If you're new to investing, it can be tempting to panic or celebrate over stock market fluctuations or the never-ending pool of so-called experts touting the next greatest opportunity on cable news shows.
But self-taught investor Kenneth Dickson says he's learned over the years that by the time a business gets a lot of buzz on the news, it's already too late.
"My first ever purchase of stock was for DELL stock in 1998, and in those days, DELL was quite the hot stock. But by the time I bought it, most of the upward leg had already happened," he says.
Through that purchase and others, he began to realize that most of the gains on a stock purchase come through: A. buying at the right price, and B. dividends. Instead of racing to buy stocks with buzz, he watches them for a while and checks their dividends to get a clearer picture of how they really are.
Kenneth shares his investment thoughts on his site InvestorBlogger. Here, the blogger and entrepreneur offers his insight on how to approach the market and find success as a business owner. Read on:
Tell us about InvestorBlogger...when and why did you start the site?
I actually started InvestorBlogger as an afterthought. I had been editing an academic journal and producing its online version for a few years. We'd always used Yahoo! Geocities for our initial launch, but eventually we decided to create our own site. I used a popular hosting site, and we uploaded the HTML to that URL. At the same time, WordPress had just split off from B2Evolution, and I started playing with WordPress version 1 (if I remember). Of course, we found it pretty useless for hosting our journal; the pages were too long and the server too underpowered for that.
In the end, I needed another domain to play with, and registered InvestorBlogger in 2004 as a way to play with WordPress. Humble origins, pretty much an afterthought. But investing writing and blogging was just starting, so I started to rediscover my passion of the late '90s.
What's your background in personal finance? How did you become interested in it? Why are you passionate about sharing your insight with others?
My background in finance is pretty much self-taught. I was baptized by the dot-com era of the '90s, and was eager to get in the rush of things. But I spent some reading up on investing through the Motley Fool forums, which were quite insightful at the time. I also had several bookshelves of investing tomes, most of which I read or skimmed or scanned over the years.
Of course, my account was thoroughly creamed by the following crash, and I saw my $20K shrink rapidly to about $6K at the lowest point. When money vanishes, that is when you realize that the axiom, Return of Your Capital is more important than Return on Your Capital.
What do you think are the smartest investment decisions you've made over the years? Why?
Personally speaking, the smartest investment choices have always been in sectors that aren't in vogue at the moment. I bought DELL, and it pretty much underperformed the whole time I owned it. UL has been doing well for me, though, and so has SBR, which I bought at a cheap enough price to make a decent amount of upside on both stock and dividends. The recent up trend in SBR has been helped by the oil price rises from Syria and Iraq adding uncertainty over supply.
What are the biggest investment mistakes you've made over the years? What did you learn from them?
I've been analyzing my stock purchases since 1998 on my blog, and my overall performance has been quite dismal, though I managed to pick some really good stocks. I would say that of all the mistakes I have made, selling too quickly is the biggest. And it seems to be one I'm happy to make again and again.
Purchased Microsoft recently at $27 and sold it around $30.50. Of course it took off after that! NAT was another stock I sold way before the price of oil reached its peak, and their good dividends on that! And an ETF, called TWN, that I got out of at $14 and change, taking a small loss. After I sold it, it went up to around $20.
I've also held onto stocks too long, though and seen stocks like CMGI (another late '90s star) get pounded into nothing. In short, I have either failed to understand the current market sentiment properly or the business's situation.
What advice do you have for investment newbies? What's the best way to get started?
I have three simple tips for investment newbies:
Save any spare cash you have for an emergency fund, first. Then put as much as you can in any tax-free pension plans (401K) up to your annual limit. You should also try to create a proper budget for your spending so that you can determine how much free cash you can invest. You cannot invest money you don't have or shouldn't invest. For God's sake, never borrow money to invest. That will be gone in a flash.
There is a reason that Warren Buffett doesn't follow the daily gyrations of the market, and it's a good one. Because it muddies your focus, so choose your stocks carefully and do your research. Learn how to value your company, and follow it until you know how it actually works. Don't get too obsessed with up-to-the-minute news.
I would also avoid making spur-of-the-moment decisions to invest or close positions. You will pay through the nose for either of those mistakes. But having an entrance and exit strategy is always a good idea. So when you are looking to buy, decide what you would like to pay and what you could pay. Don't just enter at any price. Also, when you exit a stock, decide how to exit in a similar fashion. Trailing stop losses might be a good idea if you want to protect yourself against unexpected drops in the price.
What are your favorite tools and resources for learning more about investing?
I quite like Yahoo! Finance because the archives and data are quite extensive. But I'd encourage anyone using Yahoo! Finance to double check their calculations (PE, Dividend Ratio, etc.) by hand.
I like stock screeners, too. I find that the better ones can help you zero in on good stocks and eliminate troublesome ones. Google's Stock Screener is quite helpful. TDAmeritrade's is quite good, too.
I'd stay away from stock forums, except when scouting for ideas among lesser-known stocks. It's hard to be rational when a bunch of investors are screaming (in CAPS) at you! Saying that, Seeking Alpha is pretty good, and one of my favorite go-to places for ideas and more insightful treatment of investing topics. Just don't expect consensus!
How are you feeling about the economy these days? What sorts of investments do you like? What are you steering clear of?
While the European economies seem still mired in high unemployment, low growth cycles, the U.K./U.S. economies are slowly improving, and hiring of workers is increasing. This suggests that things are getting better. The stock market has already priced most of that in. In the short term, interest rates are going to be low, but with a slight bias to increasing.
In the real market, this means credit, loans and mortgages are going to be more expensive, even if the central banks don't increase rates. I would stay away from bonds for the same reason. Once the historical lows of the current interest rate environment pass, bond prices will fall sharply. In the U.S., property should come back into vogue, but in the U.K., house prices in the prime markets are astronomical.
Increasingly, I suggest staying away from anything that's HOT at the moment. If you're seeing it on TV or reading about it in the newspapers, it's ALREADY happened. It's "olds," not news. I invest in stocks that are here for a long time, stocks that pay some kind of dividend and represent companies that do something tangible for people. After getting burned in the dot-com bust of the 2000s, I'm leery of companies that only have a good story to tell. That's not a business. That's wishful thinking.
You also write a lot about running a small business and entrepreneurship...what have been some of the most lucrative and/or cost-effective entrepreneurial ventures you've discovered over the years?
Perhaps it's not so obvious, but we're teachers, and working and living in Taiwan gave me an opportunity to teach English abroad. I never expected to stay so many years, and I certainly didn't think I would get married here. But that's what happened!
We started our own business about 15 years ago, after watching too many people fail, including our bosses. We decided we couldn't do worse than they did, and we haven't. But ever since I came to Taiwan, I've had an entrepreneurial streak and have been involved in setting up and running several educational consultancies, a few websites of my own and our business.
Name a few good habits you think every successful business owner should possess. What about bad habits they should ditch?
The most insightful thoughts we had relate to cash flow. And that happened almost by accident. A lot of small businesses open up with insufficient cash flow. Truthfully, we didn't think about it too much at the beginning. But running a language business, we found that it was mostly a cash upfront business...so in effect, our customers were financing us for the first few months, because we could get the cash paid to our account and spend it slowly until the renewal came.
The second thing we noticed: If we could get clients to stick with us for enough time, they'd get much more benefit (better knowledge, improved skills, productive fluency in the language) out of the courses we provide, and we wouldn't need to sell to so many new customers. This really was a win-win relationship for both parties.
In the time we've been open, we've noticed a lot of businesses come and go; some had really great ideas but floundered because of cash flow. Those closed the quickest. The bosses/owners underestimated the expenses and overestimated earnings in the first six months. I remember one shoe store opened around the corner, and to attract business/customers they held a competition where they threw dollar bills out of the window. No prizes for guessing how many months they stayed open.
But this is also what has made me cautious about so many IPOs, where there's just a good story to sell and no customers...how can you pay your bills when the money doesn't come in? It applies equally well to business as well as investing.
Others closed when they discovered they didn't offer anything unique to customers either in product, pricing or location. Simply sticking it out longer than other businesses in the area helps. So I'd encourage owners to stop expecting instant success...it'll rarely happen. By sticking around long enough and developing your product or service, you will begin to attract YOUR customers.