Dividend Growth Investment for February 3rd
Good Morning,
I wanted to let you know that I just added to a position I had initiated last month. Consistent with my process, once I initiate a position in a company, I continue adding to it for as long as fundamentals are in tact, valuation is decent, and for as long as I hit my initial weight at cost of $500 - $1,000. After that, I reassess.
I try to build positions slowly and over time. This helps me balance the need for diversification over time and company and geography and returns with taking advantage of opportunities in my opportunity set that can potentially deliver good returns.
I do this mostly as part of my risk management process as well. I try to avoid putting money into a bottomless hole, by stress testing my assumptions during the accumulation phase for a given position. In the worst case scenario, where I am totally wrong on a company, the most I can lose is the amount I invested (minus any dividends reinvested elsewhere). The most I can gain is usually unlimited, which is why I seldom sell as I do not want to cut my potential short of opportunity.
That being said, if I see certain aspects that cool my enthusiasm for a company, I stop adding to it.
For example, for two companies I had recently started initiating a position in, my enthusiasm was cooled off by the fact that dividend raises were really low. These two companies include Brown-Forman (BF.A) and Canadian National Railways (CNI). I view dividend increases for their signaling power. When boards of directors evaluate the dividend policy and dividend increases, they take into consideration the economic environment, their business, the competition, and plans for growth. When they deliver a lackluster dividend increase, this shows me that they are not very confident about the near term prospects of their firm. Things could change for the better, or they could go down further from here. My goal is not to predict, but to use the information available to me, bump it up against my entry criteria and then accept or reject adding to a certain company. A slowldown in dividend growth is definitely something that jumps at me, and forces me to re-evaluate my stance. I would likely add to those positions, if they hit my entry criteria and that dividend growth bounces back, supported by strong fundamentals. If not, then those would remain small positions, and as the portfolio grows, they'd likely end up as footnotes. In the case I am wrong, and they become the next 100 bagger, I have enough ownership to take advantage of this assymetry (in the next 30 - 40 years that is, we are get rich slowly types here). But if they don't the most I can lose is the amount invested there.
Another company I own, Alphabet, I would consider if I want to add to or not, depending on where they go next with their dividend policy. Aka, I am curious to see if they will increase the dividend or not.
Speaking of CNI, you may have heard on the news that the US is in the beginning stages of a trade war with Canada, Mexico, China and perhaps a few more countries/regions by the time you read this message.
You will likely read a lot of news/commentary/opinions on what the impact would be on various companies/industries etc.
In my opinion, these are all good to be ignored. That's because nobody really knows anything, which includes experts and those who pretend to be experts.
After observing markets and experts for a few decades, I have come to the conclusion that predicting macro is incredibly hard. Predicting what would happen is really hard. And then predicting the impact is even harder.
There are second and third order effects, and too many moving parts going in different directions.
I personally try to build my investments using a bottoms up approach, buying individual businesses, and assembling a portfolio that works for my risk tolerance and investment goals and objectives. I invest regularly, and do not worry about macro, mostly because it is unpredictable to everyone, even experts.
So I focus on what I control. And stay the course.
Basically, the economy is a complex mechanism. As such, it's hard to know what the effects and impacts of changes will be down the road. Hence, it's best to focus on things within my control, and stay the course.
Now let's get to the fun part of it.
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