The volatility in equity markets may have subsided for the moment and I won’t make the mistake of calling a bottom, but as bad as this decline turned out to be (to date) developing and implementing a plan has paid off impressively.
Staying fully invested is difficult and you have to look no further than the last year to put any investment approach, strategy and philosophy to the ultimate test. With so many investors losing significant percentages of their portfolios taking stock in exposure to systemic risk and individual risk tolerance has taken a new and important precedent.
Since September the composition of my portfolios (DivG & RSP) hasn’t changed dramatically and turnover has been kept to a surprising minimum. I’ve been very active in the number of transactions I’ve initiated but the majority of those activities have either been continued purchases of existing positions or selling small components of a specific holding in order to rebalance a weighting within the portfolio.
Buying in the midst of absolute fear and despair was actually quite easy after studying the last decline in 2000-2002 with avid interest and I admit there were times where I expected a worse decline than we got.
During the darkest days of this market I swallowed hard, stuck to my plan and walked into the middle of some really bad declines to snap up shares of companies I wanted to own over the long-term. I didn’t always get the best price, but I still bought shares at prices I felt significantly misrepresented the true valuation of the company. Adding to the lack of emotion was my commitment to not chase stocks and allow them to come to me. The majority of my trades were done while I was working, sleeping or enjoying free time away from the office. I determined the prices I wanted to pay for specific stocks, entered limit orders for up to 10-15 days at a time and walked away. Some days I missed by pennies and other days the stock price fell completely through my LO to close dollars until my purchase price.
The tactic paid off regardless and my emotional interest in the market was minimal. I didn’t obsess about my portfolios, I didn’t check them constantly to see how much I was down because in reality I knew it was bad. When I did take the time to look I knew the numbers I saw and were purchasing shares at were simply the present value of stocks that I believed would be worth significantly more in the future. The constant commentary on the market, picking a bottom and the gloomy forecasts didn’t deter me. Regardless of where the markets have come since or could go tomorrow I know I made key critical choices in how I disciplined my purchasing and targeted high quality companies.
Here is what I did:
I concentrated on investing fundamentals and stuck to the 10 simple strategies of my short-term plan that I published in the fall of 2008. By concentrating on only the stocks I wanted to own over the long-term I focused on doing what I do best; picking solid companies with Enduring Value at very attractive valuations and yields.
When cash was tight for purchases and valuations were compelling I used leverage conservatively due to an advantageous interest rate from my bank on an investment line of credit (LOC).
I increased my savings by working extra hours and reducing my short-term costs where available. Extra savings were directed to my equity portfolios in the form of cash for purchases of stocks or to pay of some of the leverage I was using.
When using leverage and picking stocks at such depressed levels I focused on sustainable dividends and only experienced dividend cuts to Husky Energy (HSE) and Russel Metals (RUS). Those two dividend cuts represented only 3.6% of the 55 total dividend paying common equities in my main portfolios and zero cuts to my positions in any fixed income alternatives. Putting that percentage into perspective is more impressive when I count the number of companies that have cut their dividends in the past 24 months.
Always being focused on risk and discipline I learnt quickly that diversification matters among asset classes, countries and sectors with each helping to buffer the losses of some against the strength of many. In hindsight I paid a large premium for some stocks in 2007 and 2008 versus their current prices, but still wouldn’t change my approach of investing over time in companies I own.
The most amazing statistic of what I’ve accomplished over the past eight months is the 36% increase of tax-efficient income in my DivG portfolio by adding 20% more capital to my portfolio. As yields rose when valuations plummeted I was able to add to positions that pay out a higher percentage of income than my previous purchases. This additional income will be used in the future for buying more shares of companies I own and accelerating the annual income I receive in this portfolio is a great short-term strategy for when markets behave irrationally.