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Chowder’s Investing Words Of Wisdom, Part II

I read many comments, articles, and other writings about DGI investing throughout the week. Earlier this month, I started to bookmark the pieces that catch my eye, with plans to highlight them for readers here on DGI For The DIY.

Regular readers of this site are aware of the respect and admiration I have for Chowder on Seeking Alpha. He was one of the contributors there that caught my attention early on, and has played a big part in my maturation as a dividend growth investor.

Chowder no longer publishes articles on Seeking Alpha, but he remains a prolific commenter (16,363 and counting), and regularly offers keen insights about investing and the stock market.

On April 7th, he shared his thoughts on investing for younger investors: staying fully invested, dividend reinvestment, and why waiting for a perfect price to buy may lead to missed opportunities.

Here is the quote (bold emphasis by me):

I’m still convinced the best approach for young people is to be 100% invested, reinvest all dividends as long as you are still contributing to the account on a regular basis, and allow the concept of compounding work in your favor.

The longer compounding has, the more powerful it becomes. Since none of us … NOBODY … can predict in advance how our best ideas will play out, I say stay invested and let the market do what it needs to do.

Again, I’m talking to the young folks here who have a couple of decades or more before hitting the distribution phase. Build that income stream as quickly as you can, and your monthly dividend income will grow to a point where you can turn the reinvestment feature off and have cash to invest every month for opportunities if you feel the need to do so.

My son’s Roth is on dividend reinvestment because cash is being deposited in the account every month for buying opportunities. He isn’t contributing more than $500 per year to his taxable account, and the taxable account is twice as large as his Roth, so I collect the dividends in cash for buying opportunities, but staying 100% invested helped build that income flow up quicker.

Older folks, I get it, cash on the sidelines provides peace of mind at a time when you don’t have the time the young folks do for the market to correct your mistakes. I was 100% invested for years but now keep a small amount of cash on hand.

On another subject …You folks using short term trader price entry points are focused on the wrong thing in my very humble opinion. There are going to be many entry points over time and this one isn’t any more important than any other UNLESS you are going in LARGE.

If you’re picking up a few shares here and a few shares there, it isn’t going to make enough of an impact to really matter whether you pay $50 for something or $52. The price point doesn’t have the same impact on SMALL as it does on LARGE.

I was a trader, I understand price entries. Every trade I made was a full position right off the bat. You don’t ease in when trading and most people you read or listen to on the boob box is providing trading tactics which are ineffective for long term investors.

It’s those short term price entry tactics that kept you from buying LMT at $90 and finally paying $170, it’s what still has people identifying good investments like MO, JNJ, COST and others and missing out on them because you got cute on entry. You still don’t own as much of any of these as you wanted, if you own them at all.

I get making a choice between one company and another and picking a better valued company, I don’t get, price is reasonable but I want better, and then you go in small.

If you are going to get your hero price, go in LARGE. You have to learn how to leverage your correct decisions. Hero price is usually a correct decision that took time to develop. If you get it, take advantage of it, easing in will only keep your position small because you will be reluctant to add at higher prices and if you were correct, price isn’t coming back down to hero price.

Long term investors do not need to get cute on price entry. If you don’t believe me, start keeping a diary of your decisions. We traders had to! Mark down that magical price, whether you bought or not, and then look at it 3 or 4 years later and realize how naive you were at the time when you see how few accurate calls you made at the time.

All of that stress over a single price entry point will seem insignificant if you are a long term investor. I kept those diaries, I tracked those decisions, and nobody is going to convince me otherwise with their hindsight analysis. I lived it, I know the realities of it, I’ve invested in equities over 3 decades and many market corrections, try to learn from it, work with me here.

I think Chowder really provides some great thoughts on strategy and mindset for long-term investors with this comment. In fact, it could about be an article in itself with the topics he covers.

On dividend reinvestment, I agree completely with his thoughts, and am doing the same with my Dividend Growth Portfolio. The portfolio holds 52 positions, and I want them all to grow over time, so by keeping dividend reinvestment turned on at all times, I am able to continue growing my share count without thinking about it.

If I was too focused on share price and valuation, dividend reinvestment would be turned off, and I wouldn’t be adding shares to some of my most successful purchases. I also have new money coming into the portfolio every month, with which I am able to add to positions offering attractive valuations or that are in need of higher weighting.

I think Chowder’s point on buying with size is a valid one too. Too often we have a target price in mind with a stock, but then when it finally falls to that level we lack conviction to buy it, or get greedy and hope for an even better price.

I’m finding that valuation is a range, not an exact number, and putting too much emphasis on it can keep a person from investing in some really great companies.

I fell into this trap with Nike last fall when it fell to $50, yet I didn’t buy because I was steadfast in not paying more than my target valuation of $49. My lack of action delayed my Nike purchase another 5 months and caused me to spend nearly $5 more for each of my shares purchased.

A lot of good my stubbornness did me!

His point on worrying more about valuation than performance is also a good one, and is something I have struggled with as well. For example, I don’t yet own Johnson & Johnson in my portfolio, and no longer own 3M Company or Clorox either because of valuations.

In the case of $JNJ, I hesitated when it briefly hit the 3% yield point a while back, and it quickly recovered and left me without any shares. In the case of $MMM and $CLX, I owned them and made money on them, only to sell out of my positions because of fears that they were too expensive to continue holding.

Three years later and I still haven’t bought them back!

Closing Thoughts

Sometimes investors fall into the trap of being too active with their investments, thinking they can somehow outsmart the market.

They turn off dividend reinvestment on a stock because it is having short-term problems with its business, or has had a big run-up and appears overvalued, or is losing out to a competitor, or, or, or…

It can be easy to outsmart ourselves and find reasons not to turn on that reinvestment button, thinking we can do a better job by focusing new cash only on stocks that are trading below fair value. This is short-term thinking though, and could have an impact on long-term results.

Some of the best performers in my portfolio have been companies that are perpetually overvalued. So if I focused on that metric, I likely wouldn’t have put any more capital into them over the last four years.

Cracker Barrel, Dr Pepper Snapple, Microsoft, Starbucks, and Thor Industries are all stocks that have given me 100%+ gains, and they’ve pretty much all been “overvalued” while I’ve owned them. Yet I now own an extra share or two in each because of the reinvestment of dividends over the years I’ve owned them, and I am thankful to have those extra shares now with the way they have performed.

So remember to keep things simple and don’t outsmart yourself. Buy high quality companies that perform well, and do nothing else but hold them and let the snowball grow.

Interested in more thoughts from Chowder? Check out Part I of the series.

4 thoughts on “Chowder’s Investing Words Of Wisdom, Part II”

  1. Excellent article! I’ve lost count of the times my stubbornness on the share price caused me to lose out on buying some great companies at a fair price only to find myself stewing in regret.

    1. Thanks Helen, glad to hear you enjoyed it!

      I think we all have plenty of regrets about things we should have done differently with investing. Key thing is to learn from the mistakes, and hopefully avoid repeating them in the future. Such is life I suppose! =)

      Best wishes,


  2. Thanks for the thoughts. Now I wonder whether my buys below a forward P/E 17 turn out as “value of the 2nd row” that doest move.

    1. I think value has its place, and I still plan to focus on it, but I can see where it can be a trap as well.

      Names like IBM, QCOM and AFL come to mind as stocks that appear undervalued but have basically tread water for several years because they lack growth.

      Meanwhile companies with higher PE’s that are producing growth continue marching higher.

      Buffett’s old adage that it’s better to buy a great company at a fair price than a fair company at a great price sums it up well.

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