Friday, November 30, 2007

focusing my strategy

I believe successful investing involves developing a sound strategy and sticking with that strategy through thick and thin. After the strategy is solidified one must apply the parts of the strategy in practice over and over again. For me, the long- term strategy that I have decided to carry out is Dividend Growth Investing. The supporting key features of a holding that I always remain conscious of are demographics, and brands. Most of my holdings contain one or two of these key features. I mostly do not care what the markets quote me on my stocks day to day or week to week. My only actionable concern with the market comes when it is offering me a sale I can't resist. It's fun to follow the daily soap opera that is the financial markets but this has little to do with my long-term strategy.

The 'bible' of my stock selection process is my watchlist. I've explained in a previous post, how I develop my watchlist. I've also explained in a previous post how I go about selecting stocks for this watchlist. If developing a concrete, bulletproof strategy is considered a '10' on a scale of 1-10, then I would say I am at around an 9 right now. I've probably moved to this 9 slot from around 7-8 over the past few months, and after reading 'The Single Best Investment'. The book rung true for me, and opened up my eyes a little wider to the dividend growth strategy which I have embarked on.

As a result of my recent realization, I have decided to add some more focus to my dividend growth strategy which was already in place. Eventually I will get to a place with my holdings and watchlist where the point of clarity has been reached; then I can move on to the job at hand which is the practice of implementing the strategy over and over. This will free up more time to change diapers and mow the lawn....

The focus that I have added involves narrowing the universe of stocks in which I will invest. In the book, Miller talks about 'Creating Your Own Private Compounding Machine'. The formula for success is High Quality + High Current Dividend + High Growth of Dividend = High Total Returns. In a round about way I had been already using this strategy to select stocks, but I am now going to focus my strategy based on this idea and toss out some of the bad apples...

The Bad Apples
- not that these are not fine companies, but they just don't fit with my strategy and thus I am wasting my time keeping tabs on them.

Thomson Corporation (TOC)
Thomson Corp. is actually a pretty good, consistent company with decent earnings and dividend growth and amount, however I have decided to remove TOC from my watchlist for the following reasons:
  • I don't understand enough about how the company makes money.
  • Their Price / Earnings ratio is too high, for no good reason, and I can not rationalize it so I know I could never buy the stock

FedEx Corporation (FDX)

  • The dividend yield is 0.4%
  • UPS is a public company.

Starbucks Corporation (SBUX)

  • The dividend yield is 0%
I am actively researching new companies to add to my watchlist, and I have actually selected about 3 that are in the process of being added. I will discuss these new stocks at a later date.

7 comments:

Middle Class Millionaire said...

MG,

It’s nice to hear someone else say something negative about TOC, I feel the same way about it’s valuation. However, I’m keeping it on my watch list and waiting until it either catches up to it’s valuation or the market brings it down to something reasonable.

augustabound said...

Same here in regards to TOC. Low ROE and the stock has declined over 25% in 6 years. Like you I don't fully understand what they do and really don't have the inclination to learn. There are so many good companies that I do understand and still want to learn about. The Reuters talks have kind of turned me off a bit too. I'm not sure if this is a good thing or not (the merger).

4Life said...

MG: That was a great post! It is so imperative in life (not just investing) to determine what is important to use and use that to define the guidelines by which we live (or invest).

Best Wishes,
D4L

Canadian Dollars said...

Nice post MG! I agree with Starbucks. I used to follow this stock, but for now I'm starting to lose interest in Fourbucks. Their coffee is a small luxury. They even admitted that their target demographic is the yuppie earning 80K a year. That's hardly the bread and butter of America. Nor is it the bread and butter of China and other emerging markets too.

MG said...

MCM, That is probably wise if you like the firm long term. It just throws up too many red flags for me.

D4L, Thanks.

$CAD, I don't make $80K but I buy and like the coffee. I'm a bit of a coffee addict though.

Doug Mehus said...

You don't like Thomson? Thomson's shares are near a 52-week low and their dividend yield is average for the large cap Canadian equities but slightly above average for media stocks.

They make money largely from licensing, selling their content to doctors, lawyers, HMOs, medical and finance professionals. Their biggest division is Thomson Financial and they provide all kinds of financial data to analysts, ECNs, brokerage houses, you name it for a fee. Upon completion of their acquisition of Reuters Group PLC, Thomson Reuters Corp. will be the largest company in that industry and pretty much hold a duopoly on the financial data provider market with privately-held Bloomberg LP.

It's one of the stocks I like, along with Yellow Pages Group, perhaps Astral Media (as I see strong growth ahead and good upside potential for regular, stable dividend increases post-Standard Radio buyout), TransForce, TD Financial Group, cheque printer Davis + Henderson, Manitoba Telecom Services and Bell Aliant Regional Communications.

Cheers,
Doug

MG said...

Hi Doug,

I did not say I did not like TOC. I am just eliminating it from my watchlist because it does not fit into my stategy.