Thursday, June 02, 2005
People argue with us all the time about relying on dividends. Once while I was discussing our investment strategy with the CEO of an insurance company, the guy just got up and left. On his way out, he said he was not interested in an investment style that was so conservative. He said he wanted to make the highest rate of return he could, and he believed our approach aimed way too low. I asked him what his target rate of return was, and he said, "As much as I can get." I told him in my years of following the dividend approach, I had always been surprised that it had consistently made more than I thought it would. I suggested he may want to hear me out, perhaps because these surprisingly good results could measure up to his "All I can get" goal. But his mind was made up and I found my own way to the door. There is a new name on the door of the building the insurance firm was in. I don't know what happened to the company or the man, but I do know that he was trying to emulate the success of Conseco, which at that time was a hot shot Indianapolis-based insurance firm. That turned out to be a disastrous strategy. Conseco's hot streak went cold when it was forced into bankruptcy in the 1990s as a result of a string of "as much as I can get" investments that appeared to vaporize as fast as they were made. One horn of the beast we must ride is greed, the other horn is fear. Unless you know what you are doing, you will find yourself making investment decisions out of one horn or the other, and not out of the area between the two horns. Valuations matter and if you don't know how to value an investment, by default, you will find yourself thinking out of your emotions. Greed and fear are terrible partners in any investment. They will never give you peace, and in your saner moments, you will realize that you must have been out of your mind to have invested in this tech stock or that real estate venture--and of course you were. Your adversary is not the investment beast you attempt to ride. Your primary adversary is you: Your emotions, your politics, your understanding of the nature of the beast. The sum total of everything you are and are not will be laid bare in the investment arena. And, in the end, you will reap what you sow. The dividend approach is a very narrow path that you may follow. It is a place where you can sow reason and reap what is reasonable. It is a sane place, where horns must be checked at the door. It is a place where you mostly wait, not a boring wait but a hopeful and exciting wait like an expectant father.