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Time In The Market Is Your Greatest Friend In Investing

The more I learn and experience about investing, the more convinced I become that doing nothing is the best strategy for long-term success in a portfolio.  I believe that time in the market is more important than timing the market.

“The lesson to long-term investors is clear; it doesn’t matter whether we are in a bull market or bear market. The goal is to dollar cost average each month in quality dividend growth stocks selling at attractive valuations, reinvest dividends, and hold patiently for the next 10-30 years. I cannot emphasize quality factor, since the quality companies are more likely to survive a deep recession, and continue paying and growing dividends, even during the hardest of times. “

When I was much less experienced, I thought that some people could just switch in and out of stocks, and thus outguess the markets (some do). The biggest cost of course is opportunity cost, since in the majority of scenarios I would be better off, if I simply stay put, and allocated my dividends in the best ideas at the time and not do what some day traders do. Hence, the only time I have considered selling is if a dividend is cut, or a position becomes so overpriced or take such a weight in my portfolio, that it would be best to trim or eliminate it.

What I recently found out was that The Corporate Leaders Trust was created in 1935 with an equal number of common stock shares of the 30 leading U.S. companies at the time. The goal was to seek long term capital growth and income through investment generally in an equal number of shares of common stock of a fixed list of American blue chip corporations. After 78 years, it is currently invested in a total of 23 leading U.S. corporations. The trust cannot purchase new companies, so holdings have changed only due to spin-offs, dividend eliminations, or mergers since fund inception. The fund was expected to be liquidated by 2015, but its life has since been extended through 2100.

There were only a few outright failures in the portfolio of the fund. However, what really helped results was the fact that the trust let winners run for as long as possible. As a dividend investor, I have learned that I should not sell, even if the stock I own is up over 500%. This is because it does not make sense to get rid of your winners, that will propel your portfolio forward, both in terms of capital appreciation and dividend growth. In a long-term portfolio that is held for generations, one could reasonably expect to have positions that result in crazy returns over long decades. The changes are as a result of acquisitions, spin-offs, and dividend eliminations. When a company eliminates dividends or goes bankrupt, it is sold out.

A $10,000 investment in 1941 would be worth $18 million by the end of 2014, and generating annual dividend income of almost $400,000/year at a current yield of 2.23%.

This is a testament of the power of selecting the leading dividend paying blue chips of the time, and then patiently holding for generations. Investors in the trust ignored all the extra noise of the next 78 years, and did really well by investing in businesses that stood the test of time. A diverse portfolio of mature blue chip companies with enduring business models will generate loads of excess cash for their shareholders, which could then be reinvested into more shares at depressed values.

If you really sit and think about it, long-term investing is the best friend of the individual dividend investor. It allows you to quietly compound your capital by focusing only on quality blue chip dividend paying companies that have enduring business models (moats), while ignoring the everyday noise that tries to make you to do something, when in reality there is no need for you to act. A 3% yield today might not sound like a lot today, but if you reinvest those dividends that grow at 6% – 7% annually for the next 20-30-40 years, the level of dividend income would be crazy. If you also look at that from the perspective of a company that grows earnings by 6%-7%/year for that period of time, your wealth would be increasing a lot as well. The small yield today is the seed that will bring fruit to you and your family or charitable cause for decades to come. Do not waste it, but do the smart thing by investing it and watching it turn into a beautiful tree.

So to summarize, this fund proves that a diversified portfolio of blue chip companies that regularly pay dividends, and adapt to the ever changing economy is a great way to build and maintain wealth and income. It is a living proof that passive buy and hold dividend investing works for those who are patient and have a long-term mindset.

Live Long & Prosper

Full Disclosure: Skyy has positions in T, CVX, GE, PG

 

 

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