What's the Point of Investing, Anyway?

Like a lot of other investors, younger Nelson had one simple goal. He wanted to compound his money at the fastest rate possible.

The only question was how I’d accomplish this. After trying a few different strategies — including buying stocks with high dividend yields or dabbling in what I considered “blue chips” — and watching approximately 430 episodes of Market Call on ROBTV (this was before BNN), I settled into a deep value strategy inspired by Benj Gallander of Contra the Heard investment letter.

Even today, Gallander’s returns are fantastic. Contra’s President’s Portfolio has delivered a 16.7% annual return over the last decade, and that’s actually underperforming what Gallander was able to accomplish before.

And so I adopted the same strategy starting around 2005 and then in earnest around 2010 once I finally had some serious money to invest. There were winners, like Cloud Peak Energy, which was between a 300% and a 400% return for ol’ Nelly. I punted it the day after Trump got elected. I also bought Intertape Polymer in 2009 and sold half for a 250% return and the other half for a 500% return.

I hope that last paragraph doesn’t sound like me bragging, because my performance over those years wasn’t anything to write home about. For every home run I had swings and misses with stocks like Danier Leather (it went to zero but I got about 40% of my money back in the weirdest bankruptcy ever), Reitmans (a shitco I foolishly followed Prem Watsa into), and Penn West Petroleum, which netted me a loss of around 75%.

I drastically underperformed the market from about 2010 to 2016. Fortunately my high savings rate erased a lot of my investing sins.

For whatever reason, I just couldn’t figure out the deep value thing — no matter how much I copied my investing hero. It was time for another path.

Enter dividends

My wife and I have always been travelers. Shortly after moving in together in 2014 we lusted for something a little different, one big adventure before we settled down for good. So we went to South Korea for a year.

I learned three things during my year abroad:

1. I wouldn’t trade that experience for anything — both the good and bad parts

2. Living somewhere is the only real way to experience the culture

3. I wanted the freedom to do something like that again

Once we came back, the path was simple. We would settle into jobs and funnel every extra dollar towards passive income. I invested in a few private mortgages and put the rest of our money into individual dividend-paying stocks. Real estate wasn’t a viable asset class because it required a certain amount of active management.

It was so much easier than deep value investing. I was free to focus on excellent companies that happened to pay a dividend. I didn’t have to worry about some deep value stock going to zero. Hell, I didn’t really have to worry about a stock’s underlying price. As long as fundamentals were going in the right direction, any dip was an opportunity.

Like many other dividend devotees, I started tracking my passive income. Nothing excessive, just a spreadsheet I’d update every time I bought a new stock. And what I found is I was excited when my income went up. Total return mattered too, but not as much.

Evolving the system

These days my portfolio is stuffed with stocks that share three common characteristics:

1. Excellent businesses that generate lots of cash flow

2. That were purchased at a reasonable price

3. Which pay dividends

Or, as someone much more eloquent than me once put it — buy good companies, don’t overpay, do nothing.

Sometimes I’ll veer off into the weeds and buy good or even mediocre businesses if the price is cheap enough. I squint hard and convince myself the newest portfolio target is a little better than it really is. And I’ll even go in the other direction and buy an excellent business that doesn’t happen to pay a dividend. Facebook, the largest position on the U.S. side of my portfolio, is the most prominent example.

My hope is to hold Facebook for as long as it takes for it to pay a dividend and then troll Twitter with my FB yield on cost stories. It will make all my non-sexual dreams come true.

Investing became much more satisfying when I equated it to my goals. And up until a few years ago, I wasn’t really aware of what my goals were. I just wanted more money because more money = good.

Once I started down my own personal path, everything changed. I didn’t stress out when my holdings underperformed the underlying index. It made investment decisions a lot easier too. I look at every position and ask “does this stock help us with our goals?” When the answer is no, I punt it.

Speaking of goals - what was the goal of this post?

Geez. The guy who writes the headings is a dick.

The point is this. Your goal might be to end up with the most amount of money. Or it might be to earn a reasonable return while doing zero work and letting ETFs do the heavy lifting. Or it might be to incinerate capital because you secretly hate yourself. I don’t know. But what I do know is by focusing on passive income I get a real-time look at how close I am to hitting my cash flow goals. Freedom has always been my motivation, and I think dividend investing is the best way to get there.

So even though the academics and “serious investors” think dividends are stupid, they’re here to stay in my portfolio.