Thursday, October 22, 2015

Individual Investing Styles ... Horizontal vs. Vertical ... The Horizontal Way is the Winning Way

{NOTE: We recently argued against investing in bonds for those seeking to be successful long term individual investors. For the first time in a long time, current dividend yields on blue chip stocks exceed the interest rate paid on government bonds. And to make an already good thing an even better thing, the (1) cash dividends and (2) share prices of high quality stocks will increase over time, unlike the interest payments and principal amount of bonds. See our Tuesday, October 20 post titled "Investing in 'Safe' Bonds Now Is Neither a Safe nor a Good Long Term Investment Strategy for Individuals ...."

Historically, stocks have returned an average of ~10% annually. In a low inflation scenario, we've used 8% in the examples below. Investing in bonds, interest and principal combined, may earn zero or a little more than zero for the next several years. At least that's the 'planning' estimate I'm using.

Failing to plan is the same as planning to fail, and if we don't know where we're going, any road will take us there.

I'm an owner of individual stocks and trade them only occasionally. In my younger days while still employed, my investments primarily consisted of regularly buying low cost S&P 500 Index funds and getting the company match.

Payments to intermediaries subtract from earnings on stocks. Thus, minimizing transaction and advisory expenses is always a good idea. Successful individual investors make an effort to get what we pay for, in other words.}

I've long considered myself to be an objectively oriented horizontal investor.

Many if not most people, however, are what I refer to as emotionally oriented vertical investors.

Let me explain what I mean by the comparative benefits of horizontal as opposed to vertical investing. One approach works extremely well for long term oriented individual investors, and the other works primarily to benefit the stock selling intermediaries, aka brokers.

Long term oriented horizontal investing is safer than vertical investing, and it's vastly more profitable as well. Yet it's neither commonly practiced nor internalized by most individual buyers and sellers of stocks.

Horizontal is all about time in the market and vertical is all about market moves, up or down.

Time is the horizontal investor's friend. For example, a 20 year old who has $1,000 to invest and then earns an average annual return of 8%, will see that saved and invested money double five times, or each and every 9 years (9 years X 8% = doubling the one time initial investment, aka the rule of 72) during his working career. At age 65 it will have grown to $32,000. At age 56 - $16,000, at age 47 - $8,000, at age 38 - $4,000 and at age 29 - $2,000.

On the other hand, if the investing doesn't begin until age 47 and $1,000 is invested, at age 65 it will only grow to $4,000.

$32,000 is eight times greater than $4,000. It's simply the total-time-in-the-market factor at work.

That's why successful individual investing is all about taking a long term oriented horizontal approach. The earlier we start and the longer our money works for us, the more we accumulate.

On the other hand, vertical investing concerns itself with the short term market movements. Individuals believe they make money when the market goes up and that that they lose money when it goes down. But they're wrong about that. Money is only made or lost when the initial investment is sold and converted into cash.

Daily, weekly, monthly and annual price fluctuations and movements are only important when the shares bought are finally redeemed for cash. And long term investors won't redeem those shares for decades, assuming they allow the horizontal nature of successful investing to work for them.

Accordingly, buying low and selling high is the basis of horizontal investing. And the earlier we begin buying, the longer timeframe we have to enjoy average market returns over several decades.

It's that simple. It really is.

So be a horizontal investor and don't get scared out of the market when it moves down. And don't cash out of the market when  it moves up. Stay the course for days, weeks, months, years and decades.

It all comes down to this --- horizontal investing is intelligent investing. So be a smart investor of a diversified basket of blue chip dividend paying stocks by 'buying low and selling high.'

That's long been my approach, and still is very much my plan.

And one more thing --- our 'Beloved Cubbies' made it four in a row in the loss column last night. Congratulations to the Mets. For Cub fans everywhere, it's just another typical 'Wait 'til next year' end of the baseball season. And so it has gone in Cubbieville each year since 1908.

That's my take.

Thanks. Bob.

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