Where Should A Dividend Investor Begin?


The best accidental side effect of running a website and writing articles for Seeking Alpha is that it occasionally allows me to stumble into friends I haven’t to in a while—the kind of people that you enjoyed being around, but then life happens, and for whatever reasons, things happen and you fall out of touch. Long story short, I recently got in touch with one of my best friends from my Freshman year at Washington & Lee, and he asked me a question about starting a long-term investing strategy and the kind of books that will send you in the right direction. Because the question was broad enough to be useful to a general audience, I thought I’d share my response with you all. I would mention his first name, but since he is the only person I’ve ever met in my life with that name, it might give too much privacy away. Anyway, he knows who he is, and without further delay, here’s my book recommendation:

Possibly the most important book you can read about investing (even though it has little to do with the nuts and bolts of investing) is a book called Poor Charlie’s Almanack that collects the wisdom of Charlie Munger. For those of you unaware, Charlie Munger is the right-hand man to Warren Buffett at Berkshire Hathaway, and has held the Vice Chairman title at the legendary conglomerate for over four decades and counting. The title of the work, Poor Charlie’s Almanack, is a play on the fact that Benjamin Franklin published a collection of wisdom titled “Poor Richard’s Almanack”, and that Founding Father is the one person that Munger has repeatedly stated he spends most of his life trying to emulate.

Charlie Munger is on the very short list of men and women that you can legitimately argue has a breadth of investing knowledge and wordly wisdom on par with Warren Buffett. In fact, Munger is one of the few people you can claim is a modern-day philosopher king when it comes to both investing and life in general.

If the book isn’t strictly about P/E ratios, book value, dividends and such, why do I think this is the place where investors should start their journey? Charlie Munger will open up your eyes in one important way about investing because his lectures identify each mental model that can complicate the process of rational long-term investing. If we were strictly rational, we would always be making optimal investing decisions that revolve around a company’s future cash flows in relation to its current stock price, adjusted for risk. But, as you will see in the collection of Munger’s works, there are at least 110 different mental models that prevent us from making rational decisions in life and investing.

Even if we cannot modify our behavior to become rational, the collection of Munger speeches will at least allow us to become aware of our investing shortcomings. To paraphrase from one of Aesop’s fables, there is a lot of value in becoming aware of the proverbial knapsack on our own back. We cannot correct our behavior if we do not know what is wrong, and the mental models mentioned in Poor Charlie’s Almanack can, at a very minimum, alert us to the psychological traps that can affect our decisionmaking.

If you are not familiar with the term “mental model”, I’ll give an example. One mental model that Munger identifies is something known as “familiarity bias.” When you encounter something or someone on repetitive occasions, you are likely to start trusting that source, whether or not that trust is warranted. I’ll give an example. Let’s say you are a regular at a local Starbucks every morning, and see the same person sitting at a table next to you drinking coffee two days in a row. You never talk. You know nothing about him.

Now let’s say that one morning you are grabbing some Starbucks coffee before a flight and have your luggage with you. Before you finish, you realize you have to go the bathroom. You want to ask someone to “watch your luggage” and see two people sitting there: the guy you saw sitting there twice before, and someone you have never seen before. Almost every human being will not only ask the person they have seen twice before to watch the luggage, but will feel comfort in doing so. Munger’s speech will point out that our sense of safety and security that the person will guard our luggage is mostly a self-made mental construct, and that man is no more likely to guard your luggage safely than someone you have never seen before (although, if you read far enough, Munger will point out the mental model explaining why the person you trust won’t run away with your luggage. Hint: It is driven by the pride associated with being deemed the most “trustworthy” person in a group).

How does all of this stuff relate to investing? Well, the spirit of Munger’s mental models carries over to emotions that drive our investment decisions as well. Let’s say that you have a DRIP Investing plan that you have been participating in for decades. To make the example specific, let’s say that every month you put $100 into Bank of America stock, and enjoyed a growing dividend along the way. When 2008 hit, the “familiarity bias” of purchasing Bank of America every month would make it feel safe, and that would inhibit your ability to objectively analyze the effect of the Countrywide merger on Bank of America’s long-term earnings power. It can be incredibly useful to be able to pinpoint the exact emotions that inform our decisionmaking process.

Although I advertised the Munger book as a collection primarily about philosophy, there is a lot of specific investment wisdom as well. For instance, Charlie Munger points out that Disney is able to adapt to technological change better than any other company he had ever studied in his life, calling it the equivalent of “an oil company that can put the oil back in the ground after it is done drilling so it can drill it again.”

I’ll explain what he meant by that. Munger points out that some companies get destroyed by technology. Think Eastman Kodak. Think Compaq. Picture anything that relies phones as a major part of the business model, like Research In Motion (now Blackberry). Do you really think anyone can say with a straight face that Blackberry will be profitable in 50+ years? When you have to constantly innovate or go bankrupt, you are dealing with a business model that just isn’t meant to last generations.

Disney, meanwhile, responds favorably to all technology shifts because it provides the company with a new way to generate profit from old material. I’ll use Walt Disney’s breakout hit, Snow White and the Seven Dwarves, as an example. When VHS was the medium, Disney was able to sell consumers Snow White in that format. And then when DVDs hit America, Disney was able to release Snow White in DVD form. Whatever the next form of streaming may be, do you have any doubt that Disney will be able to take advantage of that opportunity? That is the kind of character trait that makes Disney the kind of company you can hold for decades, while Blackberry is not something I would put in a portfolio with a 20+ year holding period in mind.

Poor Charlie’s Almanack is the kind of book you should read if you want to acquire a lot of wisdom in a short amount of time. Almost every day, there is an example from one of Munger’s mental models that I use in my own life. I’ll give an example. Munger once spoke of the impossibility of tax reform because every single loophole in the tax code is there to protect a moneyed interest. Congressmen just don’t wake up one day and decide to subsidize Salmon catching in Alaska—some fisherman with money wanted a tax break, and brought that to a Congressman’s attention. The lesson from Munger is that the person with a particular tax break cares a lot more about it staying there than you care about it going away, and that passion asymmetry explains why the tax code doesn’t get reformed.

Well, I was able to apply “the spirit” of that mental model to issues facing us today. Most of my social network is conservative in nature. I went to a Catholic high school. As you know, I went to Washington & Lee for college. As you can attest, we went to one of the few college campuses in the country where the student body is actually conservative politically. I mention this because, contrary to the typical politics of a young twenty-something, most of my friend group is against gay marriage.

For the past four years, I told them to give up that fight and accept that gay marriage is inevitable. How did I know that? Because I learned about the passion asymmetry mental model from Charlie Munger. Someone who is in a gay relationship that wants to get married is going to care a lot more about receiving the right to get married than someone who doesn’t want to create that right. It’s all passion asymmetry. Once a group with outsized passion on an issue swells in numbers enough, it will win every time. That kind of thinking comes courtesy of Charlie Munger.

So that’s why I recommend Poor Charlie’s Almanack. It’s not just an investing book—it gives you an entire latticework of thinking that outlines 100+ life principles, dozens of which apply to investing. The one catch is that the book is a little bit pricey. Normally it sells for $80-$120. However, you’re in luck! Someone is currently selling it on half.com for only $22, and I would click here to buy it before someone else does: http://product.half.ebay.com/Poor-Charlies-Almanack-The-Wit-and-Wisdom-of-Charles-T-Munger-by-Charles-T-Munger-and-Peter-D-Kaufman-2005-Hardcover/44903903&tg=info

That is the book that started everything for me. Other than that, I would read The Intelligent Investor by Benjamin Graham, and I would work my way through Warren Buffett’s Letter to Shareholders which you can access here: http://www.berkshirehathaway.com/letters/letters.html

Although Buffett is referring to the business of Berkshire specifically, he throws in many bits of wisdom that you can extract and add to your personal life. And because you can read each letter in about twenty minutes, it makes for great segmented reading that you can work your way through over a month or so. Buffett’s letters prove that long-term investing is alive and well. The companies that he wrote about having “durable advantages” in the late 1980s and early 1990s are still around and making profits today. Heck, he still owns some Washington Post stock he bought in the early 1970s.

Those are the places where I would start. In a year or two, you might want to read Phil Fisher’s Common Stocks and Uncommon Profits, Peter Lynch’s One Up on Wall Street, and Seth Klarman’s Margin of Safety. However, I wouldn’t start out with any of those three. They will sour you on investing and make you wonder what the hell they are going on about if you start your journey there.

Hopefully some of this helps, my friend!



Originally posted 2013-06-28 13:43:12.

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