"No man can become rich without himself enriching others"
Andrew Carnegie

Thursday, June 6, 2013

Everything You Believe Is Wrong

English: Cleaning tissue "KimWipe (S)&quo...
English: Cleaning tissue "KimWipe (S)" 日本語: キムワイプS (Photo credit: Wikipedia)
By Investment U

Boston, Jun.6, stock market trading .- I'm reading a fascinating book called the Emperor of All Maladies by Siddhartha Mukherjee. It details the history of cancer and cancer treatments.

What I find most interesting is not the chemistry or biology in how new medicines were discovered (the book is not heavy on the science, so don't be scared off). Instead, what makes the book so thought provoking is how sure doctors were of their philosophies toward cancer... and yet were completely wrong.

The absolute trust that patients put in their doctors' opinions often led to agonizing deaths rather than recovery.

It was not that long ago that doctors believed the best way to treat breast cancer was to perform radical mastectomies that removed not only the entire breast, but often ribs, collarbones and all surrounding tissue.

In fact, most cancers were treated with incredibly invasive surgeries.

A few decades later, after tobacco became popular in the United States and Europe and instances of lung cancer started to soar, a few rogue doctors asked whether tobacco smoke could be responsible for the surge in new cancers.

The medical establishment thought it was sheer lunacy. Even the Surgeon General mocked the idea by stating that smoking cigarettes will be shown to have the same correlation to lung cancer as drinking milk.

They were wrong.

In Data We Trust

In my own life, I have seen the fallibility of doctors. I was furious at our pediatrician who, after two visits, insisted my son had a simple stomach bug that would go away. Turned out he had appendicitis.

My son's appendix was so inflamed the surgeon took a photo of it because it was the largest one he'd ever seen.

After years of writing about healthcare and now after reading Emperor of All Maladies, one thing is clear to me - I don't trust advice unless it's backed up by data.

And it's not just medical practices that I question. I've been skeptical of many investing so-called "truths" for years.

For example, many people believe that Treasurys are the safest investment in the world. I argue they are not all that safe. You will lose money, even when holding them to maturity.

If a 10-year Treasury pays 2.1% and inflation rises above that level, your buying power decreases.

Historically, the average rate of inflation in the United States is 3.4%. If you buy $1,000 worth of 10-year bonds today at 2.16%, you'll have $1,216 in 10 years.

But if inflation averages 3% over the next 10 years (still lower than the historical average), you'll need $1,343 to buy $1,000 worth of today's goods and services. You'll be $127 short. So while your bond was "safe" because your principal was returned, you lost buying power.

Growth versus value is another argument in which both sides will claim that their strategy is the only way to make money.

Investors in growth stocks warn of value traps and point to successes like Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG). Meanwhile value investors believe you're simply the greater fool for buying a stock that boasts a "high" P/E ratio or some other value indicator.

The truth is both strategies work and tend to go in cycles. Sometimes value is in favor. Other times growth is the best choice.

No Debate

When I researched the performance of dividend stocks and discovered the effectiveness of a strategy that focused on dividends, I felt like I'd been slapped in the face.

After digging deeper, I was compelled to write a book. I wanted to get the message out to a wider audience.

I named the book Get Rich with Dividends and now have started a radio show with the same name. The message is this: Investing in Perpetual Dividend Raisers is a time-tested and proven way of making money in the stock market over the long term.

For example, over 10-year periods, the stock market has a 91% winning rate, and the only losing periods were attached to the Great Depression and Great Recession (though not all 10-year periods in those two eras were losers).

Since the S&P Dividend Aristocrat Index was created in 1990, it has never had a losing 10-year period... and that includes the Great Recession.

In fact, in the incredible period that ended in 2008, you still would have made 40% on your money. Keep in mind that means buying near the top of the dot-com bubble in 1999, and selling in 2008, near the bottom of the financial collapse.

This isn't just theory.

If you invested $10,000 in Alliant Energy (NYSE: LNT) 10 years ago, you'd have $31,591 today. And you'd have over $37,000 if you had reinvested the dividend.

Kimberly-Clark (NYSE: KMB) - the boring maker of tissues, toilet paper and diapers - generated a 131% return for investors over 10 years.

And oil company Chevron (NYSE: CVX) turned $10,000 of shareholders' money into $41,385 in just 10 years. Reinvesting the dividends - shareholders wound up with $47,630, a 376% return.

Feel free to question this investing "truth" I just laid out for you. Do your own research and see if you come up with the same conclusion.

But as someone who was formally trained as a contrarian and has questioned establishment investing ideas his whole career, I am more than satisfied with the data that supports investing in Perpetual Dividend Raisers over the long term.

The facts prove the strategy. .
Enhanced by Zemanta