The Single Best Investment by Lowell Miller

book_singlebestinvestmentA few months ago I finished reading a great investing book.  I’ve read several at this point, and I particularly liked it for a variety of reasons: 1) I liked the conversational style in which it was written (it wasn’t so dry like many other financial and investing texts). 2) Miller explains the concepts of dividend growth investing without going over your head, but is still detailed enough to extract real, actionable facts. 3) The author doesn’t shy away from why he likes this method of investing compared to the many others out there, and balances his argument with both quantitative and qualitative reasoning.

Miller does a great job at taking the reader from having almost zero investing knowledge to having a lot.  One of the early chapters talk about the nature of compounding, which, even though I’ve long known about the concept, was still an engaging read because the way it works is so simple but it is still amazing when I think about it.  It truly is the eighth wonder of the world.

Also near the beginning of the book comes the discussion of asset classes and stocks versus other types of investments.  I like this discussion because it’s explained so clearly: bonds, CDs, T-Bills and other “safe” investments may be an ok place to park cash at some point, but over the long haul buying ownership in thriving and growing businesses via the stock market is going to give you better returns.  As Miller says, you just have to detach yourself emotionally from the “bouncing principal” that you as an investor will invariably experience over the time that you build and maintain your portfolio.

Next, Miller goes into his strategy of dividend growth.  He asserts that growing dividends paid by companies over time, when re-invested, produce great total returns and an ever-increasing stream of cash.  The primary formula he relies on is:

 High Quality Company +

High Current Dividend +

High Growth of Dividend =

High Total Returns

Basically, if the company is of superior quality it is producing and growing business profits in a sustainable manner.  It is also returning cash to shareholders via dividends and increasing the payout year after year.  If a company is sending real money back to owners, it’s a strong signal that things are going well and the company expects to grow earnings in the future.

Miller teaches the reader about some financial ratios to consider, things to look for in a company, and overall what to watch out for.  He spends a chapter talking about how a stock can never (well, he says very rarely) be over or undervalued because of the vast access to information that investors have today.  He asserts that under normal market conditions that true value of a stock is reflected into its price.  I somewhat disagree with this – just because you or I have more access to information about a companies’ metrics and other data does not mean that we act totally rationally about whether to buy or sell.  I fall back on the Ben Graham quote, “In the short term, the market is a voting machine, but in the longer term it is a weighing machine.”  In the short term, the stock market is simply an auction, with buyers and sellers running around giving their opinions on the value of securities.  Over the long term, however, I believe that the investing community as a whole recognizes business’ value based on long-term profitability.

There is a chapter on reading charts, which I found interesting but seemed a little out of place and did not really seem like something I would use in my own investing process.  Then again, I am a relative newbie as I write this so perhaps there is a great deal of value in technical analysis that I don’t see.  Personally, I prefer to study the data of the actual business, not necessarily the fits, spurts, and relative strength of the stock price associated with that business.

Throughout the rest of the book, Miller discusses different sectors and what to look for, which I really enjoyed.  He also lists a checklist of fundamental things to look for before buying a stock.  That chapter is great, and I referred to it before my wife and I bought our initial stake in Coca-Cola [ insert link here ].  Lowell also provides real examples of stocks that he’s bought for the funds he manages, which gives some good insight.

He also discusses the fundamental mindset of knowing when to hold and having the right attitude about your position in a company.  I particularly liked his analogy to real estate and about having “a landlord’s attitude”.  Just as a landlord focuses not only on the capital appreciation of his houses, but also on the cashflow from those houses, so should the stock investor concentrate on the income that his ownership stake provides.  It essentially sums up the income investing approach.

All in all, I really like this book.  I would have tweaked a few things about it, but not many.  Almost every chapter gave me a lot of relevant knowledge that I’ve started applying in my own investing.  Before reading this book I had heard a lot about dividend growth investing and why so many people out there stand behind it, but this book really provided the foundational knowledge on the topic that I was craving.  For anyone interested in dividend growth investing or really even just the philosophy of income investing, I would highly recommend this book.  It has a lot of great points, but more than that it has a great philosophy of investing that is backed up quantitatively and qualitatively.  If you’ve got the basics of personal finance already covered and are beginning to look specifically about different investment strategies, this is a good book to add to your list.

Introducing the Berkshire Hathaway Investing Plan

You know that old adage, “When is the best time to plant a tree?  Twenty years ago.  When is the second best time?  Today.”?  Well, I decided to start a fun little experiment to demonstrate how the average American can plant small seeds of future wealth by choosing a successful enterprise with a good track record and dollar cost averaging into it to build a position.  It requires almost no investment skill, and absolutely no discipline at all.  You just put a tiny amount of money into the plan every paycheck.

For my little experiment, I chose Berkshire Hathaway as the investment vehicle.  Why, you might ask?  Well, as you are probably already well aware, Berkshire Hathaway is the massive holding company run by legendary investors Warren Buffet and Charlie Munger.  They’ve grown it to over $484 billion in assets, and it is now the 9th largest company in the world.  Take a look at the returns Warren and Charlie have provided to shareholders over the past 48 years:

almost 20% returns over long periods of time...pretty sweet.

almost 20% returns over long periods of time…pretty sweet.

They have thoroughly beaten the S&P 500 over the long term, and provided high returns in an absolute sense as well.  Also, the diversification of the companies’ streams of income is akin to the earnings power of a large mutual fund (minus all those pesky operating fees that an investor pays).  There are profits rolling in from insurance premiums, diamonds, ice cream, jets, railroads, dividends from large equity positions and much more.  Berkshire has been criticized somewhat in recent years because its returns have lagged the market.  Well, in 2013 the market went up over 30%, and that’s kind of a hard target to beat….but let’s not get caught up in that.  Over long periods of time, as the data above shows, Berkshire has handily beaten most stock investments out there, and considerable beaten the market as a whole.

I opened an account at Loyal3 to being making the transactions.  Although the number of stock selections is pretty limited (around 50 or so companies right now), the cool thing is they are completely free, as of this writing.  This makes dollar-cost-averaging small amounts of money make sense from a cost perspective.  In order to make fees negligible at a traditional discount brokerage firm, you have to invest around $1,000 or so at a time in order to make the commissions worth it.

The Loyal3 interface is pretty intuitive.  It was easy to select the stock I wanted, specify the amount of the transaction and then confirm.  To start, I am contributing $10 every time I get paid (every two weeks) to this program.  In the future I may up the amount of the contributions.  I really want to experiment here and see how the position builds and grows over time.  I’ll post real updates of how the account is doing.  Here’s what I’ve got so far – let the compounding begin!

 

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