Stop Market Timing and Start Dividend Investing


Often enough, you will hear from conventional financial planners that quickly entering and exiting certain stock market investments has the realistic possibility of being a futile endeavor, and usually the explanation “why” simply focuses on the fact that stock market prices are fickle in the short term and can take years and years to correctly reflect the value of the enterprise you have in mind. That’s absolutely part of the equation, but there is more to it than that: almost all of the stock market’s gains come in very short bursts that are wildly unpredictable.

If you removed the 100 best days in stock market history since 1926, you would lose 33% of your wealth. That is mind boggling to think about—the companies that make up the major indices such as the Dow Jones and the S&P 500—do not move in some linear fashion that give you 10% returns each year, but move up and down in fits and spurts.

I’ll give you a couple examples to bring home the point:

October 13th, 2008, was one of the best single days in stock market history. The stock market went up 11.08%. Considering that we were in the middle of a major stock market correction, this day could have easily been missed by an investor that ill-timed his exit strategy. It would have sucked to sell out on October 12th.

On October 28th, 2008 (that same month!), the stock market went up 10.88%. The historical average for large-cap American stocks during the 20th century was gains of roughly 10% per year. That single October day in October gave investor’s more than a year’s worth of gains.

There is a long list of 98 other “important” stock market gaining days that continue along in this vein. March 23rd, 2009 saw the stock market go up 6.84%. There were three different days in November 2008 that saw the stock market climb over 6%. March 2008 had two separate occasions of nearly 4% daily gains. July 24th, 2002, witnessed a 6.35% gain, and a week later on July 29th, the stock market saw a 5.41% gain. Those are just examples from the post-2000 period, but if you review the 20th century in general, you will likely reach the conclusion that most of the stock market’s gains come in quick and dirty spurts, and that is what can “market timing” a lagging strategy.

That is the kind of reason why you turn on the television to CNBC, watch the guys on Wall Street, and see them look so miserable. They are trying to guess the short-term direction of prices, and that is a fool’s game. You can spend your life studying the techniques of Walter Schloss, Warren Buffett, Irving Kahn, and Charlie Munger, and then you can put together a respectable value investing career for yourself. How the hell can you be a good market timer? Who knew that October 2008 would have two days when the stock market went up by greater than 10% in a single day? Who knew that July 2002 would have a couple days with 5% or more gains each? If you think you can predict those kind of price fluctuations, you might as well buy yourself a crystal ball and drop the illusion that what you are doing is investing.

I want you to have a good investing life that drowns you in income every three months without you having to stress about market fluctuations. We have these wonderful American companies sitting right in front us, begging us to become their owners. We all know Coca-Cola. It’s been raising its dividend for half a century. It has a 30% return on shareholder equity. It’s costs are crazy low. The volume shipments grow modestly with time. And if you bought $10,000 worth of Coca-Cola stock twenty years ago today, and reinvested the dividend, you’d be generating $5 in Coca-Cola dividends every day. I know a gal that works the midnight shift at Steak ‘n Shake, and it would take her an hour of working from 2 AM-3 AM every day to earn the same amount of money  as you’d be getting from your Coca-Cola holdings just for waking up in the morning.

The stock market gains come and go in short bursts. Missing those short bursts partially explains why most investors cannot even beat most index funds. That is why I am fond of the phrase “it is time in the market, not timing of the market” that counts. Predicting the daily fluctuations in stock price is a stressful fool’s errand. Homey don’t have to play that. Think like a business owner. Determine the kind of companies you expect to be profitable 25+ years from now, determine a rational price to pay for those stocks,  become an owner, and then kick back and collect the dividends while monitoring the long-term health of the firm. Get in the habit of structuring your life so that fresh dividend cash is always getting funneled into your account. Don’t worry about the day to day fluctuations. The big gains come in short, unpredictable bursts anyway.