Some Guiding Principals

Risk Management

I am writing this post to establish some guidelines and frameworks that will be foundational to this service.

The first principle that applies to all investing is that we must manage risks. Without this, nothing else much matters. Every large loss starts with a small loss. Never allow a small loss to become a large loss.

I will explain along the way how I view and manage risks, but just understand that the concept of risk management is part of my DNA and thus of this service.

A 20% loss requires a 25% gain to recover. A 50% loss requires a 100% gain to recover. And let's not forget the time spent wasted getting back to "start" even if you do.

The mathematical laws of compound interest only work if losses are kept small.

Nuff said.

The Importance of Market Direction

This goes hand in hand with risk management. Studies have attributed as much as 70% of the movement of stocks to the general direction of the market.

As a general rule, we should attempt to maximize our gain during rising stock market trends and protect our capital during market declines.

Protect and grow.

Rinse and repeat.

I will share how I do this as we go along, but I will mention that market internals, i.e., what is happening beneath price, is where I focus.

The Importance of Sector Rotation

If the direction of the general market is important, it's quite possible that the direction of a sector is even more important.

A rising tide tends to lift all boats. During economic cycles and themes, we often see the majority of stocks within a given sector or industry moving in the same direction.

I will never forget when I first saw the following graphic showing the performance of perfect sector timing vs. perfect market timing.

Now, we are never going to achieve perfect market timing or perfect sector timing but you get the point. The importance of being in a strong sector cannot be overstated.  Ideally, we want to buy stocks in strong sectors and avoid stocks in weak sectors.

I'll show you how.

Quantamental  

I do not believe that neither fundamental, quantitative, or technical analysis exists alone. I like to blend these approaches.

The Dividend Growth Portfolio begins with a quantitative, multi-factor screen and ranking system. From that, we will use a systematic process to discover and allocate to select names.  

The Importance of Dividends

Dividends are important for a variety of reasons. First and foremost, they provide investors with a steady stream of income. This income can be used to supplement other sources of income or reinvested to further grow the portfolio. Additionally, dividends are a sign of financial stability and strength. Companies that pay dividends are typically profitable and have a long-term outlook.

The Percentage of Overall Return from Dividends

According to a study by Hartford Funds, dividends accounted for approximately 42% of the total return of the S&P 500 from 1930 to 2020. This means that almost half of the return from investing in the stock market has come from dividends. This highlights the importance of dividends for investors, and why they should be a consideration when building an investment portfolio.

The Challenge

At the end of the 1970s, before the greatest bull market of all time lifted off, the S&P 500 dividend yield peaked at 5.36%. Today, the yield is only 1.69%. I mention this because I think it is important to have a perspective on how current dividend yields compare to historical levels.

Historically, dividend yields have averaged between 3-5%. Only in recent years, post 2009 to current, have yields offered so little in comparison.  

The reason behind this has been the "easy money" policies of the central banks which sent interest rates to 0%. This drove down the equity risk premium and stock prices soared faster than dividend payouts increased.

But that era now seems to be over. Today, with inflation remaining persistent, central banks are tightening, the money supply is falling, and stock prices are under pressure.

The challenge for all investors will be learning to navigate when the tailwinds have become headwinds.

Conclusion

What you can expect is a no-BS approach built around a repeatable framework. While the future is unpredictable, we can use a predictable process to manage the future to maintain control and discipline.

Thanks for reading.

Tim