Mr Budget recently came across a thread on Quora which is quite interesting – What is the wisest financial advise you have heard from a rich person.
According to Mr Wonderful, one of the sharks of Shark Tank, he follows a few investing rules:
- If a company has no cash-flow, don’t invest! A company without cash-flow is valueless and nothing more than a speculation.
- Never buy a stock that doesn’t pay a dividend
He adds on further by explaining his investing rule with proper stats: “Over the last 40 years, 71% of the stock market’s return came from dividends, not capital appreciation”
“Don’t wait for the stock price to go up, get a check every other month and take your share of profits. I’ll never own a stock that doesn’t pay a dividend,” ~ Mr. Wonderful.
I think this is a very good yard stick that I will be using to guide my purchase decisions in the future. I also read somewhere that companies who have a dividend policy are more savvy in terms of capital allocation and capital utilisation, as compared to companies without a dividend policy.
Strong companies will always give a share of the profits back to the shareholders. Companies that produce dividends on the other hand, have to ensure that their cash flow is strong enough on a regular basis to make the dividend payout and thus are managed differently.
This is also reflected in REITs – all of which have dividend policies and their prices have been increasing over the past decades.
Another reason why this is a good investment barometer is that, when the cash of the company starts running short, dividends are among the first expenditures to get cut. That will serve as a good indicator of how the company is performing in terms of capital utilisation.
What this means is that, for growth stocks without dividend policies, Mr Budget will have to be more mindful about deploying our investment capital into them.
Some of Mr Wonderful’s other rules for investing:
- no more than 5% in any one name
- no more than 20% in any sector
- volatility is the enemy, so stick with less volatile large caps and dividend payers
- Take your age, and put that percent of your wealth into bonds
This is a good reminder as Mr Budget just liquidated Beyond Meats, a counter which I bought few months back and suffered a 60% capital lost.
The counter was bought without proper analysis at the fear of missing out, and subsequently caused a 60% capital lost.
The Mrs asked me why did i not hold onto it – but what i didnt tell her is that, for me to recover my position and break even, the counter would have to go up by 120%, a highly unlikely case given the increased competition and the wearing off of the novelty.
Hence, it’s better for me to just cut loss (one of my biggest lost position) and to see if I can deploy the cash into something else.
And this time, into a dividend paying counter.
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