I've been investing surplus capital from carefully saving over 50% of my net income for over three years now. I've done this month in and month out, building up my Freedom Fund to a respectable six-figure portfolio that has equity ownership stakes with 35 different high quality companies that pay out dividends, and raise them on a regular basis.
Did you notice that not one time in the above paragraph did I mention the word "stocks"?
The longer I do this, the more I learn. And one thing I've learned along the way is that I've almost come to the point where I don't really like the word "stocks" any longer. I think there are certain connotations with the word, and people somehow associate stocks with gambling or day trading, like the stock market is some kind of casino.
I've never looked at the stock market like that. I don't do any kind of day trading, and I've always associated myself as a long-term investor. The stock market, to me, is a way to access a portion of the large capital markets. It's a way for me to invest my excess capital in wonderful businesses that have a habit of growing earnings by 6-10% or more annually, and likewise growing dividends in a similar manner.
Whenever I invest my hard-earned capital with a company I look at myself as a partial owner of that company, because that's exactly what I've become. I'm not just buying some paper certificate (digital certificate these days), I'm buying an actual ownership stake with the business. I look at all parts of the company. I look at the fundamentals (income statement, balance sheet, cash flow statement), the long-term earning power, the products or services they provide and whether or not I anticipate demand for the aforementioned to continue well into the future, geographical representation and growth of such, diversification, high quality brand names, economies of scale, supply chains and logistics, management and even historical acquisitions. I like to take a look at the complete business, and ask myself one important question: would I feel comfortable having my entire net worth in this one company? If the answer is no, why would I want even 5% of my net worth invested?
While I believe diversification is extremely important (I do have investments with 35 companies, after all), there's not one company I'm invested with that I wouldn't be a proud owner of if I owned 100% of the entire company. Even some of my smaller ownership positions have the same love.
Take Medtronic, Inc. (MDT) for instance. I currently own just 37 shares of this wonderful medical devices business. Would I love to own all 1.02 billion shares all to myself if I could own no other businesses? Of course! Take a look at the last four years. We just went through one of the worst economic downturns this country has ever seen, and yet MDT has seen EPS grow from $1.97 in 2008 to $3.43 in 2012. Not bad, huh? And this isn't some recent phenomenon. They have been growing dividends for over 35 years on the back of growing earnings, with a 10-year dividend growth rate of 15.5%. Medtronic also has very little debt on the balance sheet, with a debt/equity ratio right about 0.4 right now. And they have worldwide exposure, currently serving customers in over 120 countries. I'd definitely give up every other investment I have to cast my fate alone with MDT.
Now, as a private small-time investor this is only a dream, and luckily so. I don't have to own just one business. I can own pieces of as many high quality business as I feel appropriate. Currently, I'm targeting my Freedom Fund to eventually own stakes in about 45 or so high quality businesses. But that's just it. I'm not buying stock certificates here. I'm buying actual ownership stakes in these businesses. Every time Medtronic sells a pacemaker or insulin pump I earn a very (very!) small portion of the profits they earn from that sale. I earn that portion via the dividends that company, and all the other companies I have ownership stakes in, send me as a portion of the profits I'm entitled to as a part-owner. It's simply fantastic!
And that's what's so wonderful. It's not just pacemakers and insulin pumps that my Freedom Fund is invested in. Another one of my equity stakes is in McDonald's Corporation (MCD, Financial). Whenever McDonald's sells a Big Mac or a Premium McWrap I earn a wee tiny percentage of the profits from those sales. Somebody just purchased a bag of Tostito's (PEP, Financial)? Money in my pocket. You need some Crest toothpaste (PG, Financial) to brush your teeth? You see where this is going.
I have hand crafted my portfolio into a dividend-churning machine by focusing on the fact that I'm a part-owner in these companies. I don't look to make a buck by buying something cheaply and then trying to sell it to someone else down the line for more money. That's too hard. Why would I want to do a bunch of guesswork and hoping and preying that someone will pay more for something that I bought for less? Makes no sense to me. I'd much rather focus on an almost guaranteed way to build wealth over the long-term, and that's to think and act like an owner. And when you're enamored with a business at $50 per share, you're absolutely in love at $40 per share. That's why I enjoy averaging down. I don't look at it like I'm losing money. I look at cheaper share prices as an opportunity to own an even larger percentage of a great business at a cheaper price. Even better, the dividends that I'm receiving as a portion of the profits are even larger because I now own a bigger portion of the company. Who doesn't love a good sale?
My advice is to stop thinking about your investments like stocks that you can buy and sell at a whim. In this day and age, with instant ticker prices and cheap transaction costs, it's easy to get caught up in the excitement of buying and selling and thinking of your stocks like little casino chips. But this isn't really all that exciting. It's stressful. What is exciting is being an owner of a high quality business that's going to make you a lot of money over many decades, compounding your investment many times over. People hear of these stories wheresomeone turns $180 into $7 million and wonder how they did it, when the answer is very, very simple. They invested in a great business, reinvested the dividends and let compounding work its magic. And this works, if you just stay out of the way and allow great businesses to do what they do best: make lots of money and share that money with you. And why would they share that money with you? Because you co-own the company!
How about you? Do you think of your investments as ownership stakes?
Full Disclosure: Long MTD, PEP, MCD, PG
Did you notice that not one time in the above paragraph did I mention the word "stocks"?
The longer I do this, the more I learn. And one thing I've learned along the way is that I've almost come to the point where I don't really like the word "stocks" any longer. I think there are certain connotations with the word, and people somehow associate stocks with gambling or day trading, like the stock market is some kind of casino.
I've never looked at the stock market like that. I don't do any kind of day trading, and I've always associated myself as a long-term investor. The stock market, to me, is a way to access a portion of the large capital markets. It's a way for me to invest my excess capital in wonderful businesses that have a habit of growing earnings by 6-10% or more annually, and likewise growing dividends in a similar manner.
Whenever I invest my hard-earned capital with a company I look at myself as a partial owner of that company, because that's exactly what I've become. I'm not just buying some paper certificate (digital certificate these days), I'm buying an actual ownership stake with the business. I look at all parts of the company. I look at the fundamentals (income statement, balance sheet, cash flow statement), the long-term earning power, the products or services they provide and whether or not I anticipate demand for the aforementioned to continue well into the future, geographical representation and growth of such, diversification, high quality brand names, economies of scale, supply chains and logistics, management and even historical acquisitions. I like to take a look at the complete business, and ask myself one important question: would I feel comfortable having my entire net worth in this one company? If the answer is no, why would I want even 5% of my net worth invested?
While I believe diversification is extremely important (I do have investments with 35 companies, after all), there's not one company I'm invested with that I wouldn't be a proud owner of if I owned 100% of the entire company. Even some of my smaller ownership positions have the same love.
Take Medtronic, Inc. (MDT) for instance. I currently own just 37 shares of this wonderful medical devices business. Would I love to own all 1.02 billion shares all to myself if I could own no other businesses? Of course! Take a look at the last four years. We just went through one of the worst economic downturns this country has ever seen, and yet MDT has seen EPS grow from $1.97 in 2008 to $3.43 in 2012. Not bad, huh? And this isn't some recent phenomenon. They have been growing dividends for over 35 years on the back of growing earnings, with a 10-year dividend growth rate of 15.5%. Medtronic also has very little debt on the balance sheet, with a debt/equity ratio right about 0.4 right now. And they have worldwide exposure, currently serving customers in over 120 countries. I'd definitely give up every other investment I have to cast my fate alone with MDT.
Now, as a private small-time investor this is only a dream, and luckily so. I don't have to own just one business. I can own pieces of as many high quality business as I feel appropriate. Currently, I'm targeting my Freedom Fund to eventually own stakes in about 45 or so high quality businesses. But that's just it. I'm not buying stock certificates here. I'm buying actual ownership stakes in these businesses. Every time Medtronic sells a pacemaker or insulin pump I earn a very (very!) small portion of the profits they earn from that sale. I earn that portion via the dividends that company, and all the other companies I have ownership stakes in, send me as a portion of the profits I'm entitled to as a part-owner. It's simply fantastic!
And that's what's so wonderful. It's not just pacemakers and insulin pumps that my Freedom Fund is invested in. Another one of my equity stakes is in McDonald's Corporation (MCD, Financial). Whenever McDonald's sells a Big Mac or a Premium McWrap I earn a wee tiny percentage of the profits from those sales. Somebody just purchased a bag of Tostito's (PEP, Financial)? Money in my pocket. You need some Crest toothpaste (PG, Financial) to brush your teeth? You see where this is going.
I have hand crafted my portfolio into a dividend-churning machine by focusing on the fact that I'm a part-owner in these companies. I don't look to make a buck by buying something cheaply and then trying to sell it to someone else down the line for more money. That's too hard. Why would I want to do a bunch of guesswork and hoping and preying that someone will pay more for something that I bought for less? Makes no sense to me. I'd much rather focus on an almost guaranteed way to build wealth over the long-term, and that's to think and act like an owner. And when you're enamored with a business at $50 per share, you're absolutely in love at $40 per share. That's why I enjoy averaging down. I don't look at it like I'm losing money. I look at cheaper share prices as an opportunity to own an even larger percentage of a great business at a cheaper price. Even better, the dividends that I'm receiving as a portion of the profits are even larger because I now own a bigger portion of the company. Who doesn't love a good sale?
My advice is to stop thinking about your investments like stocks that you can buy and sell at a whim. In this day and age, with instant ticker prices and cheap transaction costs, it's easy to get caught up in the excitement of buying and selling and thinking of your stocks like little casino chips. But this isn't really all that exciting. It's stressful. What is exciting is being an owner of a high quality business that's going to make you a lot of money over many decades, compounding your investment many times over. People hear of these stories wheresomeone turns $180 into $7 million and wonder how they did it, when the answer is very, very simple. They invested in a great business, reinvested the dividends and let compounding work its magic. And this works, if you just stay out of the way and allow great businesses to do what they do best: make lots of money and share that money with you. And why would they share that money with you? Because you co-own the company!
How about you? Do you think of your investments as ownership stakes?
Full Disclosure: Long MTD, PEP, MCD, PG
