Learn YOUR Strengths/Weaknesses and Get Better Returns

If you’re a regular reader of the Income Surfer, you know that this site is all about balance. Balance in our personal lives by making sure to pursue our passions and spending time with loved ones. Balance in our financial lives by limiting our debt and resisting the urge to over consume. Today I want to extend that conversation to talk about balance in our passive cash flow. You can call it diversification if you want, but I prefer to think of it as balanced passive cash flow. My wife and I recently laid out a plan to generate cash flow from several different (and dissimilar) sources. We will have income from stocks, real estate, and bonds (even though we’re still young).

 

I am a value investor and feel almost gleeful when picking through the wreckage when an asset class collapses. My idea of a great investment is one that is both (currently) undervalued and pays me to wait for other investors to find the value I see. A great example of that, was my purchases of Coca-Cola (KO) and Johnson & Johnson (JNJ) during the financial crisis of 2008-2009. I invested heavily in those companies and have been handsomely rewarded. I anticipate holding those companies for years to come. A shorter term example is when I bought agricultural commodities (corn, wheat, etc) by way of an ETF last year, when a record crop had depressed their prices. I didn’t know exactly when the bottom would be, but my research (and gut) told me it was coming near. I broke up my desired investment into 4 parts and averaged in. Some investors may think I should have waited for the bottom and timed the trade perfectly. Believe me, if I could I would have. My crystal ball is broken however. I began to sell the ETF I was using when the Ukrainian conflict caused soft commodity prices to spike earlier this week. No matter what happens from here, it will have been a profitable trade.

Even more recently was my January 31st purchase of Unilever (UL) at $38.46. I outlined the reasons I bought Unilever in the linked Seeking Alpha ARTICLE. Again, I would have loved to be able to time my buying and selling perfectly….but I’m just not able to. Therefore, I broke up my investment into three parts. I conducted my fundamental analysis, confirmed the timing with technical analysis…..and bought. In this case the stock rallied before I could make my second and third investments, but I’ll get another chance eventually.

 

Many legendary investors speak to the importance of knowing ones strengths and weaknesses. Warren Buffett for instance rarely speaks without mentioning his circle of competence. Legendary investor Jim Rogers knows his trades are often ill timed, so he breaks up his investments and averages in…..like I described above. I also believe it is critically important that each investor knows their own strengths and weaknesses. Do you get caught up in manias and buy cult stocks? Do you panic and liquidate your investments when the broad market has a big sell off? Do you tend to trade too often, or too little? I suggest you look at yourself and recognize your strengths and weaknesses. Obviously, it is easier to make money if we stay close to our strengths and avoid our weaknesses.

 

Most investors, however, are not self aware of their strengths and weaknesses. If you need proof, just type the following question into a search engine like Google, “Why do retail investors get such poor returns?” You will be linked to study after study about how average investors receive below average returns and time the stock market horribly. Oh, and one more thing…..this isn’t Lake Wobegon…..most of us are average investors! The good news is that once you recognize this fact, you can take steps to dramatically improve your results. In the Art of War, Sun Tzu reminds us to know our enemy, and OURSELVES.

Surfer

I already told you of one technique I use to resist my weaknesses. Another, is that I have a tendency to over trade. Therefore, I often sell too early and leave a lot of money on the table. I believe it is preferable to sell too early than buy too high, but it is still a weakness. Therefore, when I find a stock investment which I believe will be a great long term investment, I will buy it through a DRIP (Dividend Reinvestment Plan). That way dividends are reinvested in the company at little or no cost to me, but it takes more than a mouse click to sell my investment. So you may be wondering, what if I don’t want to reinvest the dividends because the company’s prospects have changed. Well, I have a couple DRIP investments that are trading at prices I consider too high to reinvest. I called the plan administrator and asked to have the dividends deposited in my bank account (or sent to me by check). That way, I am less likely to sell the investment on a whim, but I can still reallocate the dividends to more appealing assets.

As I was saying earlier often times the best investments are both (currently) undervalued and paying me to wait for other investors to realize what I believe to be true. This is one reason why the core of my portfolio is invested in companies that are both growing and paying increasing dividends. Many of these companies have been paying (steadily increasing) dividends for 40 or 50 years. Think Coca-Cola, General Mills, Procter & Gamble, Johnson & Johnson, etc. You can literally buy the shares and just check in a couple times per year, while profiting from the company’s success. Does that sound too easy? Well, perhaps I’m overstating…..but not by much. Find great investments and let your money work for you. Obviously, if you pay too much for any company(even a great one) it won’t turn out to be a great investment……but that addresses valuation, which we’ll discuss in a future article.

Sign up for email notification by filling out the form on the right side of this page, and you’ll see a list of the companies I’m looking at….with each monthly newsletter. In the coming weeks and months my partners and I will be releasing tools to help you find balance in your financial lives. Some upcoming projects include an ebook about my methodology for stock selection and several stock valuation tools I know you will enjoy.

 

What new income sources are you pursuing? What can you do to have more balance your life?

Have a great Thursday!

-Bryan

Disclosure: I own shares in all of the companies mentioned in this article. This article is for informational/motivational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional.

23 thoughts on “Learn YOUR Strengths/Weaknesses and Get Better Returns

  1. JC @ Passive-Income-Pursuit

    I also have a tendency to buy too early but I usually go in with the plan to make at least 2 purchases in case the price continues to decline. For example, with my position in PEP I first purchased in December knowing full well it wasn’t a great price but it was around fair value and I wanted to own a piece of their pie. Then when February rolled around I was able to make 2 more purchases each one about 5% below my average cost basis at the time. I sold way too early on my HAL shares, although since that’s my employer I don’t feel as bad, but I left $6-7k on the table. Oops.

    Becoming a better investor requires constant learning and reading. You can only get better through practice as well. In the short time that I’ve been an avid DIY investor I’ve learned so much and even though I don’t read as many books as I’d like to, between all the reading I do online I average something close to 2-3 books on investing per month. I don’t agree with all of it and it doesn’t all stick, but if seen enough times the points that I like will be instilled in my brain and become natural.

    Reply
    1. Income Surfer Post author

      I understand completely JC. I’m glad I’m not the only one that benefits from that technique. I agree on the constant reading too. For years now I have been a voracious reader. I particularly like books and articles that have an opinion different from my own. They help me question myself and my ideas. You’ve made great strides in the past few years JC. Those Seeking Alpha valuation articles you write are top notch
      -Bryan

      Reply
  2. Ryan @ Impersonal Finance

    My biggest weakness is my main fear of losing money, but I can overcome that by research, dollar cost averaging, and just listening to the masters like WB who literally just told average investors to select index funds. I do have a little money that I play around with, and my last buy was PG a few weeks ago. I’m long on them.

    Reply
    1. Income Surfer Post author

      Hi Ryan. It is said knowledge is power. I would also say an inquisitive nature helps. Index funds are a great option, either for the core of a portfolio or especially for new investors. Sorry you didn’t get another snow day today. Thank you for taking the time to read and comment.
      -Bryan

      Reply
  3. No Nonsense Landlord

    I buy a lot of IVW. Buy every month, at market price, and it will average out. I bet the market last year in my 401K, mostly by not trading.

    Most (85%) or professional fund managers cannot beat the market, so I do not attempt it anymore.

    Reply
    1. Income Surfer Post author

      Interesting Landlord. I was really surprised at the mix of holdings in that ETF. Be careful you don’t get burned when those high growth names reverse direction. At least they have JNJ, Microsoft, KO, etc in the top holdings also. Best of luck and thank you for taking the time to comment

      Reply
  4. Mrs. PoP

    We have rental income, but our stock investments are fairly boring. Buy more ETFs whenever we have extra cash flow.

    On a side note, it’s great to see another Floridian hanging around the PF blogosphere!

    Reply
    1. Income Surfer Post author

      Thanks for dropping by Mrs. PoP. I’ve always liked the name of your site. I also have to say, it’s really nice to see a site that lacks the extremes. I’m obviously more of a “balance” guy. There’s nothing wrong with having a core portfolio of broad ETFs. I’ll have to send you an email so we can swap locations. Who knows, we could be neighbors.

      Reply
  5. Kay

    I also have a strategy of averaging in. I’m working on building my own dividend stock portfolio and my focus is to buy and hold. I very rarely sell anything. I would like to add a rental property at some point, maybe several years down the road. I’ve also started with P2P lending as another form of income stream.

    Reply
    1. Income Surfer Post author

      Welcome Kay. Thank you for taking the time to read and comment. I enjoy your site and love the analogy. That’s great! Multiple incomes streams are the only way to go. In the P2P space, you may want to check out Adam at http://www.writeyourownreality.com. He’s the most up to date guy I know and an excellent resource. I hope you have a great weekend!

      Reply
  6. Dividenden-Sammler

    Three years ago I was a daytrader!
    I have worked in my normal Job from 8 to 5 and than daytrading from 6 to 10.
    That was very, very hard!

    After three years, I have noticed that it is not worth.
    Less friends, less time – and not much more money!

    Now I only invest in dividend-share, the same like you mentioned here in the article!
    I’m lacking some companies, such as KO, UL, JNJ and so on.

    But now I´m on the right way!

    Best regards
    D-S

    Reply
    1. Income Surfer Post author

      Day Trading is tough D-S. I know I couldn’t do it. That schedule sounds exhausting. It sounds like you found a more practical method. I feel like a jerk because I can’t read German on your blog. Forgive me, but I really appreciate you reading and commenting here. Have a great weekend
      -Bryan

      Reply
      1. Dividenden-Sammler

        Bryan,

        at the top of my blog, right side, you have a button for the translation to english :-)
        The button was until yesterday at the end of the blog, therefore you may not have seen him.

        Now the button is on the right side at the top.
        Press on the flag and read in your language… ;-)

        Best regards
        D-S

        Reply
  7. Mel @ brokeGIRLrich

    I’ve never actually heard of averaging in. That actually sounds really helpful and smart, since timing the market is not something I would ever feel comfortable doing. I’ve been starting to work towards diversification. Some time ago I read Multiple Stream of Income and found that while the idea of buying real estate is still a little daunting to me, I can at least start by buying some stocks. So I’ve been working toward that initially.

    Reply
    1. Income Surfer Post author

      Hi Mel. Thank you for taking the time to read and comment. Averaging into investments has helped me a lot in the past. If you are just starting out, you may want to consider a broad index ETF, and buy a small amount every month. Additionally, if you want to get some exposure to real estate…..along with some healthy payouts……you may want to consider a REIT or REIT Index. Send me an email if you would like to discuss this further. I’m always happy to help
      -Bryan

      Reply
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