Psychology and the Stock Market (1977) by David N. Dreman
Even though it was published over 35 years ago, this book provides a good overview of the role that psychology plays in the stock market. Part I addresses the poor performance of professional investors and the rise and fall of technical analysis. Part II takes a look at various bubbles and manias that have occurred throughout stock market history, showing that they tend to have common characteristics. Part III delves into the psychology behind the poor performance and bubbles by discussing the follies of groupthink, which is the lack of independent critical thinking among many investors that leads to herd-like behaviors such as panic selling. I appreciated how the author drew upon a great deal of social psychology research to support his groupthink idea. Part IV deals with the efficient market hypothesis (EMH) and the question of whether an investor can beat the market. It provides one of the most compelling counterarguments to EMH that I have ever read, highlighting psychological evidence that destroys EMH assumptions about investors being completely rational, informed, and unbiased in their decision-making. Believers in EMH should find themselves questioning their beliefs after reading this book.
Note: I read this book in November 2012.
Sunday, February 3, 2013
Saturday, February 2, 2013
Monthly Review: January 2013
We are now in 2013, which marks the start of my second full year of dividend growth investing and the second year for this blog. As discussed in a recent post, the only change with regard to my investing is that I started a Roth IRA, which will be a smaller, tax-efficient extension of my current dividend growth machine. The only change with regard to the blog is that the tables on my Portfolio, Dividends, and Savings pages have been changed to Google Docs spreadsheets, which will make them a bit easier to read and update. Aside from that, it will be business as usual for the next few months.
Here is a review of what happened in January:
Dividends: I received a total of $80.54 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for two stocks (click on each stock to see my post about the increase): Thus far this year, there have been dividend increases for 8 of the 27 dividend growth stocks in my portfolio. Some of the increases were announced in late 2012 but did not take effect until 2013.
Savings: This month I saved $1,228 (42.2%) of my net job income. My savings were decreased by higher discretionary spending (I bought some clothes and a new blender) and the payment of annual membership dues for professional societies associated with my work. In addition, my net job income was slightly lower due to higher payroll taxes.
Transactions: I sold one stock and bought two stocks during the month (click on each transaction to see my post about it):
Portfolio: My portfolio currently consists of 27 stocks and has a market value of $71,148.69 (including cash), which is a 9.2% increase over last month's value. It was my best month ever for capital gains, which represented 73.7% of the increase. The remaining portion came predominantly from new capital.
Seeking Alpha: After not writing anything for a while, I finally published a new article on the investing website Seeking Alpha: As the title suggests, the article is a review of my investing performance last year. I was pleasantly surprised by the popularity of the article, which received over 16,000 page views. For comparison, my previous two articles each had around 4,000 page views. I ended up earning $176.25 from page views in January, which will be paid later as part of my Q1 2013 total. This month I also received my Q4 2012 payment of $107.21.
Looking Ahead: February will be a better month for dividends, with a substantial year-over-year increase. I am expecting dividend increases to be announced by GPC, KO, and NVS. The Board of Directors for NVS has already proposed a dividend increase, but it has to be approved by shareholders at the AGM on February 22. My savings rate should improve in February due to lower expenses than in January. As discussed in the post about my Roth IRA, my next few purchases will be in that account. I have already funded it with $5,000, but I do not plan to invest all the money at once. I will likely continue making one purchase each month (aside from any purchases made to offset sales, as was the case in January). Also, my February and March savings will go toward replacing some money I borrowed from my cash reserve to make the maximum contribution to my Roth IRA for 2012. Thus, my investing will proceed as usual, provided I can find some attractively valued stocks in the current market environment. In particular, I will be looking for stocks with yields above 3% that I can purchase for my Roth IRA.
Here is a review of what happened in January:
Dividends: I received a total of $80.54 in dividends from the following stocks:
- CNI: $6.39
- GPC: $24.75
- PM: $42.50
- UNP: $6.90
Dividend Increases: I was pleased to see dividend increases announced for two stocks (click on each stock to see my post about the increase): Thus far this year, there have been dividend increases for 8 of the 27 dividend growth stocks in my portfolio. Some of the increases were announced in late 2012 but did not take effect until 2013.
Savings: This month I saved $1,228 (42.2%) of my net job income. My savings were decreased by higher discretionary spending (I bought some clothes and a new blender) and the payment of annual membership dues for professional societies associated with my work. In addition, my net job income was slightly lower due to higher payroll taxes.
Transactions: I sold one stock and bought two stocks during the month (click on each transaction to see my post about it):
- 60 shares of ADM (sale)
- 55 shares of MSFT (purchase)
- 10 shares of VFC (purchase)
Portfolio: My portfolio currently consists of 27 stocks and has a market value of $71,148.69 (including cash), which is a 9.2% increase over last month's value. It was my best month ever for capital gains, which represented 73.7% of the increase. The remaining portion came predominantly from new capital.
Seeking Alpha: After not writing anything for a while, I finally published a new article on the investing website Seeking Alpha: As the title suggests, the article is a review of my investing performance last year. I was pleasantly surprised by the popularity of the article, which received over 16,000 page views. For comparison, my previous two articles each had around 4,000 page views. I ended up earning $176.25 from page views in January, which will be paid later as part of my Q1 2013 total. This month I also received my Q4 2012 payment of $107.21.
Looking Ahead: February will be a better month for dividends, with a substantial year-over-year increase. I am expecting dividend increases to be announced by GPC, KO, and NVS. The Board of Directors for NVS has already proposed a dividend increase, but it has to be approved by shareholders at the AGM on February 22. My savings rate should improve in February due to lower expenses than in January. As discussed in the post about my Roth IRA, my next few purchases will be in that account. I have already funded it with $5,000, but I do not plan to invest all the money at once. I will likely continue making one purchase each month (aside from any purchases made to offset sales, as was the case in January). Also, my February and March savings will go toward replacing some money I borrowed from my cash reserve to make the maximum contribution to my Roth IRA for 2012. Thus, my investing will proceed as usual, provided I can find some attractively valued stocks in the current market environment. In particular, I will be looking for stocks with yields above 3% that I can purchase for my Roth IRA.
Friday, February 1, 2013
Roth IRA
This week I started a Roth IRA as a supplement to the taxable account in which I currently hold all my stocks. For readers who don't know, a Roth IRA is a retirement account in which contributions are made with after-tax money (currently up to $5,500 per year), all dividends and capital gains within the account are tax free, and withdrawals are tax free (after age 59 and a half). The tax-free status of the Roth IRA is its main advantage over a taxable account, where dividends and capital gains are currently subject to a 15% tax rate. In a Seeking Alpha article that explored different factors that affect the long-term compounding of dividend income, I showed that dividend growth is slowed by taxes, so it is beneficial to hold stocks in tax-advantaged accounts.
I had been thinking about starting a Roth IRA for a while, but I held off because of uncertainty about my future employment -- there was a nontrivial possibility that I would be either unemployed later this year or working in a different country. Fortunately, that uncertainty disappeared a few weeks ago when I managed to get a new job (starting in the summer), as discussed in a recent post. With greater clarity about my employment and income, I decided it was time for the Roth IRA.
My plan is to fully fund my Roth IRA each year and use the money to buy dividend growth stocks, making the account a tax-advantaged extension of my current portfolio. The only difference between investment decisions for my Roth IRA and taxable accounts will be with respect to dividend yield. I currently require a 2% minimum yield for stocks in my taxable account, whereas I will require a 3% minimum yield in my Roth IRA. The rationale is to keep higher-yielding stocks in the latter account to take greater advantage of its tax benefits.
I have already made a contribution to my Roth IRA, putting in the full $5,000 allowed for 2012 (which can be done prior to April 15). It was easiest to do it in one shot, but that meant supplementing my January savings with about $3,000 from my emergency cash reserve. I will replace that money with my February and March savings. Later this year I will contribute the $5,500 allowed for 2013.
Once I start my new job I plan to rollover the two retirement plans I have with my current employer into my Roth IRA. The first is a 403(b) with TIAA-CREF that has about $14,000 and the second is a 401(k) with Vanguard that has about $6,000. These amounts solely reflect employer contributions over the past five years and the money is currently invested in target date funds. I will have to pay some taxes because the rollover money comes from pre-tax contributions; my calculations show that I will stay in my current marginal income tax bracket if I do it this year, whereas I would be in a higher tax bracket next year because of the higher salary at my new job. Even though the tax hit will hurt, it is a one-time expense that I will save for in advance. The upshot of the rollover is that it will add nearly $20,000 to my Roth IRA, which will allow me to buy a lot of dividend growth stocks. Thus, by the end of this year, I could potentially have around $30,000 in my Roth IRA ($5,000 from my 2012 contribution, $5,500 from my 2013 contribution, and about $20,000 from rollovers).
In case you are wondering, the taxable account with all my current dividend growth stocks will continue to grow over time. My next few purchases will be in my Roth IRA, but once my 2013 contribution is made and I have covered all my moving expenses during the summer, I will resume adding new capital to the taxable account from my monthly savings. Some readers may recall that last year I saved over $17,000 for investment. If I manage to maintain or increase that amount going forward, then I would be able to add over $10,000 to my taxable account each year, after my Roth IRA contribution. Given its higher starting balance and larger contributions, my taxable account will produce the majority of my dividend income over time.
The last point leads to an important question regarding investing and retirement: What if I want to retire early? If I retire before I'm 60, then I would only be able to withdraw direct contributions from my Roth IRA, which would entail selling some stocks. I would not be able to withdraw any earnings, such as dividends, without incurring penalties. This sounds like a disadvantage, but only if you ignore the fact that I will also have a much larger taxable account. If my taxable account produces enough dividend income to retire early, then I wouldn't need to worry about age restrictions on my Roth IRA. When I do turn 60 (actually, 59.5), I would gain access to a second, tax-free dividend income stream. Thus, I don't think having a Roth IRA will adversely affect me in the event of early retirement.
I will start reporting information about my Roth IRA on this blog once I make my first purchase. Given that it is separate from my taxable account, I will distinguish between them when reporting transactions, dividends, etc.
I had been thinking about starting a Roth IRA for a while, but I held off because of uncertainty about my future employment -- there was a nontrivial possibility that I would be either unemployed later this year or working in a different country. Fortunately, that uncertainty disappeared a few weeks ago when I managed to get a new job (starting in the summer), as discussed in a recent post. With greater clarity about my employment and income, I decided it was time for the Roth IRA.
My plan is to fully fund my Roth IRA each year and use the money to buy dividend growth stocks, making the account a tax-advantaged extension of my current portfolio. The only difference between investment decisions for my Roth IRA and taxable accounts will be with respect to dividend yield. I currently require a 2% minimum yield for stocks in my taxable account, whereas I will require a 3% minimum yield in my Roth IRA. The rationale is to keep higher-yielding stocks in the latter account to take greater advantage of its tax benefits.
I have already made a contribution to my Roth IRA, putting in the full $5,000 allowed for 2012 (which can be done prior to April 15). It was easiest to do it in one shot, but that meant supplementing my January savings with about $3,000 from my emergency cash reserve. I will replace that money with my February and March savings. Later this year I will contribute the $5,500 allowed for 2013.
Once I start my new job I plan to rollover the two retirement plans I have with my current employer into my Roth IRA. The first is a 403(b) with TIAA-CREF that has about $14,000 and the second is a 401(k) with Vanguard that has about $6,000. These amounts solely reflect employer contributions over the past five years and the money is currently invested in target date funds. I will have to pay some taxes because the rollover money comes from pre-tax contributions; my calculations show that I will stay in my current marginal income tax bracket if I do it this year, whereas I would be in a higher tax bracket next year because of the higher salary at my new job. Even though the tax hit will hurt, it is a one-time expense that I will save for in advance. The upshot of the rollover is that it will add nearly $20,000 to my Roth IRA, which will allow me to buy a lot of dividend growth stocks. Thus, by the end of this year, I could potentially have around $30,000 in my Roth IRA ($5,000 from my 2012 contribution, $5,500 from my 2013 contribution, and about $20,000 from rollovers).
In case you are wondering, the taxable account with all my current dividend growth stocks will continue to grow over time. My next few purchases will be in my Roth IRA, but once my 2013 contribution is made and I have covered all my moving expenses during the summer, I will resume adding new capital to the taxable account from my monthly savings. Some readers may recall that last year I saved over $17,000 for investment. If I manage to maintain or increase that amount going forward, then I would be able to add over $10,000 to my taxable account each year, after my Roth IRA contribution. Given its higher starting balance and larger contributions, my taxable account will produce the majority of my dividend income over time.
The last point leads to an important question regarding investing and retirement: What if I want to retire early? If I retire before I'm 60, then I would only be able to withdraw direct contributions from my Roth IRA, which would entail selling some stocks. I would not be able to withdraw any earnings, such as dividends, without incurring penalties. This sounds like a disadvantage, but only if you ignore the fact that I will also have a much larger taxable account. If my taxable account produces enough dividend income to retire early, then I wouldn't need to worry about age restrictions on my Roth IRA. When I do turn 60 (actually, 59.5), I would gain access to a second, tax-free dividend income stream. Thus, I don't think having a Roth IRA will adversely affect me in the event of early retirement.
I will start reporting information about my Roth IRA on this blog once I make my first purchase. Given that it is separate from my taxable account, I will distinguish between them when reporting transactions, dividends, etc.
Thursday, January 24, 2013
Stock Bought: VFC
Today I bought shares of VF Corporation (VFC), the world's largest apparel manufacturer. The company has a diverse portfolio of branded lifestyle apparel that includes well-known names such as The North Face, Vans, Timberland, Jansport, and Wrangler. A series of successful acquisitions (the most recent being Timberland in 2011) and expansion into international markets have driven growth over the past several years.
VF Corporation has had good operating results, with 5-year growth rates of 8.8% for revenue and 11.1% for earnings. The company has stable margins, good free cash flow, and a return on equity above 20%. Its financial position is satisfactory, with debt/capitalization of 22%, debt/equity of 52%, 14x interest coverage, and a current ratio of 1.6. Value Line gives it a safety rating of 2 and a financial strength rating of A. S&P gives it quality and credit ratings of A and A-, respectively.
The company is a Dividend Champion, having increased its dividend for 40 consecutive years. Its 10-year dividend growth rate is 12.1% and the most recent increase was 20.8%, announced in October 2012. The EPS payout ratio is 39% and the FCF payout ratio is 33%.
I consider VFC to be attractively valued at the current price. It has a P/E of 16.0 (its 5-year historic average is 15.4), P/S of 1.5, and PEG of 1.5. Using a Dividend Discount Model with a dividend growth rate of 8.5% and a discount rate of 10.9% (which equals the current yield plus the dividend growth rate), I calculate a fair value of $157.33. Morningstar gives a fair value of $169.00 and a 4-star rating, whereas S&P gives a fair value of $159.90 and a 4-star rating. The average of those three estimates is a fair value of $162.08, which implies an 11% margin of safety at the current price. Dividend Growth Investor considers the stock to be "attractively valued" in a recent article; F.A.S.T. Graphs shows the stock being "in value" in a recent analysis; and Chuck Carnevale includes VFC on his current list of "attractively valued blue-chip Dividend Champions." Thus, depending on how valuation is assessed, the stock is either fairly valued or slightly undervalued. The stock is also trading 15% off its 52-week high and today it dropped over 3% (for no apparent reason) to a 6-month low that triggered my limit order.
I bought 10 shares of VFC at the price of $144.30 per share, giving me a 2.40% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $8.70, which will add a total of $34.80 to my annual dividend income. My 12-month forward dividend total increases to $2,138.
VFC is the 27th stock in my portfolio and provides some nice diversification in the consumer discretionary sector. Even though I am cautious when it comes to companies in the apparel industry, given that fashions can quickly go out of style, I think VFC has staying power with its diversified collection of brands. I see anecdotal evidence of this at the university where I work, with many students wearing The North Face coats and Jansport backpacks. Personally, I wear Wrangler jeans, which are very comfortable. (Now I have an incentive to go out and buy another pair!)
I lack sufficient cash to make any other purchases this month, which is just as well because I do not see many good buying opportunities. Earnings season has yet to bring much in the way of price dips for the stocks on my watch list. If VFC continues to decline, then I would consider increasing my position.
VF Corporation has had good operating results, with 5-year growth rates of 8.8% for revenue and 11.1% for earnings. The company has stable margins, good free cash flow, and a return on equity above 20%. Its financial position is satisfactory, with debt/capitalization of 22%, debt/equity of 52%, 14x interest coverage, and a current ratio of 1.6. Value Line gives it a safety rating of 2 and a financial strength rating of A. S&P gives it quality and credit ratings of A and A-, respectively.
The company is a Dividend Champion, having increased its dividend for 40 consecutive years. Its 10-year dividend growth rate is 12.1% and the most recent increase was 20.8%, announced in October 2012. The EPS payout ratio is 39% and the FCF payout ratio is 33%.
I consider VFC to be attractively valued at the current price. It has a P/E of 16.0 (its 5-year historic average is 15.4), P/S of 1.5, and PEG of 1.5. Using a Dividend Discount Model with a dividend growth rate of 8.5% and a discount rate of 10.9% (which equals the current yield plus the dividend growth rate), I calculate a fair value of $157.33. Morningstar gives a fair value of $169.00 and a 4-star rating, whereas S&P gives a fair value of $159.90 and a 4-star rating. The average of those three estimates is a fair value of $162.08, which implies an 11% margin of safety at the current price. Dividend Growth Investor considers the stock to be "attractively valued" in a recent article; F.A.S.T. Graphs shows the stock being "in value" in a recent analysis; and Chuck Carnevale includes VFC on his current list of "attractively valued blue-chip Dividend Champions." Thus, depending on how valuation is assessed, the stock is either fairly valued or slightly undervalued. The stock is also trading 15% off its 52-week high and today it dropped over 3% (for no apparent reason) to a 6-month low that triggered my limit order.
I bought 10 shares of VFC at the price of $144.30 per share, giving me a 2.40% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $8.70, which will add a total of $34.80 to my annual dividend income. My 12-month forward dividend total increases to $2,138.
VFC is the 27th stock in my portfolio and provides some nice diversification in the consumer discretionary sector. Even though I am cautious when it comes to companies in the apparel industry, given that fashions can quickly go out of style, I think VFC has staying power with its diversified collection of brands. I see anecdotal evidence of this at the university where I work, with many students wearing The North Face coats and Jansport backpacks. Personally, I wear Wrangler jeans, which are very comfortable. (Now I have an incentive to go out and buy another pair!)
I lack sufficient cash to make any other purchases this month, which is just as well because I do not see many good buying opportunities. Earnings season has yet to bring much in the way of price dips for the stocks on my watch list. If VFC continues to decline, then I would consider increasing my position.
Tuesday, January 22, 2013
Dividend Increase: CNI
Canadian National Railway (CNI) is increasing its quarterly dividend by 14.7%, from C$0.375 to C$0.43 per share, putting the company on track for its 17th consecutive year of dividend growth (press release). Given that I own 20 shares of CNI, my quarterly dividend increases from $7.50 to $8.60 (before 15% foreign tax withholding), which will add an extra $4.40 to my annual dividend income. This dividend increase also boosts my yield on cost to 2.28%. Thus far this year, there have been dividend increases for 8 of the 26 dividend growth stocks in my portfolio.
Thursday, January 17, 2013
Milestone: Portfolio Value Reaches $70,000
Today my portfolio's value reached $70,000 for the very first time, closing at $70,128.67, thanks to a strong performance from my stocks to start the year. This milestone comes just four months after reaching $60,000 last September. As I have mentioned elsewhere, my secondary investing goal is to achieve a satisfactory total return on my investments, and a steadily increasing portfolio value is an indication of progress toward that goal.
The next milestone is $80,000, which I might be able to reach later this year.
The next milestone is $80,000, which I might be able to reach later this year.
Wednesday, January 16, 2013
Dividend Increase: KMI
Kinder Morgan, Inc. (KMI) is increasing its quarterly dividend by 2.8%, from $0.36 to $0.37 per share (press release). Its dividend has been increased in each of the past five quarters, which is fantastic. Given that I own 40 shares of KMI, my quarterly dividend increases from $14.40 to $14.80, which will add an extra $1.60 to my annual dividend income. This dividend increase also boosts my yield on cost to 4.23%.
Thus far this year, there have been dividend increases for 7 of the 26 dividend growth stocks in my portfolio. Six of the increases were announced in late 2012 but take effect in 2013. In addition, I gave ABBV and ABT credit for increases because their combined dividends are higher than the pre-split dividend.
Thus far this year, there have been dividend increases for 7 of the 26 dividend growth stocks in my portfolio. Six of the increases were announced in late 2012 but take effect in 2013. In addition, I gave ABBV and ABT credit for increases because their combined dividends are higher than the pre-split dividend.
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