Wealth creation is pretty simple really.

Discussion in 'Share Investing Strategies, Theories & Education' started by dunno, 2nd Mar, 2021.

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  1. skater

    skater Well-Known Member

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    I'm not sure about anyone else, but you've confused me.
     
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  2. Blueskies

    Blueskies Well-Known Member

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    The downside of not paying dividends:

    Warren Buffett’s Berkshire Hathaway is nearing the maximum stock price of $US429,496 allowed on the Nasdaq

    "Class A shares of Berkshire Hathaway are fast approaching the maximum stock price allowed on the Nasdaq exchange, The Wall Street Journal first reported.

    The stock sat at $US429,172 ($551,635) on Thursday morning, a few hundred dollars below the maximum of $US429,496.7295

    Nasdaq and some other market operators record stock prices in a compact computer format that uses 32 bits, or ones and zeros,” The Journal explained. “The biggest number possible is two to the 32nd power minus one, or 4,294,967,295. Stock prices are frequently stored using four decimal places, so the highest possible price is $US429,496.7295"
     
  3. orangestreet

    orangestreet Well-Known Member

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    I was listening to a podcast featuring Morgan Housel and he was talking about what I think is a similar dilemma for him.

    He says he has bonds in his portfolio not for any other reason but to dampen volatility and force him not to sell when things get rough. He says that the most effective way to get wealthy is to stay the course in the long run to get compounding work for you. However, if you go with a 100% equity portfolio and then lose your nerve during a sustained downturn, it is no good for wealth creation. He readily agrees that his portfolio is sub-optimal but it is what allows him to invest with a degree of peace of mind and stay in the markets over the very long term.

    When I heard it, I realised I was doing something similar myself. I have not been able to get over the mind-block of selling small bits of shares to generate income for my (future) retirement. I have read every argument about how selling shares for income is not just similar to dividend returns but in many ways superior. But I will readily admit that it simply has not sat right with me (yet). However, I totally get the diversification argument and want to invest globally so that I am exposed to the best companies in the world.

    So therefore, I will continue to invest in a portfolio (for example VAS + VGS) and attempt to live off the natural yield of the portfolio. As @Nodrog says, it might take a bit longer - but so be it. This will give me the conviction to stay the course. Also, it will be the easiest method for my wife to follow if I happen to die suddenly. Seeing my own enthusiasm for investing dwindle over the years, I don’t want to be in a position where I am retired and living my dream life to be actively trying to follow what the markets are doing and decide the optimal time to sell down assets to generate income. To me the simplicity of the plan is well worth the effort of front-loading the sacrifice for a few more years up front to create a portfolio so large that the natural yield will be plenty to live well. Neither would this involve chasing high-dividend yielding stocks or investing only in Australia for a higher yield.

    Having said all this, I have learnt over the years that it is healthy to change your mind when compelling facts are presented. Within the last decade, have changed my mind about investing in equities (from IPs), shifting across to ETFs (from LICs), diversifying into overseas stocks (away from the PT kool-aid). I strongly suspect that I might still change my mind about the above too at some stage.
     
    Last edited: 7th May, 2021
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  4. See Change

    See Change Well-Known Member

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    The bottom line all of these people ignore is survivor-ship bias .

    How many other people who started at the same time as him , with the same goal , failed .

    One person will write a book , How I made 1 million in a year trading ... but the 10,000 who didn't dont .

    Cliff
     
    Last edited: 7th May, 2021
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  5. APINDEX

    APINDEX Well-Known Member

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    Agree wholeheartedly it's not that I do not think focusing on total return across a globally diversified portfolio and selling down is not a more optimal option with less risk, it is thinking of this behaviourally for both me (maybe less so) and also my wife and kids the living off the natural yield approach will be the easiest/less stressful to follow.
    I know PT quotes this but he was not the one who originally said it perfect is the enemy of good applicable in so much of life I think

    Again agree 100% if it wasn't for being able to change my mind I would never have switched my focus from IP's to equities the most important thing is finding the investment vehicle that suits you both from an outcome that aligns with your needs/wants and also behaviourally. Who I am to say real estate is not a good investment some of my friends have done well from it I know it's not for me, same with trading or even picking your own stocks we can't argue that some people have done well at this and are good at it as well, I may flirt with the idea of picking stocks but the reality is I neither have the hard skills required nor the behavioural emotional requirements to manage a high value portfolio of stocks that I have picked individually, hence I just play around at the edges with very small amounts which is also probably a waste of my time ha-ha
     
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  6. dunno

    dunno Well-Known Member

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    That’s awesome.

    Discretionary free cash flow and investment policy matters, not dividend policy.

    Buffet/Munger outlined it in theory long ago and Berkshire Hathaway has proven it post stating the theory.

    Cycling back to the original post. Does it make sense to hinder the “ample diversification” part of the equation because you eliminate Berkshire Hathaway and other companies that can re-invest profitably simply because they pay no or low dividends.


    (I'm just Imagining the trouble I could get into with this line of argument if I challenged the low CMA factor regression quants.)
     
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  7. dunno

    dunno Well-Known Member

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    I think we are in total agreement. I hope so because I think your post is spot on. Appreciate dividends all you want but don’t let it divert you from proper diversification.

    I have zero problem with living of natural yield. Its what I do.

    I think many misinterpret my argument for total return to mean you have to sell. Selling is only an option if you want because the portfolio could sustain it and you could retire earlier if you want to push the limits. You don’t have to push the limits though, build the portfolio a little more and live off natural yield is great goal for simple and safe retirement.

    Where I may or may not disagree with some is that I reckon if you don’t let dividends cloud your diversification decisions, you will arrive at a place where you can live off natural yield earlier than somebody that does cloud diversification with dividend considerations. You end up getting what you’re NOT focusing on because you are invested in a more efficient risk allocation.

    Your Morgan Housel point gives me pause on how hard to push the dividend irrelevance. On one hand I would really love to see people more quickly and more safely achieve their goals via adequate diversification, on the other hand if they can cling to dividends and stay the course in the hard times........... But then again March was not even close to a test of dividend resilience by historical terms and I don't see many acknowledging the draw down history of dividends. People expecting dividend stability who one day find out it may be a false premise could be at the most risk of not staying the course.
     
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  8. Big A

    Big A Well-Known Member

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    Just started reading the book myself. Great read.

    keep pushing the dividend irrelevance. It worked with me. It took a while but I now understand it and have made a significant change with my capital allocation moving forward.

    In all honesty though I don’t how much of my change in mindset also came down to the fact that I started my portfolio by building up a large income stream via unlisted property trusts. Once I had that ample income flow, even though I didn’t need that income just yet I was comfortable enough to move towards a larger equities strategy.

    Then again without the push from yourself and others on here to make me understand the irrelevance of dividends, I might have continued to go heavier in Reits at the expense of the equities side of the portfolio.
     
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  9. monk

    monk Well-Known Member

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    Am trying to get my head around this & comments/lessons from you & @The Falcon in this thread are making me think more about this. I originally thought that chasing high yield lic's was the way to go but quickly learnt from this forum & experience this wasn't the way to go, thus settled for less aggressive old school Lic's & eventually, slowly to adding index etf's.
    Thinking back my objection to selling down when/if natural yield doesn't cover expenses goes back to an earlier previous business many decades ago, when it was important to differentiate between 'working capital' which must not be touched but added to for future business growth as against profits from the business for living expenses.
    Been some valuable lessons in this thread, so glad of everyone's thought provoking input here.
     
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  10. MTR

    MTR Well-Known Member

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    Gosh, love the last paragraph:)
     
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  11. Wilko

    Wilko Well-Known Member

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    I get the whole total return vs dividend investing argument and have been guilty myself of chasing dividends to the detriment of better diversification.

    Where it falls down for me is that it's much easier ( I think) to pick mature businesses with a history of paying dividends than it is to pick growth stocks. If i knew I could pick a parcel of shares that would outperform the market then I'd do it. So would everyone. But I know I cant so I'm happy to take a bigger % of my total returns as dividends.

    Unless someone wants to send me a list of stocks that will outperform over the next 20 years and I'll give it a go!
     
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  12. Hockey Monkey

    Hockey Monkey Well-Known Member

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    Thats why you buy the whole haystack via index funds
     
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  13. dunno

    dunno Well-Known Member

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    What @Hockey Monkey said.

    As per the thread title, It's all pretty simple really.
     
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  14. Ynot

    Ynot Well-Known Member

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    I agree with @Wilko as i was also very confused as to what individual shares were being recommended to buy to achieve the “total return approach”. To me, the old school LICs seemed to be providing some diversification, some growth in value plus a reliable and sometimes growing income stream.

    So all you are saying is buying an index etf such as VAS or IVV will achieve a total return approach? If you select partial DRP (to growth the etf investment and remainder in dividends, doesnt that achieve the same purpose?
     
  15. MTR

    MTR Well-Known Member

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    So no one is loving property.... yet many are making pots of money....
     
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  16. mtat

    mtat Well-Known Member

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    Total return approach is not anti-dividend stocks and pro-growth. It simply does not favour dividends.

    Dividends don't matter.

    Invest in the total market via ETFs. (e.g. VAS, VGS)

    If the ETF pays you dividends distributions, so be it. They are equivalent to selling down your shares, so during the accumulation phase you want to elect DRP or reinvest.
     
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  17. Ynot

    Ynot Well-Known Member

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    Thank you @mtat and @dunno
     
  18. Silverson

    Silverson Well-Known Member

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    I was having a fiddle with Noel Whittaker historical stock return calculator.
    Property and shares both give pretty similar returns over the longer term, yes there’s leverage with property but you can also leverage with shares(against property too). Also have the benefit of lower holding costs etc with stocks.
    Also whilst no love or urgency to purchase property we have a development in Melbourne inner north underway.
    Did you ever decide to purchase here as a ppor?
     
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  19. Silverson

    Silverson Well-Known Member

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    If you adopted this approach (LICs/etfs) earlier how would your position look in comparison. You have managed to amass a remarkable amount, just wondering how much less this would be if you had adopted the “passive approach”
     
  20. Sackie

    Sackie Well-Known Member

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    What all these calculations fail to consider in the investment equation which is of paramount importance is the investor themselves. And how they'll impact the investment returns.

    While A may return similar to B, depending who is taking the journey, the ultimate results can vary greatly imho.