- I've been investing in my Roth Ira for roughly three years, but I've just started my brokerage account this year in April. By all means I am still a beginner.
- This article will contain how I became interested in investing and will delve into why I chose to invest the way I do.
- As a beginner, I hope to not only engage others just getting started, but more experienced investors as well.
After I left my past job roughly three/four years ago, I was left with a small amount of money in a Roth 401k that rolled over into a personal IRA. At this point in time, I knew absolutely nothing about investing. I never had any interest in the market, any interest in stocks, and to be honest learning the tickers for all the companies seemed overwhelming. But, there I was, with a sum of roughly $5,300 sitting in an account doing absolutely nothing. I learned very quickly that I wanted to roll that over into a Roth IRA, if nothing else than to just deny the taxman from taking any more of my money.
But that's when I hit a roadblock. I had no idea I had to actually invest in something inside the Roth. As someone who over-analyzes and overthinks things, I couldn't just merely put the money into some random fund Fidelity was touting without first obsessively researching everything about Roth IRAs and investing. But all that did was send me further down the rabbit hole. Learning about things like PE ratio, earnings per share, payout ratios, free cash flow, and the like, overwhelmed me. So, I did what most beginners do, and Googled "best stocks to put into a Roth IRA" and "stocks Warren Buffet owns". And I invested small amounts into the ones that made sense to me.
They are, as follows:
To any experienced investors, I would think it's very obvious I regret buying some of those names, and that I got very lucky on some others. I did not know anything about buying at low valuations, and even if I did, I didn't know how to figure out what a stock's current valuation was. And to be honest, at first I was somewhat of a yield chaser. I wanted to have well-known and high quality companies in my Roth IRA, but I also wanted to make income...all the income. So I started looking a stocks with a high yield such as Summit Midstream Partners seen above, or Hi-Crush Partners that I had in a Robinhood account. And that was great, for about two months. And then the share prices on these yield traps (a company that raises their yield to tantalizingly high levels in order to entice investors to throw away their hard earned money) started dropping. And sure enough, dividend cuts started coming after. Suffice it to say, I learned a harsh lesson rather quickly in my investing career. Fortunately, I did not lose too much of my invested money.
After this happened, I started to go back and look at my portfolio. Clearly I was doing something wrong if the market was continuing to climb and my portfolio wasn't keeping even pace with it. I had some great out-performers in Apple (AAPL), Realty Income (O), Store Capital (STOR), and Medical Properties Trust (MPW), but stocks such as Tanger (SKT), Sanofi (SNY), Summit Midstream Partners (SMLP), and Owens & Minor (OMI) were not only lagging, but actively losing me gains. Worse yet, SMLP and OMI cut their dividends, effectively giving me zero incentive to keep these stocks. So I sold them.
I knew going into this whole she-bang that I wanted to focus on dividends. Something about not worrying about the share price as long as the dividends kept flowing in really resonated with me. Originally, I planned going into this to never sell a single stock. Boy how wrong I was. Out of my original eleven investments, I sold out of my positions completely in four of them - SNY, OKE, SMLP, and OMI. SMLP and OMI both cut their dividends and I gave myself a hard a fast rule that any dividend cuts or suspensions are a deal-breaker for me. So I gave both of those losers the old Singapore Scram. OKE and SNY were different. There's nothing completely terrible about either stock. My reasoning was, SNY has traded sideways for the past five to ten years, and has very slow dividend growth. So there's no real benefit to keeping it when I could reinvest that money into something with either share price appreciation, faster dividend growth, or both (ideally). OKE was something I wasn't completely enamored with and I really only sold it because my Roth limits were hit for the year and I wanted to free up some funds to purchase AAPL when it started falling to $142 in late 2018. With OKE currently about $35 cheaper than my cost basis back in 2018, and AAPL still up from where I bought it even after this absolute massacre of a month, I'd say I made the right choice. Now, that could have gone either way, but with a company like AAPL with hundreds of billions in cash, I knew the dividend was safe, knew that the share price would rise again, and knew that the dividend growth would be at least modest in the mid-to-high single digits.
So what did I learn from this?
1) If something seems too good to be true, it is. And in the off-chance it's not, it usually isn't wise to gamble money on the risk.
2) Dividend yield alone isn't enough. The growth has to be there as well. The consistent growth is what really shows the true quality of a stock.
3) However, going off dividend growth alone as a metric will lead to some pain, which is what happened with OMI. It's important to look at the whole package, not just one metric.
4) Understand what you're looking at when you're looking at financials. Know what payout ratios are, both FCF and FFO, and know when to look at which one. FFO is better to look at for REITs and MLPs, for instance. I'll cover these financial metrics in a future post very soon.
5) Use common sense.
A lot of times all we can do is rely on common sense, and honestly, rational thinking will probably get you further than a lot of technical analysis will in the business of choosing stocks for your portfolio.
There are a ton of analysts out there telling people to choose stock A or choose stock B, and they all have a lot of great fundamental reasons why. They really do. These are great things to look at and absorb. And I chose a lot of my stocks based on those analysts in the past, even up till about a month ago. But don't just take these analysts at their word. Use their research to supplement your own. And invest in the way that you feel comfortable.
Now that this black swan event has hit, it's making me rethink the entire way I invest. And it's definitely a good thing for the future of my portfolio as it is making me diversify more (as are free trades) and allowing me to choose stronger stocks that will be able to weather any storm. Right now my portfolio is still a work in progress and honestly I'd like to dump a few stocks I have remaining that I acquired based upon those analysts' suggestions. I would, however, like to wait for some share price appreciation to limit losses as much as I can.
Now I'm focused on quality. I want to look at my portfolios and be happy with what I see and know that no matter what happens in this completely wild and unpredictable world, I have zero worries about the dividend being cut or growth being halted. Think Apple, Microsoft, Nike, Visa, Johnson & Johnson, etc. The companies we all come into contact with everyday of our lives. There are some more obscure companies that are just as safe, as I'll touch upon those in the future, and would love to hear if any readers have some as well that they're fond of.
That's where I'm at now, and subsequent posts will follow my investing journey quarterly, what I've purchased and why, up till the present day. My goal after that is to continue to update regularly based on purchases, why I'm buying what I'm buying, and what I'm looking to add to my portfolio.
I hope you enjoyed this post and were able to get some value out of it.
Thanks for reading,
Ben
What were some of your biggest investing blunders? Do you regret these purchases? Or, like me, do you accept them for the learning lessons they are?
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