core. There’s certainly a bit more to it than that, but being able to discern what a company does in a easy-to-understand sentence or two is really at the heart of my strategy.
Johnson & Johnson (JNJ): Provides a number of healthcare products to clients ranging from the general public to healthcare professionals.
Sure, I could write a book on the company, its history, products, and future potential. But it boils down to something that’s pretty simple. I can understand Tylenol, Benadryl, baby shampoo, joint replacements, and pharmaceuticals. This is a company with a market cap north of $280 billion, but it’s not that difficult to understand the core operations, the products, how they make money, or how they will likely continue to make money.
Realty Income Corp. (O): Purchases commercial real estate, rents it to high-quality tenants, and uses that rent to mainly pay shareholders a healthy dividend.
That’s pretty much it. I get that real estate is a bit more complicated than that, which is exactly why I let Realty Income and the management team handle the complicated stuff and send me a check. But it’s also an incredibly easy business model to understand. Furthermore, I don’t have the liquidity to go out and buy a bunch of commercial real estate, nor do I have the time, interest, or inclination. But I don’t have to. They handle it for me and send me my check. How easy is that?
Can It Be Explained To A Child?
Never invest in any idea you can’t illustrate with a crayon.
– Peter Lynch.
I love that quote. Even more so, I love the idea behind it.
But I take it one step further. I like to make sure that I can explain how a company works to a child. In fact, if a company were pitching me an investment, I’d ask them to talk to me like a child. Tell me what you do and pretend that I’m ten years old. That eliminates all the pretentiousness right away and gets right down to the nitty gritty.
Could I explain how Coca-Cola works to a ten year-old? Would they understand orange juice, Coca-Cola, and tea? Probably so.
Would I be able to tell a ten year-old how Walt Disney Co. (DIS) makes money? Could I show that child a DVD of Frozen? Could I take them to one of their parks? Could I flip on ESPN (if I had cable)? Absolutely.
So on and so forth.
There are many companies that I’ve avoided over the years because I couldn’t totally understand the business model. And if I can’t understand, how could I expect a ten year-old to?
Take a company like Annaly Capital Management (NLY). Could I easily explain to a child how mortgage pass-through certificates and collateralized mortgage obligations work? Not really, because even I’m not real sure how they work. Now, I’ve had many people tell me what a great company (and stock) NLY is over the years because it’s typically yielded well into the double digits. Keep in mind, however, that its dividend today is half of what it was just five years ago. And so is its stock price. Now, if you can easily understand CMOs and all the risks therein, go for it. But it’s not for me.
I’ve discussed before that it’s not necessary as an investor to understand every iota of a business. But if you can reasonably explain the basics to a child, you’re in good shape.
Conclusion
I’m going to be discussing this concept – keeping it simple – a bit more over the coming days because it’s a concept that I think deserves a greater discussion, and perhaps one that is too long for one article.
But this is a great introduction to the thought process of keeping investing simple. You don’t need to invest in a complicated manner to make money.
For instance, Coca-Cola has returned an annualized 10.10% over the last 10 years with dividends reinvested (compared to SPY’s 8.02%). And they’ve increased their dividend at an annualized rate of 9.33% over that time frame. That’s even factoring in the troubles they’ve had over the last few years with slowing volume growth across sparkling as well as currency headwinds. If 10.10% isn’t enough for you to realize your dreams then you’re simply not saving enough. Furthermore, Coca-Cola has given you less risk than the overall market with a beta of 0.47. Less risk and more money? I’ll take it.
Full Disclosure: Long KO, JNJ, O, and DIS.
What do you think? Do you keep it simple? Can you explain your investments to a child?
Thanks for reading.
Photo Credit: Boians Cho Joo Young/FreeDigitalPhotos.net
A child could probably understand dividend investing better than most of my actual friends.
DM,
Very good point! This reminds me to also start positions in these fine companies.
Your point about NLY is very good – even if I’m not 100% averse about high yield stocks like BDCs. Maybe I would add the question about your emotions in case of a market fallout to a the pro list:
How would you feel to hold JNJ going down 20% or more percent? And how would you feel holding NLY going down the same amount? As I had some recent experiences, I can say this is one of the most essential questions to me. Not understanding the business you hold, will not make you sleep-well-at-night, because you have no confidence in the value of the company.
Thanks for the reminder!
I’m at the very beginning of my journey into learning about dividends, and at times, I feel like a 10 year old in a room full of adults. So much to learn! But then again, it’s only been four days. 🙂 I’ve actually made a lot of progress in a very short time.
I love the methodology behind it, and as someone who is considerably risk-averse, I love how much of the stock market volatility is removed by investing in this manner. I keep looking for the downsides, and why everyone isn’t doing this. I imagine they’re out there, but I haven’t found them yet.
It works in investing……it works in every day life. The real trick is for us to each resist the urge to over think (or over complicate) things. Keep up the mantra buddy.
-Bryan
Tommy,
I agree! 🙂
Cheers.
DivRider,
Great point. I actually had a whole paragraph started on sleeping well at night and how keeping it simple allows one to sleep easy (I certainly sleep well), but decided the article was going to be way too long if I kept on with every point I wanted to write about.
But sleeping well at night is incredibly important, in my view. Is an extra 0.5% worth whatever risk you’re taking on and whatever sleep you might be losing? Only you can answer that, but making money just isn’t that difficult.
Thanks for adding that!
Best regards.
Mike,
Welcome to the party! It’s a lot of fun. 🙂
I guess the a downside would be that you have to spend a little more time analyzing/following stocks, at least in comparison to indexing. But if you’re anything like me, it’s actually one of the most enjoyable aspects about investing. I’d rather read an annual report than, say, fix a toilet. So that’s why I invest in stocks rather than real estate.
Best of luck as you move forward. Shoot me an email if you ever have any questions.
Take care.
Bryan,
Absolutely. You see that overarching theme. 🙂
Thanks for dropping in. Hope all is well in your neck of the woods!
Best wishes.
Nice article, Mantra. Sometimes investors forget the big picture and spend enormous amount of time and energy trying to squeeze out an extra 0.01% out of their returns. Keeping it simple definitely helps in staying on the right course and not overthinking into a corner.
cheers
R2R
Simplicity is key! The things that contribute to the biggest payouts are discipline and patience.
Thanks for sharing keep it up Jason 🙂
Love the article and the quote. You’re right, if you can’t explain how the company makes money to a child, then it’s probably too complicated for you to invest in it.
Thank you Jason!
In a past life, I was an internet marketer, but I haven’t run an active website in years. You’ve inspired me to go throw together a WordPress.com side and grab a Twitter handle. If nothing else, I can use it to try and keep myself on track.
Thanks for all that you do here! 🙂
-Mike
Simple and straightforward, both the post and the concept. This is a major part of my initial criteria in investing at this point. If I had to name the two tenants of my dividend growth portfolio, it is that there 1) must be dividend growth, and 2) I must understand the fundamental operations of the company. Both are disqualifying considerations if they don’t pass the test.
Lastly, the less complicated the path, the fewer opportunities to make a wrong turn somewhere. Investing is an emotional animal at times. Keeping your ‘mantra’ simple will help eliminate the pitfalls of emotions.
Great article. I am relatively new to DI but have built a nice position in real estate. I agree with your take on real estate. The hassle factor is big and the debt load caused many sleepless nights til payed off. All investments moving forward will be in quality dividend stocks and I will use KISS. Thanks for all the great info you provide.
Hi Jason,
I think this really is a good point. I’ve only just gotten started in dividend growth investing (as opposed to indexing) and I find myself occasionally flummoxed by some concepts that everyone else seems to understand but that I don’t (or haven’t taken the time to learn).
That’s actually exactly how I feel about technical analysis–I understand what they say they’re doing, but I sure couldn’t explain why it’s supposed to work, and so I tend to stay away.
Looking forward to more posts on this!
Excellent points DM. If there are products whose necessity are easy to understand and have historically always been bought it is the epitome of the KISS principle.
In fact I’m trying right now to amass a lot of KO, JNJ and PG. I feel I am a bit heavy in ED. It’s a rock solid utility that’s a dividend aristocrat but it’s dividend growth rate has been fairly poor. This year they raised it 3% but before that it was about 1% a year for awhile. That’s at or below inflation. I think I prolly should sell about 50 of my 100 shares to free up some cash to complete my desired number of purchases in JNJ and PG sooner. I have an alternate schedule for KO, which involves using my bonus check to amass shares there.
I just think the money may be better deployed in some of these companies you have mentioned, even though I will retain a holding in ED. Thoughts?
Good point. I think keeping it simple comes with mastery though. Charlie Munger said, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” So things become simple once you’ve mastered the concept. That’s my take anyways. And I’m not happy with 10%! I want more so I tend to complicate things.
Great post as always. Cheers!
R2R,
Overthinking might lead one to outsize returns, but it’s probably way more hassle than its worth. That’s especially considering that one’s savings rate will more likely determine their success unless they’re accumulating assets for 30 or 40 years. I’d rather get on with life than try to eke out an extra 0.25% or whatever. And that 0.25% isn’t only not guaranteed, but may actually lead you in the wrong direction, decimating chances at succeeding. Keep it simple. 🙂
Cheers!
Ace,
Agreed. I’ve done incredibly well thus far and I can point to persistence, patience, perseverance, and consistency as the attributes that got me to where I’m at. And keeping it simple allows me to stay focused on the tasks at hand and enjoy the ride, rather than being stressed out about my investments.
Thanks for dropping by!
Best wishes.
Tawcan,
Absolutely. Funny how the best investments can be the easiest and most simple. 🙂
Cheers!
Dividending,
Hey, that’s fantastic. Wish you much luck and success with it. I had the same intentions when I first started – keeping myself honest and on track. But I’m fortunate in that it grew and I’ve been able to inspire others along the way. I’m incredibly fortunate. 🙂
Thanks for stopping by!
Take care.
W2R,
“Lastly, the less complicated the path, the fewer opportunities to make a wrong turn somewhere.”
Definitely! That’s really the essence of this article and my mantra insofar as it relates to investing. Complicated investments might lead to better results, but if there’s even a chance for financial ruin why take the chance? Especially when simple businesses will get you all you’ll ever need and then some.
Thanks for adding that. May we both continue to prosper!
Best wishes.
Chris,
Yeah, I decided very early on that real estate isn’t for me. And I don’t regret it for a day. I always consider the “hassle factor”. The bigger it is, the less likely I am to invest. And real estate is magnitudes of order higher in terms of hassle in comparison to stocks, in my view. But many have done incredibly well with it. I hope they continue to do well. One less investor like me is less competition for them (and you)! 🙂
Thanks for the support. Much appreciated.
Cheers!
Mike,
Generally speaking, the sum of a stock’s yield and its dividend growth rate is a proxy for its total return over a long period of time, assuming a static valuation. So you have to ask yourself if you’re okay with a ~5% total return (4% yield plus 1% dividend growth). I personally find very few if any utilities attractive on an absolute or relative basis due to both valuation and growth concerns. But that’s just me. I guess I can’t see how a local utility, that’s bound by regulation and geography, can give me better results in terms of dividends, dividend growth, and total returns over the next 10 or 20 years in comparison to a global beverage or healthcare company. But that’s a call you have to make.
Hope that helps! 🙂
Best wishes.
DM,
First company that comes to my mind is KO also, ever since I was a child I’ve been drinking Coke and I am pretty sure people will keep using KO products with decades to come. They make great products and strong name brand with wide economic moat that everybody can relate to. Simplicity is beauty.
Take care,
FFF
Henry,
I’m not so sure that keeping it simple comes with any kind of mastery. As Lynch is alluding to, it’s on par with being almost childlike. And that doesn’t require mastery, but rather an ability to stay out of your own way by avoiding overthinking and not complicating matters. In fact, I’m not sure most people will ever “master” investing at all, and being overconfident like that is cited as the reason men often underperform women, as one of the articles in my last “Weekend Reading” post discussed.
I’m not sure the context in which Munger said that, but I’d venture to guess it has to do with succeeding at investing in general or finding great businesses at a good value.
Thanks for stopping by!
Best wishes.
Charles,
I have a follow-up post on this that will expound a bit on some more concepts regarding keeping it simple. 🙂
It’s easy to be a bit overwhelmed with this at the start. I definitely recommend some of the books I have listed here:
http://www.dividendmantra.com/getting-started/
And you don’t have to buy them. See if your local library has something. But I’d definitely recommend doing a lot more reading than investing right now. You’ll get there. Stocks aren’t going anywhere. 🙂
Take care!
Excellent write up, Jason. You’ve personally proved that simplicity is king. It’s so comforting investing in fundamentally solid businesses knowing that I just have to sit back, add a little more now and then and get rich 🙂 Thanks for setting the example!
Great stuff. I agree, simple is good. I like J&J because I can see and understand their products and business, which makes it easier to see it as a business overall and determine whether they are worth investing in. For some people simple means putting all their money into the hands of an advisor. Not something I would do but some people appreciate knowing they can put their money into one fund and can easily see its performance
I’m surprise you don’t have GE listed. nonetheless, you got a great list. Maybe even more simple is to invest in an index fund and … forget about it 😛
I think it was Leonardo Da Vincci that said “Simplification is the Ultimate Sophistication”.
I always try to KISS (keep it super simple).
Looking forward to posts expanding on this.
Great recommendation Jason….reminds me of the common investing technique of picking things you see and use. The stocks you’ve mentioned are all household names. Definitely stocks I think should be the foundation to everyone’s portfolio. AFFJ
I am with you on the regulation issue. That can be a noose around any company’s neck. Nice article.
Keep cranking,
Robert the DividendDreamer
Dan,
I think that’s why active funds are still as popular as they are. Just comes down to comfort levels, I suppose. But most people would really be better off just buying an index fund or three and be done with it. Of course, that requires a tad more work than just throwing your money at someone else. Nothing wrong with a fee-based advisor, though, for more general financial advice/planning.
Cheers!
FFF,
I have a hard time imagining a world where Coca-Cola is out of business. Maybe they have a rough patch here and there, but over the very long term, they (and their shareholders) should do well. Let’s hope that’s the case. 🙂
Thanks for dropping by!
Best regards.
Vivianne,
GE would probably require two sentences. 🙂
But I can’t list every stock in my portfolio. I might put people to sleep!
Cheers.
GYFG,
I think Da Vinci was on to something there. Simplicity is not only easier, but it’s oftentimes better. Can’t go wrong with that. 🙂
Take care.
Ryan,
Thanks so much. Appreciate the support, as always! 🙂
I’d like to think that I’ve done a pretty good job showing that one doesn’t need to overcomplicate investing to do well and build enough passive income to live off of. There’s a lot of ways to skin a cat, but buying and holding high-quality dividend growth stocks is one of the easiest and best ways out there.
Best wishes!
AFFJ,
Yeah, Lynch really did a great job putting common sense at the forefront of investing. Sometimes the best investments are right in front of your face. 🙂
Thanks for stopping by.
Best regards.
Robert,
Thanks! Glad you enjoyed it. I think I’ll publish the second part on Thursday. Keep an eye out. 🙂
Cheers!
This was great. Simply great. 🙂
Reminded me about a businessman describing what his company does as “everything under the ground”
Hi Jason,
mostly I agree with you, but I think it is dangerous to argue doing things a 10 year old child can understand. In one thing you are right: If someone is investing in companies like J&J, Coca Cola or Procter & Gamble you will do quite good. In my opinion the main factor for success is how much you can invest to get a nice portfolio. And yes, I see this is very simple investing. A second part is to keep the shares and not to sell them because you think there is a better opportunity. Yes, sometimes you can have with this success, but nobody knows if this really works. I only sell shares if they don´t pay a dividend any more or they reduce it significant. Otherwise I don´t do anything and this is quite simple.
Now comes my “but”: I´m not 10 years old and I´m able to understand more difficult businesses as well. I know you don´t like technology. I´m working for a technology company and there will be a lot of future interesting development. J&J won´t do this, but for example Apple or other interesting companies. The main reason for me is, that there are a lot of chances which are worth for investing. I don´t look for startups and I don´t look for “Mickey Mouse shares”, but there are solid companies which do quite well. A lot of them are getting bought from the bigger companies if they have a technology which is interesting for the big players. But most of them are working on technologies which a ten year old child can´t understand. This is I feel also comfortable with. But thats my way of investing, not yours. My portfolio includes J&J etc. as well as Apple, Intel etc. Apple was outstanding, Intel was good the last year. I´m surely not understanding every part of these companies and how they work in the market because they do so much things. But there is one I really understand: They are sucessfull. Thats the most important criteria for me.
I like the idea of keeping it simple but I don’t always live by it. I still like to buy some stocks that I feel could grow a lot quicker over the short term (and if it keeps growing long term, great) to propel my portfolio to new heights. Once I feel the stock has grown enough or I feel like my capital gains are sufficient enough, I’ll sell.
Take my investments in UA or SN or SAM as examples. At the same time though, these companies don’t make up much of my portfolio so I still consider myself a DGI that is KISS!
Thanks for the reminding me I should pick some easier stocks to understand!
Great article DM, looking forward to the coming articles… just something I was thinking for your next KISS articles, maybe a few key metrics to help investors understand a good deal or not whether its over valued or not. Just a suggestion. Great article! Keep em comin!
Hi Jason,
Thanks for the link–I haven’t read “The Ultimate Dividend” on that list and will definitely go check it out. Most of the other’s I’ve read through, though (especially Millionaire Next Door–it was given to me by my father when I was still in high school!).
By technical analysis I meant “charting”–it seems like voodoo to me, and I just shake my head when the folks on CNBC or whatever bring it up. I wouldn’t say I’m a master of fundamental analysis, but I understand its broad strokes, at least!
If you have the time, I think it’d be great if you made a “KISS guide”, or a checklist of how YOU find and review equities (unless you already made one and I missed it).
Here is a suggestion: Why not write a post listing some companies that you do not invest in because they are not simple? It’s all perspective. Someone with a master’s degree in Computer Science might find some companies simple that you or I would not.
Very good advice and it is so simple it’s funny. People should not shy away from investing because it is the only thing that gives you a return on your money. Divide the budget 8 ways or 10 ways into any categories, as long as 1 of them is into investing consistently month after month.
Great point about to evaluate a company. The ” keep it simple concept” goes for me hand in hand with businesses, which operate with tailwinds and which can be run even by medium talented managers. If some macro factors of our society contribute to a growing market and the company has a moat, nor to much competitors, I like to keep it simple too. Most people can bring in their knowledge in handling and use of everyday products. You just mentioned Coca Cola or tooth paste, cleaner and so on.
Regards
Marco
Very good advice. My SO isn’t as into investing as I am, and I find that explaining in plain english why a particular company is a good investment is a good exercise. A time or two I’ve caught myself struggling to explain a particular company and was forced to re-evaluate the investment. In particular, trying to explain it out loud (or at least writing it down) really helps me clarify my thoughts on the matter.
Thanks for the awesome blog. I’m a long-time reader, but haven’t commented much. Cheers.
The simple solution is often the best. Another benefit to owning easily understandable companies is that you can see their products every single day. A lot of the companies that we own are products that we enjoy or need on a daily basis. It makes it that much easier to truly understand the business and what growth opportunities as well as troubles could be on the horizon.
Hi Jason,
I have another definition for KISS, Keep it Simple and Sustainable, which is what we are all looking, sustainability of our dividend gain, portfolio, personal life, etc.
In my opinion you are a role model in term of KISS, especially in the last S, sustainability.
Cheers, RA60
austere,
Glad you enjoyed the article! 🙂
Complicated isn’t necessarily better.
Cheers!
DM,
Long all your stocks mentioned. I agree, if I cannot understand it or a way to make money with it then there is an issue. Boring, simple, and effective are the most important adjectives to describe my portfolio. I would not want it any other way.
– Gremlin
olli,
Right. I’m not saying you or even a 10-year-old child must understand everything about a company. I think one is being naive if they think they know everything about a company and its day-to-day operations. Rather, I’m saying one should understand the basics and be able to explain that to a child. For instance, I don’t think one would have difficulty explaining what Apple basically does to a child. You have tangible products there and with the way kids these days are using tables and smartphones, I think that explanation would go over swimmingly.
Apple and Intel are consumer-oriented tech companies with a number of businesses that have tangible products that surely make it easier to understand from an end product perspective. I think tech gets a bit more difficult to sell when the products aren’t tangible or the technology used for those end products is extremely difficult to understand. That’s generally where I would draw the line.
Thanks for sharing. The important thing is that investing works for you. I try to keep it very simple, which has worked really well. Others crank it up a few notches. As long as you’re comfortable, that’s what matters.
Cheers!
ADD,
Well, I don’t follow those companies specifically, but I also don’t think there’s anything difficult to understand about an apparel company (UA) or a beer company (SAM). They don’t pay dividends, but that doesn’t make them difficult to understand. 🙂
I see SAM is having a particularly brutal day today. I only noticed that because I had to pull up the ticker. I can recall about 300 or so tickers off the top of my head, but only those companies I follow or have come across.
Anyway, companies with easy-to-understand business models certainly don’t always pay dividends. As long as you feel comfortable with your investments and you’ve got the basics down as far as how they make money, you’re golden.
Best regards.
DY,
Thanks for the suggestion!
I’m actually not going to delve into valuation with Part 2 because easily understanding how a business works and valuing a business are really two very different subjects. But I may revisit the subject of valuation at some point in the future. I wrote quite a bit about that last year and the prior year, so I’m a bit burned out on it. But I also understand that there are new visitors to the blog that haven’t run across some of the older articles. 🙂
Thanks for the support!
Best wishes.
Everyday Freethought,
Right. What I find easy to understand and what you find easy to understand are going to be different. And that’s really the key to the article, the blog, and investing in general. It’s about finding what works for you. I write this from my perspective because I have no other, but you should really do what works for you. If you find NLY’s business model, for instance, easy to understand then by all means go ahead. But that’s an example of a business that I’d prefer to avoid due to the fact that I don’t really fully get how they make money, which is why I listed it.
Take care!
Charles,
I’m with you on charting and technical analysis. I find it not only difficult/impossible to understand, but also worthless as it relates to long-term investing. If you’re trading in and out of stocks, I can see how one would want an edge. Then again, we all know that trading in and out of stocks will likely leave you with a lot of suffering and lost wealth.
As far as how I analyze equities, you can find that here:
http://www.dividendmantra.com/2014/01/how-i-analyze-and-value-stocks/
Hope that helps! 🙂
Best wishes.
RichUncle EL,
Yeah, I feel bad for those that shy away from investing because it seems complicated. All you have to do is look around you and see which companies are providing the products and/or services that everyone is using. That’s certainly a good start. 🙂
Thanks for stopping by!
Cheers.
TBD,
That’s great. That’s an excellent exercise. If you can’t reasonably explain it to someone else, it’s probably best to really think about whether or not that particular investment is right for you. 🙂
Appreciate the readership very much. Thanks for the support!
Take care.
JC,
Indeed. Tangible products and/or services, especially those that we use every day, is a great example on keeping it simple. Not every company I invest in allows me to see their stuff every day, but it’s great when I can buy Coke products at Walmart or shave my head with Gillette razors. In addition, if you start to see the business model failing right in front of you, that also gives you some insight as to whether it might be best to invest elsewhere. 🙂
Best regards.
Marco,
Definitely. Buffett has made similar comments, about wanting to invest in companies that even a “ham sandwich” could run. That’s obviously tongue-in-cheek, but that’s also the gist of it. If you have a company that requires specific expertise that only a few people in the world have, it becomes more difficult to scale that business out over time. Not to say you can’t make money in such a way, but that it’s rather just more difficult under all circumstances.
Thanks for stopping by!
Best wishes.
Gremlin,
I LOVE boring, simple, and effective. It’s been said that successful investing should be like watching paint dry, and that’s pretty much it. I’ve stepped out to the fringe of my circle of competence a few times, but most of my money is in companies that are extremely boring and easy to understand.
And I wouldn’t want it any other way either!
Cheers.
RA60,
Absolutely. When looking at simple business models, you really want to understand how they generate cash flow, which will give you a lot of insight as to how likely it might be that they’re still able to do so and pay growing dividends over a long period of time. 🙂
Thanks for the kind words. Much appreciated!
Best wishes.
It’s actually my number one rule of investing, if I don’t understand what they are doing it’s not worth my time.. I also like companies with no debt, because I like no debt. Keep it Simple Steven.
No question the KISS mantra resonates with me and my portfolio. I have to say that this line hits it on the head, “…the odds that people will continue buying, say, toothpaste for the next few decades.” I always say… we are all biological. We need shelter, food, clothes, we get sick, we need entertainment and in ten, twenty or thirty years we’ll still need to blow our nose, have use for toilet paper, etc. In ten, twenty or thirty years who’ll even remember the hottest app or web site of today? I guess this is one of the reasons I hold zero tech names in my long term portfolio. Thanks for reaffirming a standard yet powerful investment philosophy.
I tell my friends that KISS means keep it super simple.
I think you’re right about Realty (O). Why waste time with Real Estate when someone else can do it for you? I know there are more rewards if you’re REALLY into it but like you, I prefer to just get my check and be done with it:) can you leave a comment on my new page? I’d really appreciate it:)
Jason,
We have been using “keep it sweet and simple” where I work. Anyway, you summed it up nicely.
Long KO, JNJ, O, and DIS.
KeithX
Steven,
I’m with you all the way. Avoiding complicated businesses with a lot of debt is probably a great way to avoid losing money. 🙂
Cheers!
DivHut,
There’s value in visibility and certainty. And I love to invest when the odds are on my side. Tech is an industry that changes quite a bit. And then you have certain industries that are heavy in regulation and competition. But betting on the simple things in life like toothpaste, energy, laundry detergent, food, beverages, and healthcare are probably good bets with the odds on your side. And that’s why the majority of my portfolio is there. 🙂
Thanks for stopping by!
Best regards.
Pacific,
Indeed. Quite a few variations of the acronym, but the key is to keep things simple and not overcomplicate it. 🙂
Take care!
aaron,
A lot of ways to make money, no doubt about it. And I have no doubt that someone with a more hands-on approach to real estate could do better than someone like me who just sits back and collects a check. But I’m happy to pay that “premium”. I’d rather let O do all the hard work and just send me my money. It’s a wonderful arrangement. 🙂
Thanks for dropping by!
Cheers.
KeithX,
It looks like everyone has a different meaning for KISS. 🙂
I’m reminded of that article I recently included where it shows that women outperform men due to men’s intrinsic nature to overthink, overcomplicate, and make things the opposite of simple. It’s a good reminder that complicated isn’t necessarily better. In fact, it’s sometimes (oftentimes?) worse.
Best regards!
Hi Jason,
This is unrelated to the article, but at what net worth would you consider getting umbrella insurance to protect your portfolio. Without a car and house, you are certainly on the low risk side; however, your personal information is very public and you are regularly making public comments which puts you at a higher risk for defamation suits. My net worth is inching close to 250k and I’m considering adding some coverage at that point.
I just love that I found your blog! I invest in real estate for cash flow and have been successful. I always turned my nose up at stocks due to stupidity and naiveness toward dividend investing. I was young and wanted it to be quick! I live below my means and make a nice income with my multiple jobs and the light bulb clicked yesterday about the importance of dividends! I was like DUH! I invest in real estate for the same reason people invest in companies! CASH FLOW is king. I am on board! I hope you don’t mind me stealing your enviable portfolio to get started! LOL
Conrad,
Good question there.
I actually investigated this last summer, but I should probably spend even more time with it now. I think it’s unlikely that I’d be sued as I don’t really discuss certain people or events in a negative light, but it’s always possible. However, it’s not particularly clear that umbrella insurance would cover a lawsuit against me as it pertains to the blog. If there’s some sort of legal tort action against me due to the blog’s activities, it’s unclear whether a personal umbrella insurance policy would cover me due to the fact that the blog is a business. I also looked into general business liability insurance, but I was unable to find anyone at the time who would insure a “blog”. I then looked into general liability insurance for writers and all I could find was that which was marketed toward commercial clients. Finally, there’s a company out there selling something called “Blogger Shield”, so that’s a possibility.
You’re probably in a different situation there without a blog/business. Thus, your odds of getting sued are even lower as well. But the cost of umbrella insurance is really cheap in comparison to the coverage. Just make sure it’ll cover what you want it to cover.
Best regards!
Sukina,
Glad you found the blog! 🙂
Right, it’s all about cash flow. That’s exactly the reason I invest the way I do. Capital appreciation may or may not come (like in real estate), but the dividends continue to flow my way…like a waterfall of cash.
You’re more than welcome to check out the portfolio, but keep in mind those aren’t stock recommendations and I may have purchased some at different prices/valuations.
Stay in touch.
Take care.
I totally agree with your perspective on investing, and I share the exact same view. You need to keep it simple, and be able to explain it to a child. It’s like that at work as well… There are people who like to use big words and sound all technical, but if you ask them to break it down simply in layman’s terms, they’ll just keep reusing the same big vocabulary because they don’t know what they are talking about. Understanding the business is so important, not just looking at the numbers and stats. Great post.
@Mike Soliman
Regarding your thoughts on ED, I did exactly that and sold ED and replaced it partly with O and an Australian Bank (CBAUY) which is by the way the biggest company in Australia. EDs sluggish dividend growth rate and the very high valuation right now made me do this move. (furthermore at the back of my mind I expect ED to go down south massively when interest rates come back, more so than O in any case!!!
@DM
I am also a great fan of keeping it simple.
Peter Lynch wrote also, that it is very helpful if you can give a maximum five minute pep talk on each of your investment (decisions), like a small SWOT (strenghts, weaknesses, opportunities, threats) technique, but with a … simple approach in everday language.
(1) that´s why I like Josh Peters book so much!
(2) In science it´s called Occam´s razor, isn´t it?
Best wishes
Thorsten
ACI,
Definitely. Understanding and digging into the fundamentals is very important, but it’s just as important to know what the business does, how it does it, and how that relates to it making money and passing along some of it to you in the form of dividends. That’s why I always include both the quantitative side of the business as well as the qualitative side in my analyses. 🙂
Thanks for dropping by!
Best regards.
Thorsten,
Occam’s razor is a good principle to compare this too. It basically comes down to not overcomplicating things. If you have a simple way to do something and a difficult way to do something, it seems prudent to always choose the former. Less to go wrong. As such, when looking at simple businesses and complicated businesses, especially as it relates to how well you understand them, the former should generally be picked, all things equal. It’s just not that difficult to make money. 🙂
Cheers!
I think this is another Lynch quote and it applies as well….invest in what you know. Sorry if this was already mentioned in a comment (your readers are to numerous for me to read all of their comments/that is a good thing). So for me I am in the software business so I am more willing to invest in the tech sector than say someone who is a accountant who likes the finance sector.
Have a good one,
DFG
Off topic!
Do you have any idea why MCD stock surged 4% yesterday? Heard something about optiontrading?
DFG,
Lynch was/is one of the greats. If you’re completely unfamiliar with how a business makes money and can’t reasonably explain it in a few sentences, then you should probably really question whether or not that stock is right for you.
I can imagine being more intimately familiar with software and technology in general allows you to invest in certain tech companies more comfortably than someone who’s not as familiar. That’s an opportunity that you can take advantage of. 🙂
Best regards!
N.Johanson,
I honestly don’t follow the day-to-day stock price movements of stocks I’m invested in and/or watch. I pay attention to changing fundamentals for better or worse, but I haven’t heard of anything on that front regarding MCD. Trying to make sense of the daily pops and slides across the market is an impossible endeavor and probably a complete waste of time. Thus, I don’t even bother. 🙂
Cheers!
Absolutely goddamn right! I wish more people, especially financial advisors, would understand this point.
I’m a very proud owner of Realty Income. I might invest some of our HSA money in O now that it’s experiencing a bit of a pullback.
Spoonman,
You’re me in about eight years. 🙂
I’ve heard that buying rental properties is like buying yourself a job. I guess it depends on how you want to spend your time when you’re financially independent. But I have no desire to spend even five minutes dealing with five or ten properties. And I have reason to believe the kind of diversification and rental income necessary to make me feel comfortable would require a tad more than five minutes of my time. All depends on what suites you. But I’d prefer to just sit back and collect a check.
Cheers!
I just bought $1,000 worth of VTSAX. I just buy them all. 🙂 Research free. 🙂
Thanks for the update Jason.
Wade,
Nothing wrong with that. You own a little slice of everything. 🙂
Although, how will you follow thousands of companies all at once? (That’s a rhetorical question, which is what I get all the time with my comparatively small portfolio of 51 companies.)
Cheers!
Hi there. What do you think of this video?: https://www.youtube.com/watch?v=7cWkF_Xskt8
Does it make you re=think your strategy in any way?
Mike
Micheal,
If videos like that caused me to rethink my strategy, I’d be rethinking my strategy every single day. There is always someone saying something. Of course, when something happens, they’ll be sure to remind you that they said something about it…even if it’s three years later. Even a broken clock is right twice a day. I’ve been hearing similar thoughts for more than two years now.
That said, I’m HOPING for a correction. I’d LOVE to see the market drop 20%. This coming Monday would be very nice. Anyone actively accumulating stocks should pray for such events. A market near an all-time high isn’t the friend of someone actively accumulating stocks. However, we can’t predict the future, so we must act on information that we currently have. And the stock market is like any other market where you have expensive and cheap merchandise. One has to look for the stuff on sale.
That’s the long answer. I probably should have just pointed to this article:
http://www.dividendmantra.com/2014/06/why-investing-new-capital-during-all-time-market-highs-doesnt-scare-me/
Cheers!
Thanks for the prompt reply. It’s difficult to block out the noise at times,
“If you can’t explain it to a six year old, you don’t understand it yourself.”
― Albert Einstein
Gregory,
A great quote. Forgot all about it, but it’s particularly applicable here. Thanks for sharing! 🙂
Best wishes.
Somewhere behind “the curtain” the wizard that keeps track of the index is doing all the work for me. 🙂 Or is it that everyone buying/selling the stocks is setting the index and the wizard is just tabulating? One or the other. Thanks Jason!
@Tommy- My son (7) is invested in dividend paying companies, and yea, he understands how things work. “So Dad, if I shop at Target, that means I make more money”