Art and Science in Investing
My son and I were in Boston over the weekend to tour a couple college campuses (campoose? campi?).
In addition to seeing a bit of Boston University and Tufts, we took in a Harvard/Princeton hockey game. We had a great meal in Harvard Square at an Italian joint called Toscana. PRO TIP: You have to ask, and it might cost a couple bucks more, but a Caesar salad with those white anchovies is amazing.
We found a great bar to watch the Ravens game. No queso, but the Tito's flowed. The bartender was a Pittsburgh native, so our mutual hatred of the Patriots allowed for some civility. My son didn't like that at all.
We wrapped the trip up with a walk around the North End and the Old North Church and with a couple oysters.
Both of the college tours were great. I know there's a lot of "oh, these kids today" going around these days. I've had my concerns, too. When I was a kid (the classic grumpy complaint), I had to experience the world directly. Of course there was TV, newspapers, etc. But you had to seek stuff out — there was no cure for boredom that fit in the palm of your hand. Okay, well, that's not entirely true. MOVING ON...
So, were the TV shows of my youth realistic at all? Was that Friday night lineup of Love Boat and Fantasy Island preparing anybody for the way the world really works? No, it was not.
College tours renew my faith that these kids are gonna do just fine. The Tufts presentation was very interesting. They take the idea of a liberal arts education very seriously. As they should. The sad thing is that as I write this, I know I'm getting some eye rolls at the term "liberal arts." It is unfortunate that in today's world, a framework for identifying, understanding, and solving problems is sometimes met with derision.
My college professor father called it "learning to think." And anytime I bristle at tuition costs (frequently), I try to remember that this skill is invaluable.
Art and Science
My son will be on the engineering track, as roughly 25% of Tufts students are. But Tufts will let him take some pretty cool English lit classes or even fine arts like ceramics.
After the presentation, I asked my boy what he thought the art/science breakdown was, how much of life is lived by the numbers, and how much is stopping to smell the roses.
He threw out some absurd number, like 80% of life is lived according to the spreadsheet. I thought back to when his mother and I started discussing children years ago... I was all numbers then: We can't afford it, maybe when we own a house, maybe when I get that promotion...
But that seed of fatherhood had been planted and was worming around my subconscious. The truth is, I was just afraid of change and the unknown, and I'm saving the story of how I lost that fear during a drunken night in Harpers Ferry when I told my ex-wife to start thinking about names...
I've never lived life just by the numbers. Oh, they factor in. One ingredient amongst many, swirling around in my subconscious.
To me, investing is part art and part science.
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There are a lot of ways you can invest by the numbers and do very well. For instance, you don’t have to think too far outside the box to trust a stock like Johnson & Johnson, or Pfizer, or Walmart. These companies have been around a long time. They have excellent management. Add they have refined their business plans over the years — they're not likely to make any significant mistakes.
But how do you know when it's a good time to buy a stock and when it might be time to wait? It sounds like the answer here might involve art, but really you can learn about when the time is right for buying by looking at the dividend yield over a 10- or 20-year period.
Valuing a Stock With its Yield
Sounds like a chore, but trust me, you can do this in like 30 minutes. Every public company has an "investor relations" section on its website. And every company that pays a dividend will have a history of those payments.
Now, dividend "yield" refers to the amount of cash a stock will pay you in a year — literally what it yields. A $10 stock that pays $1 a year in dividends yields 10%.
Solid dividend payers will tend to pay a little more than a 10-year Treasury bond. Why? Well, there is zero risk that a bond will miss earnings, have a CEO get fired, or get dinged in a lawsuit.
A company like Johnson & Johnson (NYSE: JNJ) has very reliable revenue because it makes what’s called consumer staples: toothpaste, diapers, some basic meds. People don’t simply stop buying these kinds of things. And with JNJ, we actually have a good example of what happens when a big dividend stock gets dinged by class action.
Maybe you’ve heard that JNJ baby powder has been cited for asbestos. And the company hid the truth and marketed the stuff for over a decade. The stock has lost about $10 — from $140 to $130 — on news that is really pretty bad. And the simple fact is: Bad news like that doesn’t happen very often. Since 2000, JNJ's dividend yield has ranged between 1% and 3.5%. The yield is attractive when it's high, up around 3%. Not so much when it's down around 1%.
Right now, its yield is 2.6%, so it is likely a fairly good spot to buy Johnson & Johnson.
Have a look at Pfizer (NYSE: PFE). Yes, there is more risk with a pharmaceutical company than with a company like Johnson & Johnson. Pfizer could have failed trials. And there is risk of class action here, too. The yield on Pfizer has ranged between 1% and 8.5% during the financial crisis. 8.5%! What a buy that was!
Pfizer's yield has been steady between 3.5% and 4% since 2010. Given that range, the stock isn't cheap, and it isn't expensive. I'd say it's fairly valued.
Now, if Pfizer happens to release a blockbuster drug, well, all the risk is to the upside. And this is where you can add a little art to your investing. What drugs are in the pipeline? How are trials going? Are any drugs about to lose patent protection?
I want to talk more about the artistic side of investing. Experience has taught me some good tricks, and also things to avoid like the plague. I'm running a little long today, so I'll pick up this discussion for Wednesday.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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