2010-02-05

Be a Zen Investor

A friend brought to my attention a very interesting article by blogger Leo Babauta, of Zen Habits titled "How Not to Hurry".

In the article, Leo exposes the benefits of taking life slower and doing things with more quality, more time and in a more relaxed manner. After all, being productive is not a function of how many things we do at once, but of how many things we complete orderly. "Nature doesn't hurry", says Lao Tzu, "yet everything is accomplished".

That got me thinking about how I practice stock-picking and how any form of investing should be taken: just as lazily, if not more.

Slow to buy, slower to sell

One should be slow to buy. A stock or bond purchase can be planned sometimes for years. Warren Buffett admits having wanted to buy Coca-cola for the better part of his adult life. But it wasn't until 1988 that he got the opportunity. Of course, when the opportunity arose, he was fast to pull the trigger. But being fast in 1988 pales in comparison with his 20+ years of waiting to buy.

Likewise, when selling, one should not hurry either, despite what most "common sense" out there might be. A quick sale would only make your slow buy seem contrived and ill-timed. If you spent time studying what to buy and when to buy it, it makes no sense to turnaround and sell it for a small profit or just because things deteriorated a bit. Most good buys never deteriorate this fast. The kinds of company that are associated with financial scandals and overnight bankruptcies are those you will avoid by buying slow and having a plan.

So, no need to sell anything fast. The slower you sell, the more dividends you collect and the better your tax rates will be.

The zen plan in action

Here is my zen plan that has been working for quite some time (since mid 2008 or thereabouts) with no change and close to zero effort. (Prior to this zen plan I had a somewhat similar strategy that required more effort -- subject for another day.)

  • Make a list. I made a list of good, solid companies that pay dividends and have a history of increasing them (these are also called Dividend Achievers and Dividend Aristocrats).
  • Determine fair value. I worked out their fair value by looking at various metrics, but mostly I valued them as bonds -- how much money will they pay me if they keep on raising dividends at a reasonable clip, comparable to their past history but not faster than growth in EPS and not much faster than their industry. This can be done with the help of the dividend discount model.
  • Apply a discount to fair value. This is to protect from errors in the assumptions. This is the price one should pay for an asset when time comes. Twenty percent sounds reasonable.
  • Wait. I sat and waited. And for a very long time -- a really tedious time -- I didn't buy much, but just waited for my price to be reached. Around November 2008 and then again in March 2009, the market panicked, the financial world was coming to an end and some good stocks traded at or below my target price. That was the time to be fast and hurried and I pulled the trigger many times.

Some of the good stocks I bought then include Gerdau ADR for $4.96 (it's now above $13), Visa for $45.40 (it's now above $80), Pepsi for $47 (it's now approaching $60), 3M several times for an average of $58 (it's now close to $79) and others like PAYX, KFT, HD and KO.

Some of these aren't really dividend achievers, but they all pay a dividend and I had fair prices established for them. (In the name of full disclosure, I also bought GE and a few US banks, which are underwater. I still have faith in GE, and the banks, while anemic, still pay a token dividend.)

Now it's a matter of waiting to collect the dividends and not being in a hurry to sell. If it really leads down the road to riches I will know many years from now.

No hurry.

Disclosures: I own every stock mentioned above plus others that I'm Zenfully holding for the time being.

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