March 27, 2014 is_admin

Investor or Speculator?

Trends come and go in all walks of life, particularly in popular culture.  By all accounts music and fashion are on a cycle of repetition with nothing being truly original.

Trends also exist in investment culture and habits.  Over the decades we have seen a bias for particular sectors of the market, certain product types or even a specific asset class.  There have been some wild and wacky fads including the great ‘Dutch Tulip bulb market’ bubble of the early 1600’s.  These bubbles are emotion filled and excitement driven.

The focus of these trends has always been an asset’s capital value and it has been the impact of the speculators that has seen prices rise and fall dramatically.  This, however, ignores the other dimension of an asset – its income producing capacity.

If we are able to remove emotion from our decision making and think more like a true investor (who, according to the Macquarie Dictionary, is someone who uses capital to secure income) it then becomes easier to understand Warren Buffett’s statement relating to the share market, which is simply a ‘weighing machine of profits.’   The value of a share should always come back to the underlying profitability of the business, and by association, the income it provides the shareholder in the form of dividends.

An article from BBC News titled ‘$1 trillion of dividends’ sights a ‘trend through 2014 and beyond’ bringing focus back to dividends.  [1] According to the article, this marks a change from the ‘80’s & ‘90’s that simply looked at capital value (one could argue this focus also existed through the resource driven 2000’s here in Australia).

The question is why is this trend?  Dividends have always been there, providing a consistent, reliable, increasing and tax effective income stream for those who wanted to invest and not speculate (particularly franked Australian dividends since the 1980’s).  The article acknowledges this is not new news but the ‘elementary fact was often overlooked in the past’.

And isn’t this the nature of a fad or trend?  As emotion, excitement and momentum builds, reason, prior knowledge and experience appear to evaporate as people jump on the band wagon and firmly believe, “this time things are going to be different!”  You never know, you might even get rich quick!  Eventually the dust settles and it is the great businesses of the world, the truly productive enterprises, which run at a profit and come back to the fore.

So, how do we ensure we don’t get swept along in the emotion of each new and exciting idea?  It is through support and consistency.

We must keep returning to the long term data and keep reiterating the facts of the consistent and reliable truth:

“Successful investing is all about common sense….history confirms the winning strategy is to own all of the nation’s publicly held companies at very low cost.  By doing so you are guaranteed to capture almost the entire return they generate in the form of dividends and earnings growth.” [2]

When we look at the volumes listed in the BBC article ‘$1 trillion of dividends’ we think it would be great to have a part of that!  And wouldn’t it be great to own those 10 big companies which produce 9% of dividends?  Logic would dictate these big payers are some of the biggest companies, so how do we ensure we own them?

Look no further than Bogle’s wisdom above.

Speculators create bubbles, fads and trends based on a desire to chase short term gains.  The media loves a headline which reports big numbers.  Investors own high quality assets in order to receive a consistent, reliable, increasing and tax effective income stream.  Which one are you?

To learn more, register to attend Income Solutions free information evening on ‘Common Sense Investing

By Gareth Daniels, Financial Planner


The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue.  In some cases the information has been provided to us by third parties.  Whilst it is believed the information is accurate and reliable, this is not guaranteed in any way.

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information.


[2] John C. Bogle ‘The Little Red book of Common Sense Investing’ 2007, by publishers John Wiley & Sons

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