The Old Testament tells us that “the race is not to the swift” (Ecclesiastes 9:11).
Aesop’s fable The Tortoise and the Hare explain why: The hare takes his skills for granted, while the dogged reptile wins by focusing on the basics.
The same applies to the stock market.
Speculators are the market’s hares.
They place bets that everyone else will bet on the same stock … but that unlike all the others, they’ll be the only ones who sell at the top.
To be a speculator you must believe you’re better at it than everyone else … just like the hare.
Ask anyone who bet big on putative electric vehicle truckmaker Nikola Corp. (Nasdaq: NKLA) recently — and then watched it tumble 25% in one week, 70% off the previous high — how that can go.
Investors are the tortoises.
They know that the average individual investor — who generally leans toward speculation — hasn’t even kept up with inflation over the last two decades:
Investors also know that the biggest investment success stories come from patient strategies that focus on income-producing stocks. Real estate investment trusts are a perfect example — they blew away every other asset class during that 20-year period.
Sure, speculators may make big wins in particular circumstances, like this year’s Fed-driven stock rally. But over time, speculators’ overconfidence leads them to make bad bets that wipe out previous gains … like Aesop’s hare taking a quick nap during the race.
But the really big money comes from simple strategies that build wealth incrementally.
Every Stock Takes a Nap Once in a While
This year everybody has been excited about big technology companies … Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT), Alphabet Inc. (Nasdaq: GOOGL) and Amazon.com Inc. (Nasdaq: AMZN).
Buy them now, as the story goes, and ride the future to riches. After all, stocks only go up, right? Look at how much those stocks have appreciated over their lifetimes!
Not so fast.
Between these four companies, they have experienced some of the biggest price collapses the stock market has seen in our lifetimes.
Like the hare who took a nap during the race, these stocks experienced massive interruptions to their upward march:
Now ask yourself — and be honest! — whether you would’ve had the discipline to hang onto those stocks during those drawdowns.
In fact, I’m willing to bet that many of us probably didn’t, and sold those companies in real life.
You see, it’s easy to look back and marvel at the long-term gains of companies like these, and to commend the wisdom of those who held onto them through thick and thin.
But the reality is that most investors don’t have the temperament to do that. They jump in and out of stocks at precisely the wrong times.
Now consider a $10,000 investment in a retirement account you might have made in a dividend-paying company around the same time that Apple went public in 1981.
The company normally paid a 5% annual dividend, but the early-80s “Volcker” recession led its stock price to fall by half. The company was so confident in its future prospects that it maintained its dividend anyway. In fact, it continued to grow its dividend by 5% every year, as it had in decades past.
Here’s what your investment performance would be like if you’d reinvested those dividends:
These calculations assume that the company’s average share price remained the same the whole time. That’s a plus: It’s been proved time and again that psychologically, investors are far less likely to sell low-volatility stocks like these.
Oh, and did I mention? In the year you retire, your annual dividend income from this investment alone would be over $800,000.
BE the Tortoise
I’m certainly not against speculation. In fact, I advise people who have enough money to set aside part of it for precisely that … maybe 10%. The Bauman Letter even has its own speculative Home Run portfolio.
But speculative mad money should never be the bulk of your portfolio. A combination of normal market volatility and human psychology means you are more likely to underperform the market.
That’s why my Bauman Letter portfolio has a special section called Endless Income. It focuses on dividend-paying stocks. The current yield on cost (YOC) for those investments ranges from 2% to nearly 10%. The average YOC for the portfolio as a whole is 4.36% … and it’s only about a year and a half old.
Endless Income is designed specifically for people who want to make the magic of yield growth and compounding work for them. Almost tortoises, if you will.
And in coming weeks, I’m going to be presenting some new income-producing opportunities that would make the average tortoise leap for joy!
Editor, The Bauman Letter