What 2012 taught us

December 12, 2012, 12:09 pm Peter Switzer Yahoo7

As the end of year looms along with that infernal fiscal cliff in the USA, it might be worthwhile to review what we learnt this year and what we should never have forgotten.

What follows may help you get next year’s investing right on the money.

While on that subject — being on the money — it has been a damn good year for my calls. Putting your opinion in print, in the digital as well as the radio and TV worlds on a daily basis, I tend to remember when I get something hopelessly wrong. But this year I only have nagging regrets about one company I thought looked good, which has had a share price dive. I don’t want to go there, though I do think the business has a propensity to come good.

I feel especially guilty about this company because I didn’t put my money where my mouth was, but I’m toying with it now.

Dividend play

On the good call side for my Switzer Super Report subscribers, we put together a dividend stocks portfolio, which has returned a capital gain of about 14% and you have to add a solid dividend flow to that, which will be at least 6%.

We only wanted a return of around 6-8% to beat term deposits using some of the best company names in the country, so we were really happy with the result.

Global calls

On other calls, I backed the US economy would come good and the Chinese would avoid a hard landing. I doubted Greece would leave the eurozone and regularly advised the Reserve Bank (RBA) that it was dragging the chain on rate cuts. It finally woke up to its shortcomings.

I also doubted the Treasurer’s chances of creating a budget surplus, especially if the RBA was slow to cut rates and that looks like another good call.

Ignore big call merchants

One piece of advice I have found pretty useful for most years is ignore the big call merchants. They always seem to have so much certainty on the uncertain and that gets to me. I’m always the cautious call merchant, emphasising that I invest for the long-term in great companies — let’s call them businesses — which have a history of paying OK to very good dividends, and I buy about 20 stocks so I only have a 5% exposure to any one CEO or any one silly government decision that could hurt the share price.

The guy who I really want to say — “in your face!” — to is US hedge fund operator, Jim Chanos who has been bad mouthing the Chinese and shorting companies such as Fortescue as a consequence. While he could be right on betting against Fortescue, I think he has got China wrong and I hope he loses a lot on his mouthing off.

Now I know that sounds very vindictive but this guy and others are ‘influentials’ and they use their influence and commentary to ultimately help their investments. They also spook investors and lead them astray despite the fact they occasionally get it right.

I have been astounded by the other ‘influentials’ who have come on my TV program saying “Jim Chanos said this and Jim Chanos said that” and I would reply — “so what?”

You really have to be careful of big call merchants because they can wrongly influence how you should invest to build wealth.

The big lesson of the past few years since the GFC emerged after 2007 is that you have to be wary of being spooked or buoyed by short-term noise, commentaries and events.

The investment game

In a perfect world, I’d like to be able to play the investment game using the quality company approach knowing that on a historical basis seven out of 10 years is usually good for stocks. In addition, a portfolio of great stocks will average a 10% or so return per annum over a decade, but remember this is an average. Some decades it could be six or eight good years.

However, if you’re building wealth, it has to be over 10, 20 or 30 years and so having a consistent, sound strategy is the way to go.

I had a dream

To slightly quote Martin Luther King — I had a dream that all investors had:

  • About 20 great stocks that pay dividends
  • The average dividend return was about 6-7%
  • With franking credits and no tax in retirement this could gross up to around 10%
  • Each individual aims for $1 million on retirement adjusted for inflation each year
  • And so the income stream from the $1 million was $100,000 adjusted for inflation, which is a nice retirement amount, especially if it remains tax-free!

Final lesson

I know someone who collected great shares for 40 years of work and had a small exposure to property. He retired with $500,000 and averaged $500,000 a year in retirement.

When the GFC hit, the dividend flow in one year dropped to about $470,000 while stocks fell by about 50%. The lesson is dividends don’t fall as quickly or as steeply as share prices.

By the way, in the ensuing year, the dividends returned to around 10% again!

There are many lessons for successful long-term investing and one I love is buy right and stick tight.

Next week I will look at how you buy right.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au

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