One of my finance heroes is a man by the name of Benjamin Graham. The first book of his I ever read was Security Analysis. If you don’t know, Graham is considered the father of Value Investing and Security Analysis was the first foray into why. At the time, (in the 1930s) it wasn’t considered odd to trade stocks based on dividends only. Growth investing was not nearly as prevalent as it is now.
Side bar - Value Investing, as in growth versus value, the top axis of those little Morningstar boxes? It basically means picking stocks based on their fundamentals and their ability to generate cash flow now. You make your money as much from the growth in the stock value as from the dividends you receive. This is as opposed to Growth Investing (typically things like tech companies) where all your return is the growth in the stock price.
I always liked the idea of Value Investing. And I come back to it a lot, especially in the world we live in now of big valuations and fortunes won and lost on a trading floor. It always seemed to me that, while there certainly is value to created (or lost) in growth investing - it should generally remain the province of professionals. Which is not to say that there isn’t a place for a passive growth fund in your portfolio.
But it is too easy to lose everything on paper. I like investments that provide an ongoing hedge. To be technically correct, stocks paying a dividend isn’t technically a “hedge” in the proper sense of the word - like an option or stop loss order or the like.
But when you see BitCoin go up dramatically, only to not be able to get the cash out, makes you remember that without being able to turn the thing into a medium of exchange that is widely accepted, it has no value. At least with a dividend paying stock you are constantly turning some of your returns into cash immediately.
This is also the model that Warren Buffet follows. Invest in companies that continually produce solid cash flows. It seems to have worked out pretty well for him. I hope that more companies start-ups like this get more attention. Maybe they aren’t ever going to be unicorns and that is OK. But if they have a solid plan to produce some cash flow, I think more people should pay attention.
If you want to talk more about this, you know where to find me on Twitter.