“There are some people who, if they don’t already know, you can’t tell ‘em.” – Yogi Berra

Are you one of those investors for whom things just seem to always work out well? Getting superior long term returns seems to take little effort. Whatever strategy you use seems to eventually work. You don’t spend much time or effort, yet most of the time you are feeling quite confident about your investments.

Or are you the type of investor who always seems to struggle? It seems everything you buy goes down right after you buy. When you finally sell, they take off. And the investments you hold long term mostly underperform.

We have often encountered both these types of investors. Struggling investors are far more common. They usually have trouble believing that many investors outperform with little effort. Those that find investing effortless just shake their heads at the frantic activity of struggling investors. This applies to both professional and amateur investors.

Why is it that investing is so easy for some and for others it is always a struggle?

We have found that the biggest reason for this difference is an underlying belief system of successful investors. This belief system tends to result in effective behaviour. The success of the investor tends to result more from their behaviour than from the specific investments they own.

From our years of experience, we can usually get a good idea of how successful an investor is just from talking with them and identifying their belief system, even if we know nothing about their investments.

There are 3 main principles that tend to make up the belief system of successful investors:

1. Faith

The single most important characteristic of successful investors is faith. This includes faith in the markets, in the future, in our free enterprise system, in the ability of good companies to grow their profits, and in humanity.

Successful investors tend to have this confidence and optimism. They see how much humanity has progressed in recent history and tend to see their optimism as realism. They don’t know how things will turn out all right – they just know that they will turn out all right.

This faith tends to give them a long term focus. They don’t need to keep searching for some great investment, do all kinds of transactions or get into the latest fads, because they are confident that their investments and the markets will perform well over time. Whenever their investments are down, this same confidence allows them to just see it as an opportunity to buy more. They tend to get good advice or choose their investments carefully, but then hold them a long time.

How can they outperform so easily? All you need to do to outperform is to own high quality investments for the long term and generally buy more whenever they are down. That’s all! The markets produce a good return over time and so should your investments if they are high quality. At least twice each decade, there will be a significant down market, which is your opportunity to invest more at lower prices. This alone means your return will be higher than the investment itself.

This is usually done with high quality mutual funds, broad index funds, or a well-chosen, diversified portfolio of stocks. We do it with “All-Star Fund Managers” that have all beaten their indexes long term and that we believe are the world’s smartest investors available to us.

Whichever specific investments they have, successful investors tend to have a calm confidence in their investments. The reason this is so important is that one of the single most important factors in investing is to stay invested and keep investing at market lows.

Many investors will make decent returns during a bull market, but then make the #1 mistake in investing by selling after the market tanks and losing years of growth. By selling, they miss the inevitable recovery. This #1 investing mistake is a direct result of not having faith.

Confident investors know that market declines happen, but since the markets have historically risen about 70% of years, declines are never probable. They are never focused on avoiding the next 20% down tick; but rather on being invested during the next 100% up tick.

Meanwhile, struggling investors tend to have a general anxiety about investing, a fear of losing money and a general pessimism resulting from their lack of faith.

They are constantly searching for the right investment, the right time to buy and sell, and use charts to try to market time effectively. They tend to believe that recent trends will continue and tend to “follow their gut”. Most of their information is free information from the news, internet, or other investors. They are always concerned about the “apocalypse du jour” (next crash, Peak Oil, deflation, inflation, etc.), anxious about missing opportunities, scared of losing money, and usually have a grossly exaggerated view of how risky the markets are. They are often “performance maniacs”.

Their lack of faith leads them to many behaviours that tend to reduce investment returns, such as frequent trading, market timing, performance chasing, trend following, lack of diversification, and most significantly, getting caught up in bubbles or selling after a crash.

The key point is that because successful investors have faith in the markets and their investments long term, they focus on participating effectively in the long term market growth. Struggling investors, with all their activity, end up trying to outguess random stock movements.

* This article is based on our personal observations over the years and the writings of Nick Murray, a retired advisor that I consider to be a mentor. Much of our investment philosophy is based on his principles.

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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With my debt and savings habits under control, lately my thoughts have been more so on investing strategies. One investment strategy that I believe in, as you may know, is dividend investing.

Dividend investing can mean a couple things. It could include investing for yield or dividend growth. Investing for yield is simply basing purchase decisions on the dividend yield of the stock. The higher the percentage yield, the better. The Dogs of the Dow strategy comes to mind for this one. In my opinion, basing investment decisions on yield alone is a dangerous game. More times than not, an abnormally high yield simply means an unsustainable dividend. When the dividend payouts become too much for the company to carry, dividends are typically cut dragging the stock price with it.

Investing for dividend growth is making purchase decisions based on the history of growing dividend payments over the years.  Although the initial purchase yield may be lower, it’s a great strategy for buy and hold investors as it gives raises to loyal shareholders over time.  Buying and holding dividend growth stocks is more in alignment with my beliefs and is one of the key components in my dividend investing strategy.

Having explained the two strategies, I use a combination of the two when making purchase decisions.  I narrow down the list of strong dividend companies based on a history of dividend growth, but only make my purchase when that particular stock reaches a yield threshold.

How do I determine the yield threshold?  By going back through the history of dividend payments and figuring out the average yield over the years.  Once that is determined, I usually pick a yield that is above average which then can be converted into a target stock price.  From there, I can watch the market (or use alerts) to indicate that it’s time to pick up a new position.

The Process of Finding Dividend Stocks to Buy

1. Pick your stocks. Find strong dividend stocks with a history of increasing their dividends over the long term.  A great place to start is the dividend achievers list.
2. Calculate the average yield. Do your research and figure out the average stock yield over the past 5 or more years.  One tool for this is Yahoo Finance historic prices tool.  You can select “dividends only” which will list dividend distributions over the past several years (depending on the stock).  Another way, which may be easier, is to use BigCharts.com and select “Lower Indicator” to be “Yield”.  It will graphically show you what the yield has been in recent history.
3. Pick your buy point. Select the yield at which you would be comfortable purchasing and convert that into a stock price.  For example, if Royal Bank’s average yield over the past several years has been around 3.5%, I may pick a buy point of 5% yield.  The current dividend is around $2/share which would equate to a target buy price of $40 ($2/0.05).
4. Use stock alerts. As we are all busy people, it’s a challenging task to keep your eye on the market which is why I use stock alerts.  There are various ways you can do this such as MSN money alerts, an Excel spreadsheet (with stock addin), or even a Google Spreadsheets (built in stock price functionality).  MSN Alerts are prehaps the most convenient if you are a MSN messenger user.  The spreadsheet option can provide more details, but requires that you check the spreadsheet periodically for buy signals which may or may not be convenient.

Although not overly detailed, that’s a fairly comprehensive overview on my dividend picking process.  For those of you who are fairly new to the blog, here my most recent dividend portfolio update.

I know there are a good few hardcore dividend investors reading this, do you have anything to add?

In a future post, I will put more details into how I use spreadsheets for stock alerts.

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