PODCAST 157
SAFE DIVIDEND INVESTING
29 FEBRUARY 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 157, on February 29th of 2024.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 5interesting investment question.
In Podcast #154, I announced a contest to select 20 stocks using $200,000 in “play money” that will generate the most capital gain and most dividend income over 12 months. I have now received the first completed Excel Spreadsheets from listeners Who want to participate in the contest.
While this contest was created as a learning exercise for those who are hesitant about investing in the stock market, it is open to anyone who wants to test their investment skills. To make it bit more interesting the winner will receive $100 as an incentive at the end of 12 months.
Request a printed copy of Podcast #154 and the Excel entry file if you are interested in participating.
The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors.
QUESTION 1
Do stocks price rise because there are more buyers than sellers?
To suggest stock prices, move just because there are more buyers than sellers miss the reality that the stock market is an auction vehicle. If an investor wishes to sell a stock, someone must be willing to buy that stock at the sell price the seller is bidding.
Buying and selling stocks is a communication-based interaction between pessimists who think the stock is going to decline in price and optimists who think the stock is going to increase in price. If buyers see the price as being too high, the seller must keep lowering the share price bid until a buyer finally bites and accepts the bid. Of course, the opposite occurs when the buyer wants to buy a stock. The buyer must keep increasing their bid for the stock until the owner of the stock bites and accepts the buy bid.
On any given day, with hundreds of thousands of optimists and pessimists communicating their bids, it is impossible to accurately predict what price a stock is going to be in the next minute, the next hour, the next day or the next month. Bids are often left open and active on the stock market for days or weeks with the hope that someone’s price offer will eventually match their bid price.
Some stocks trade over 20 million shares in a day. Some stocks, of small struggling companies, trade no shares in a day. The volume of a stock’s shares traded on average in a day is an important factor in determining the attractiveness of investing in a stock.
The executives of companies who make the revenue and expense decisions that result in profits believe that they can influence optimistic investors by reporting profits. Higher profits appeal to some optimists who think such reporting will immediately increase share prices. This makes those investors very dependent on the strength of the financial information being reported. However, a company that has never previously reported a profit needs to be carefully analyzed to determine what changes in the company have resulted in this first-time profit and whether it can be repeated. A share price can drop just as quickly as it rose if a company reports a loss in its next quarter’s results.
Some companies think it is very clever to take money from their profits and use it to make ever increasing higher bids on their own stock. They expect to create the illusion that the price is being bid up in the open market by optimistic speculators. They do this because often their compensation is often tied into their company’s rising share price.
From the 1930s until the 1980s stock buybacks was unlawful. It was seen to be a form of stock price manipulation. Buybacks can be destructive for a company who should be investing their profits in building the competitive operating strength of the company instead of creating a temporary stock price bubble. Without sufficient constant investment in a company’s operation, the company’s profits can eventually shrink and with it their share price.
Many successful companies believe that the best practice is to split their profits between strengthening its operations and rewarding shareholders with rising dividends keeps share prices and profits rising. Often a 40% to 60% split is between the two is seen.
There is no mathematical formula that can accurately predict future share prices. What is far more predictable are the dividend payouts of financially strong companies. You can easily and freely obtain the records of historical dividend payout records going back for decades. You can easily see the consistent, ever increasing dividend payouts year after year. These payouts occur even during recessions and market crashes when share prices of strong companies can drop by 20% or more. Even when share prices are rising you can often see the dividend payouts are rising at a much higher percentage than the share prices.
Dividends are paid out of profits. The purpose of a company is to make a profit. Without profits companies eventually become insolvent and fail. To speculate on the media-hype that a new, unprofitable company will eventually make a profit is a gamble.
The stock market was established as an exchange medium, not as a casino. To make money investing in stocks does not have to be a risky gamble. My six investment books provide the historical factual data that allows for the safe selection of diversified income producing stocks.
QUESTION 2
Should Americans purchase US stocks over international ones?
In the book, “New York Stock Exchange’s 106 Best High Dividend Stocks - Scored and Analyzed”. You can find dozens foreign companies represented in those 106 best stocks. All 106 stocks are scored using the same software. The foreign currencies are all converted into US dollars. This allows for the stocks to be objectively sorted from most to least desirable. Interestingly, the top scoring company is foreign company. Several other foreign companies were close to the top.
. Foreign stocks add diversity and strength to a portfolio. Often, when the economy of one country is down another country can be up. These economic differences can be reflected in the share prices of the companies in a diverse portfolio.
The high-profile index, the S&P 500 only contains high capital US stocks. However, the New York Stock Exchange, which lists thousands of stocks, does so without discrimination as to their national headquarters or capitalization size. It gives investors a real opportunity to achieve investment diversity.
Many speculators are looking for inexpensive shares of smaller companies with the next great product. Their objective is to make profitable investments by selecting stocks, no matter what their nationality, with the potential increased share prices.
Even companies like Microsoft began as penny stocks. American companies do not have a monopoly on innovation and creativity.
Since these foreign stocks are listed on an American stock exchange they must abide by the same rules and regulations set by U.S. Securities Exchange Commission and report financial data in American dollars. This makes it easier and safer to compare what they have to offer investors as well as removing the complication of currency exchange calculations and fluctuations.
What it comes down to is constructing the strongest portfolio be open to all investment opportunities available.
QUESTION 3
What stocks do you recommend buying during a recession?
I recommend that you only ever buy stocks that you never intend to sell for the rest of your life. If you never intend to sell financially strong companies paying ever increasing high dividend payouts, it does not matter when you buy them. These are stocks that over time will increase a portfolio’s value by several multiples. Not quickly, but steadily.
You ensure that a portfolio made up of such stocks grows by investing equally in 20 to 30 such stocks. At various times one or two stocks may temporarily falter but since they make up such a small proportion of the portfolio, it will have minimal impact on the over all growth of the portfolio.
In market crashes when all stocks drop in value, the high dividend payouts will take away the sting of what are temporary portfolio shrinkages. The dividend payouts put food on the table and pay the rent. If you do not need that money to live on, then this dividend money can be invested back into the portfolio at a time when the share prices will be at bargain prices.
I have lived very well off my dividend income for the last twenty years. Long ago I learned that share prices are controlled by illogical, impulsive speculators. Trying to time when you buy stocks is destined to fail as no one can accurately predict future share prices. However, dividends are set by rational experienced executives of a company concerned about how investors and their shareholders perceive their well-run profitable operation. Their reputation and track record are as important to them as it should be to you.
QUESTION 4
What is the recommended amount of time to spend analyzing stocks before investing in them?
This is a bit like asking, “How long is a string?”
It is also like asking an artist how long it took him to paint a masterpiece. Do not be surprised if an artist replies that it took him twenty years. When you question such a response, you learn that it took him twenty years of trial-and-error painting before he could create a painting like the one, he is now presenting. It has little to do with the few days it may have taken him to apply the paint to the canvas you are now looking at.
The same is true when it comes to analyzing a stock investment. Making the right share purchase may come from decades of interacting with businesses. When you buy a company stock you are investing in a business. No matter whether you own one millionth of this business or one hundred thousandth of the business, you are now part owner of that business. Thus, buying any stock calls upon your business experience.
Everyone had made decisions to buy one product versus another product. Thus, we all have some understanding of how commerce works and the steps in the selling of a product.
The seller is first faced with the reality of identifying a prospective customer. The second step is to approach that prospect and convince them to connect and just consider your product. In that meeting the seller must create such a need for the product that the prospect will part with money to purchase the product. It can take years to sell some products. When you purchase a stock, you are other trying to convince yourself or someone else trying to convince you to part with the money to purchase it.
How much time do you now spend determining which $50,000 car to buy? You do your research. You may look at historical reports on the reliability of the car. Does it have all the features and benefits you hope for, or do you have to make some compromises? It can take hours, days, weeks, even months before you make a final buying decision.
Now, how much time should you spend before you purchase $50,000 worth of shares in a company. What features and benefits do you hope this purchase will have for you? What compromises will you have to make because the perfect stock does not exist? It becomes complicated because unlike a car, the objective for this purchase is that you expect it to grow in value and provide an ever-increasing income.
Since most investors are speculators following whichever direction, the herd is going, I expect most investment decisions are impulsive and the typical investor spends no more than a few minutes in making a buying decision. However, the question was how much time should you spend? Should it be as much as you would spend choosing a car? Probably not. Why? Because all the information you need to decide, has been gathered, is free and is waiting for you on the internet to access it.
Current financial information like operating margins and book values is immediately available. The historical data on share prices and dividend payouts can be reviewed in a few minutes. A quick Google search of the company’s name with the words “legals and complaints” attached can usually disclose obvious negative concerns. Comparing information on this stock to other stocks in the same industry is not difficult. Reading analyst reviews on the stock takes a few more minutes. Scoring the stock takes just a minute once all the information is gathered.
As you gain more and more experience in analyzing stocks it becomes faster and easier. If you had the stamina for it, you could spend days even weeks analyzing one company and probably come to the same conclusion as you would come to after spending between half-an-hour and an hour analyzing a stock. Even with all your analysis you must still accept that no one can accurately predict future share prices. This is why you depend upon the safety in the number of stocks in your portfolio. It is highly unlikely that all 20 stocks in a portfolio can suffer the same fate at the same time.
QUESTION 5
What secret knowledge do investors possess about stocks?
There is no secret knowledge.
The Securities and Exchange commission do their best to make sure all relevant information for judging stocks is freely available to everyone. Quarterly financial statements must be made public through them. Any changes in operations or key personnel must be filed immediately with them so complaints of stock manipulation do not arise.
However, just because the information is available does not mean that the typical average investor considers it. For example, while fund management companies selling units in their S&P 500 ETFs, are quick to brag how just 9 of the 500 companies account for 31% of the market capitalization of all the 500 companies, they skip over the reality that most of the 500 companies are not financially strong. You can easily see this when you compare their very high share prices to their much lower book values. For example, Apple’s book value was $4.00 compared to its share price, which was $185.
A book value’s logical calculation by professional auditors is far removed from the chaos of optimistic and pessimistic speculators bidding daily for millions of the Apple shares in a stock market influenced by media hype, greed, and fear. Fund companies want you to believe that you could not possibly lose if you invested in their fund. Those 9 very high-profile companies are the distraction to stop you from wasting time looking more closely at the other 491 stocks in their fund.
Why is it that the average, speculative investor puts as much thought into buying a stock as they do in buying a lottery ticket. Why do they not seek out the many companies who are not in the news that have long histories of ever rising share prices and dividend payouts, good book values and high ever-growing profits. The internet makes such searching easy.
There is no secret information. There is only the mistaken belief promoted by the investment industry that only skilled professional investment analysts could possibly pick safe, profitable stocks. I wrote my investment books to show investors just how easy it can be to build a generous, strong portfolio.
THE END