Illogical Investing Thoughts You Hold

[TripleB]

I hold a few illogical investing thoughts. I am self-aware and understand they are illogical. I'll share a few:

I am comforted by having a small VP set up that has REITs and Utility stocks in it, mostly index ETFs but a few individuals of both. I like that they spit off nearly 5% of dividends back into my PP's cash fund (that gets re-allocated into the PP). I understand I could accomplish the same "thing" by investing the VP into anything, and then selling 5% of the VP and putting that 5% into the PP every year. Total return matters, not dividends.

There's just something comforting about seeing my PP grow slightly larger due to the additional "income stream" that I've set up in my REIT/Utility VP. It's a fallacy because if I wanted to, I could invest that VP money into low-dividend paying growth stock index funds and have it set to automatically sell 5% of shares each year, and automatically direct those sales into my PP cash account.

However, since nearly all my money is in tax-sheltered accounts, I don't have the tax-drag that dividend stocks cause, so there's no "harm" in me using my strategy, other than obviously being concentrated in real estate and utilities sectors for that slice of my VP.

I believe the root cause of this illogical thinking is hearing the "Rich Dad, Poor Dad" mindset that has been spread for the last decade, where "multiple income streams" are one key to success. Having dividend stocks essentially creates an additional phantom "income stream" when in reality it would be the same as investing fully in the PP and just selling off 5% of the PP and pretending that's an "income stream."

I get a nice surprising feeling when I log into my accounts and see my cash account has an extra $500 in it that I'm not expecting, and realize it came from my REIT/Utility VP -- a feeling that could also be attained with auto-redemption of a % basis set up.

It's important that we:

a) recognize our illogical beliefs
b) identify their root causes
c) reduce the cost of following these beliefs or eliminating them entirely

What illogical beliefs do you hold about investing?

[Gosso]

I used to think Eric Sprott, Marc Faber, and Jim Rogers were gods and could do no wrong.  I'm glad I grew out of that phase, but I still hold a little Sprott Junior Gold Mining Fund in the VP, just in case they turn out to be right and silver reaches $2000.

Regarding dividend stocks, I also went through a phase where I thought these were money printing machines.  But then I realized that the only thing different between a dividend stock and a growth stock was that it takes a portion of its profits and sends it to their shareholders.  So instead of using that money to reinvest at a higher rate of return (hopefully) they are giving their shareholders that money and therefore decreasing their stock-price by a corresponding amount.  So really what you want is a company that has a healthy profit regardless of what their dividend is.  It seems really silly how crazy people get about their dividends and completely ignore if their company is actually healthy and producing a nice profit.

Having said that, there are many good companies that pay a nice dividend, and if you prefer the simplicity of receiving dividends over selling a few shares then I'd say go for it.  But don't buy a company simply because it has a nice dividend, look at where that dividend is coming from and if that company has a healthy outlook.

[stone]

I'm not sure that dividend stocks are not actually a "logical" choice for a buy and hold investor. Reinvestment of company profits into expansion may make sense IF a company has potential to scale up in a way that is just as profitable as it is the size it is now. That is not the normal case. The normal case is inept aquisitions, paying too much for other companies that they then screw up. Or paying off what would have been dividends as management share options and/or as share buybacks that only create transient volatility rather than any sustained increase in value.
I'm not saying non-dividend stocks can't be good things to hold if you play them right. I'm just saying that playing them right perhaps requires a lot more cunning than with dividend stocks. Those few shareholders who do have that cunning get all of the rewards whilst with a dividend stock everyone, however devoid of cunning they may be, gets a cut.

[Gosso]

I'm not sure that dividend stocks are not actually a "logical" choice for a buy and hold investor. Reinvestment of company profits into expansion may make sense IF a company has potential to scale up in a way that is just as profitable as it is the size it is now. That is not the normal case. The normal case is inept aquisitions, paying too much for other companies that they then screw up. Or paying off what would have been dividends as management share options and/or as share buybacks that only create transient volatility rather than any sustained increase in value.
I'm not saying non-dividend stocks can't be good things to hold if you play them right. I'm just saying that playing them right perhaps requires a lot more cunning than with dividend stocks. Those few shareholders who do have that cunning get all of the rewards whilst with a dividend stock everyone, however devoid of cunning they may be, gets a cut.

I see your point.  Dividend companies are normally boring and simply produce a decent profit year-in and year-out, and this is great for buy-and-hold.  But I was thinking more along the lines of smaller companies -- I used to watch the financial porn channel (BNN in Canada) and was always amused when they would talk about these junior natural gas producers that had dividends of 10%.  People seemed so blinded by that juicy 10% that they failed to see that the company was drowning in debt, or was unlikely to survive.  It seems the companies like this are playing a game where they pump up their dividends as much as possible, get people to buy in, then try and sell to a bigger fish.

As for growth companies I suppose you hope they eventually turn into dividend payers.  At some point they cannot grow anymore and simply milk the market share that they have developed over the years.  Look at Apple, they are a growth company yet could quite easily turn into a dividend company.  For me it is all about the profits, both dividends and growth are sustained by the profits.

[TripleB]

To clarify:

The illogical thought I have has nothing to do with dividends being good or bad (I personally think they are bad). It has to do with the mental game of seeing an "income stream" that doesn't really exist, or could just as easily exist with automatic redemption set up from any non-dividend fund.

[Gosso]

Look at Apple, they are a growth company yet could quite easily turn into a dividend company.  For me it is all about the profits, both dividends and growth are sustained by the profits.

Called it!  http://www.bloomberg.com/news/2012-03-1 ... -cash.html

Apple Inc. (AAPL) plans to pay a dividend and buy back $10 billion of its stock, returning some of its $97.6 billion in cash and investments to shareholders as demand for iPhones and iPads boosts earnings.

Gosso 1 / Apple 0 

To clarify:

The illogical thought I have has nothing to do with dividends being good or bad (I personally think they are bad). It has to do with the mental game of seeing an "income stream" that doesn't really exist, or could just as easily exist with automatic redemption set up from any non-dividend fund.

I agree that dividends are an "illusionary" income stream that make people feel better about owning a stock.  That's why I like owning the overall market which contains both dividend/value and growth companies.  Although in Canada there is a tax break on dividend income, but you need to hold the stocks in a taxable account and have a low income.

[moda0306]

Gosso,

I generally agree with you, but some people look at this way:  Profits are just a function of the income statement, which can be cooked.  Cash leaving the bank account to pay dividends isn't as easy to fiddle around with.

[Gosso]

Gosso,

I generally agree with you, but some people look at this way:  Profits are just a function of the income statement, which can be cooked.  Cash leaving the bank account to pay dividends isn't as easy to fiddle around with.

But I thought all corporations were honest-hard-working-folk. 

Does a dividend prevent a company from cooking the books?  I don't know?  Personally I'm more worried about the huge chunk of money I just "gave" the company.  I expect that money to grow, it doesn't matter if it grows by stock appreciation or through dividend payments.  If they are paying a nice big fat juicy 5% dividend yet the value of stock has fallen 10%, then I have a paper lose of 5%.  Now if they didn't pay that dividend then the stock price would have only fallen 5% (in theory), and I'm at exactly the same spot.

Dividends are great for people who want their portfolio to throw off 3-4% a year and not have to worry about selling any stocks.  Beyond that I don't see the point.

[gonetowindsurf]

Ever since the new PERM etf came out - PP has not done so well - i know it will - but they say when an etf comes out that tries to catch a "fade" of investing - it marks a top for the fade. I know it is illogical to think this way with PP but it still creeps into my thoughts.

[blackomen]

Ever since the new PERM etf came out - PP has not done so well - i know it will - but they say when an etf comes out that tries to catch a "fade" of investing - it marks a top for the fade. I know it is illogical to think this way with PP but it still creeps into my thoughts.

I have yet to find any convincing evidence of that..  SPY came out in 1993 and see where it's gone..  same with GLD in 2004.  Maybe the short-term performance will take a hit.

[MediumTex]

Ever since the new PERM etf came out - PP has not done so well - i know it will - but they say when an etf comes out that tries to catch a "fade" of investing - it marks a top for the fade. I know it is illogical to think this way with PP but it still creeps into my thoughts.

I have yet to find any convincing evidence of that..  SPY came out in 1993 and see where it's gone..  same with GLD in 2004.  Maybe the short-term performance will take a hit.

The PP is up about 1% YTD.  That puts it on track for a 4% or so gain in 2012.  Given that the PP has had double digit returns in two of the last three years, I wouldn't be at all surprised to see a year with something in the mid-single digits. 

If you look at the PP's long term returns you tend to see this sort of thing (i.e., big years followed by years with smaller gains or even small losses).

[KevinW]

For a sense of scale, compare the size of each fund's assets under management (approx.):

PERM: $10 million
PRPFX: $17 billion
Vanguard Total Stock Market: $185 billion

If anyone is rocking the PP boat, it's PRPFX, certainly not PERM. And both are minor players, relatively speaking.

[Gosso]

How about the false belief that the PP is a magical portfolio that will simply increase by 0.03% every day (10%/365) -- I used to think this when first researching this portfolio.  It seems a lot of people think the PP has the stability of cash, yet gives you an annual return of 3-5% above inflation.  This would equate to a free lunch, which does not normally exist.  

But don't get me wrong, the PP is still the most stable portfolio around, but it is not cash stable.  It seems that if people were to accept that the PP can be a bit volatile over the short-term, then they might be more at ease with the strategy.  I track my monthly gain/loss and will occasionally see a change of +/-3% per month.  The beauty or magic of the PP is over the longer term (greater than six months, or sometimes longer), which gives enough time for the four components to right the ship.

Edit: typos

[Xan]

How about the false belief that the PP is a magical portfolio that will simply increase by 0.03% every day

I absolutely believe this, irrationally.  Actually I also believe it should go up by much more than that per day.  :-)

Fortunately I know that this belief is ridiculous, as you point out, so I don't (so far!) panic and hide everything under the mattress.

[Gosso]

How about the false belief that the PP is a magical portfolio that will simply increase by 0.03% every day

I absolutely believe this, irrationally.  Actually I also believe it should go up by much more than that per day.  :-)

Fortunately I know that this belief is ridiculous, as you point out, so I don't (so far!) panic and hide everything under the mattress.

Hi Xan, and welcome to the PP forum!

I'm not sure where this belief comes from, but it does seem common.  I suppose when talking about the 4x25 PP, it needs to made clear that the four components take time to balance each other out, and grow at the real rate of return of 3-5%.  These relationships do not always exist on a day-to-day or week-to-week basis, and may require a month or more to sort things out.  I think if people realize this, then they might sleep easier when the PP starts jumping around short term.

[Lone Wolf]

But don't get me wrong, the PP is still the most stable portfolio around, but it is not cash stable.

I'm not sure that even cash felt "cash stable" in the 1970s. 

[dualstow]

What illogical beliefs do you hold about investing?

I think I share yours, but frankly I don't want to take the red pill on this one. (Or is it the blue pill? I'm rusty on my 'Matrix' lore).
I never liked the term "multiple income streams", but there is something very satisfying about watching quarterly dividends come in. I get even more pleasure from watching them grow, from logging in and seeing that I have gotten a raise.

Like you, I realize that it might be smarter to just put more in the pp and let it do its thing. Most of my dividend payers are in my much larger taxable account, so unlike you I have the tax drag. (I do put as much as I can into deferred, and most of that goes into the long treasury portion of the pp).

Here's my rationalization: A good deal of my pp stock allocation is in small, volatile stocks (held in index funds). Therefore, my non-volatile dividend payers are a form of diversification, as are munis. As long as I put most of my new money into the pp and not the vp, I think this is ok. It could be worse: I could be putting money into slot machines or substance abuse. Dividend stocks are my vice.

[Gosso]

But don't get me wrong, the PP is still the most stable portfolio around, but it is not cash stable.

I'm not sure that even cash felt "cash stable" in the 1970s.   :)

You're right!  That is another illogical investment assumption I have.  Here's what the Canadian 3-month t-bills looked like in the 70's:

nominal real
1970 6.70% 3.70%
1971 3.80% 0.80%
1972 3.60% -1.20%
1973 5.20% -2.60%
1974 8.00% -3.00%
1975 7.50% -3.20%
1976 9.30% 2.10%
1977 7.80% -0.20%
1978 8.50% -0.40%
1979 11.80% 2.50%

Ouch! There's nowhere to hide!

[Xan]

Hi Xan, and welcome to the PP forum!

I'm not sure where this belief comes from, but it does seem common.  I suppose when talking about the 4x25 PP, it needs to made clear that the four components take time to balance each other out, and grow at the real rate of return of 3-5%.  These relationships do not always exist on a day-to-day or week-to-week basis, and may require a month or more to sort things out.  I think if people realize this, then they might sleep easier when the PP starts jumping around short term.

Thanks!  I've been lurking here for a bit and recently started my own PP.  Thanks to everyone here for the great resource you've built.  (I'm assuming after a while you get used to having people refer to "PP" and not revert to the fifth grade...)

In any case, I don't think the desire for always-increasing investments is unique to the PP.  I bet anybody investing in anything has the same thought.

[MediumTex]

Hi Xan, and welcome to the PP forum!

I'm not sure where this belief comes from, but it does seem common.  I suppose when talking about the 4x25 PP, it needs to made clear that the four components take time to balance each other out, and grow at the real rate of return of 3-5%.  These relationships do not always exist on a day-to-day or week-to-week basis, and may require a month or more to sort things out.  I think if people realize this, then they might sleep easier when the PP starts jumping around short term.

Thanks!  I've been lurking here for a bit and recently started my own PP.  Thanks to everyone here for the great resource you've built.  (I'm assuming after a while you get used to having people refer to "PP" and not revert to the fifth grade...)

I think that craig has been experimenting with "PermPort".

Welcome!

[Gosso]

(I'm assuming after a while you get used to having people refer to "PP" and not revert to the fifth grade...)

LOL! I thought I was the only one that thought this!

I suppose it could be worse...we could be calling ourselves the "PP-heads".  

Normally I try to type it all out, but it's so much easier to go with "PP".  I think I'll start using "PermPort".

[AdamA]

(I'm assuming after a while you get used to having people refer to "PP" and not revert to the fifth grade...)

LOL! I thought I was the only one that thought this!

I suppose it could be worse...we could be calling ourselves the "PP-heads".  

Normally I try to type it all out, but it's so much easier to go with "PP".  I think I'll start using "PermPort".

That is hilarious.  I am constantly erasing "PP" when I refer to it and typing out "Permanent Portfolio" for exactly that reason (not on this website, but when I discuss via email with others).  It's so silly...