Every now and then, I find it important to step back and assess the big picture of what I am trying to do. Today, I wanted to share with you the main purpose of what I am trying to accomplish when I write articles here on my website or over on the investment advice website Seeking Alpha.
The short answer of what I am trying to accomplish is this: I want you to think like business owners. As a corollary to that, I want you to drown in income from your business ownership stakes. I want you to get richer, and see more money show up in your checking account, just for staying alive another month.
The long answer is this: The rise of online trading, coupled with the advent of the discount broker, has made it easier than ever to forgot that we are dealing with a real business. While these changes have made it much more doable for the small, enterprising investor to get his foot in the door, it has come with the consequence of making it much easier to develop a “trader’s mindset” instead of an “investor’s mindset.”
In the 1950s, 1960s, 1970s, and 1980s, you would have to phone in a buy order to your broker. Maybe you would receive your stock certificate in the mail, and store it in a safety deposit box (you can still do this for free, by the way, if you purchase your securities directly through a transfer agent like www.computershare.com). Additionally, you might even have to spend hundreds of dollars in brokerage fees to initiate your purchase.
Think about the very real, tangible effects those three factors would have on your investment process:
(1) You had to discuss your investment with a live person, adding a layer of rationality and “talking through it” to the process.
(2) You might have a physical representation of your ownership in the form of a paper certificate, further encouraging a long-term ownership mentality.
(3) For sheer logistical reasons, it would be difficult to move in and out of stocks because it cost a lot of money.
Those three factors acted as a positive reinforcement of sorts that encourage you to think like a long-term business owner.
Fast forward to today, and there are a lot of temptations that discourage you from thinking like a long-term business owner. First of all, almost everything is damn near digitial on a screen. That makes stock ownership more theoretical, than say, owning a house. When something is tangible, the mental leap is easier to make. If you are renting a house out to a couple that is paying you $1,000 per month for the next five years, it is pretty easy to handle a short-term drop in stock price. Who cares if the value of your property temporarily falls from $150,000 to $100,000 as long as you have tenants paying you $1,000 per month for the next five years? My goal is to get you to think about your stock ownership in exactly the same way.
Additionally, it has never been easier to get into and out of a stock. At least with property, the act of selling takes a lot of time, money, and energy. With stock purchases, you can get into and out of a “three-letter acronym” in a matter of seconds, often for a price of $8-$10 or even lower. No wonder there is a temptation to play musical chairs with your holdings.
The purpose of my writing is to say “Screw that!” to stock trading in favor of thinking like a business owner. If I can get you to think about your ownership in Coca-Cola, ConocoPhillips, or Johnson & Johnson in exactly the same way you would think about your ownership in the local pizza den, the local car wash, or the local storage unit, then I have accomplished my mission.
What are the benefits of thinking like a business owner? First of all, you will begin to isolate yourself from the “Cult of Volatility” that seems to undo otherwise intelligent people. When we review the 2008-2009 period that experienced a lot of volatility, we notice one stark trend from a business perspective: for non-cyclical blue chips outside of the financial industry, profits continued to increase or stay the same. When we look at Coca-Cola, Colgate-Palmolive, McDonalds, Johnson & Johnson, Procter & Gamble, and so on, we can see that those companies were actually maintaining or increasing profits while their stock prices were plummeting. If you have a business owner’s mentality, how can you get bothered by a 30-50% price decline when your company is either repeating last year’s record profits or marching on to a new era of profitability?
Thinking like a business owner comes with a life-changing side perk: it allows you to focus on income instead of stock price changes. Think about what your daily life is like when you own Procter & Gamble, Johnson & Johnson, Coca-Cola, and Colgate-Palmolive. Each of those four companies have been increasing their dividends for 50+ years. Half a century! Nothing is guaranteed in life, but those four companies are the perfect backbone of your portfolio because they come with the reasonable certainty that they will act like little money machines dispensing you money every ninety days that comes with a 7-12% raise each year. Why wouldn’t you want assets like that on your personal balance sheet?
Imagine if you bought $5,000 worth of Coca-Cola each year and accumulated 1,000 shares over a ten-year period? You just bought yourself $1,120 in annual passive income. When I lived with three guys at a house in Lexington, Virginia, our total electric bill was a little over $1,000 for the whole year (granted, we did not use it at all during the summer, but we were by no means energy efficient during the other nine months). If I had 1,000 shares of Coca-Cola, I would have my electric bills paid for life from the dividends alone. Things get even better as the dividend continues to grow by 8-10% annually, and your Coca-Cola dividends can pay for more of your bills and responsibilities over time.
You can even get poetic with your stock ownership. I spend about $1,000-$1,100 on gas for my car each year. If I owned 300 shares of Royal Dutch Shell, I would be generating $,1080 in passive oil income. For a $20,000 investment in Royal Dutch Shell, I could have my gas bills paid off for life (obviously, you could also do this in a blended way by diversifying your energy investments among Shell, BP, and Conoco, for example). And if those companies raised their dividends by a rate greater than my future gas usage, I could use my oil investments to (1) reinvest or (2) fund additional living expenses.
Your only limit is your imagination. The reason I am here is because I want you to get it. I want you to drown in income. I want you to log into your checking account and see, “Oh, that $270 dividend check from Shell showed up in my account. I forgot about that.” I want you to build a stable collection of businesses that give you the kind of annual income to take the sweat out of the paycheck to paycheck grind and give you some breathing room. Eventually, I want you to be generating so much passive income that it enables you to pursue dreams you did not previously find possible. There are about forty or so companies sitting at the top of the world with virtually unassailable business models. I want you to become owners in them, and allow them to turn your checking account into a cash register that allows has money coming into the door. That is the kind of lifestyle I’m selling. That is why I am here.