The Money Trap

Grow Your Monster Dividends Issue 4

Welcome 417 new subscribers to my weekly dose of Monster Dividends

Hey Willie here,

I know I’ve not been posting regularly in my Monster Dividends Newsletter. There's a good reason for this – I just got back from Omaha last week, and boy it was amazing. You can check out my top important lessons I’ve learnt here.

Anyway, let’s get down to my Smaller Portfolio updates.?

So far, this portfolio’s performance is up 33%. Chipmakers and technology stocks continue to dominate the broader market performance.

Taiwan Semiconductor Manufacturing Company, which is my largest position, is a key driver of the Smaller Portfolio’s returns.?

What’s another interesting performance – Hong Kong stocks.

According to Bloomberg, Hong Kong stocks have hit their longest winning streak since 2018. Much of this rally is driven by technology, with Alibaba and Tencent hitting double-digit share gains.

Two reasons:

1. The stock market seems to “suddenly” expect results to improve.
2. China has said it would start to deal with the unsold properties and use policies and financial tools to lower borrowing costs.

Projected Dividend Income

In terms of dividend income, I project $1,373 of dividend income for 2024.

My dividend rate should continue to grow year after year, as I expect dividend growth to be a significant contributor to my overall returns in the coming years.?

Now, I expect this portfolio to do slightly better than the average index over the long term. But I don’t expect such returns to carry on forever.?

Note: I’m not aiming for some crazy, high growth returns.

The entire point of a dividend growth strategy is to focus on a consistent return that can compound both dividends and capital gains over the next ten years. For instance, by the end of a decade, I should expect this portfolio to grow at an average rate of 10% a year.

Thus, I expect recent performance to slow in the coming months.

And that’s what I want to talk about today.

The Money Trap

They say all dividend investors need to be careful of dividend traps – buying into risky, high yield stocks that could suffer share price losses.?

But you know, there’s also another trap that’s even more risky – The Money Trap. I’ll explain.

This happens when stocks start going ballistic. For instance, you got the “1960s -tronics" boom. During the 1960s, the stock market was obsessed with the electronics boom. Any company, products or services that ended with “-tronics” immediately saw their company’s valuations soared.

Back then, IBM and Texas Instruments were trading at more than 80x PE ratio.

At the same time, it was also what markets called the conglomerate boom – where it was popular for companies to buy many unrelated businesses in order to grow.

Then during the 1970s, you’ve the Nifty-Fifty's, where people started picking up blue-chip companies “for safety”. Nothing wrong, right? But these companies became so popular, shares were trading at expensive valuations – Avon Products, Kodak, Xerox, Disney and even McDonald’s traded at 80-90x PE ratio.

There were 50 of such blue-chips that were regarded as solid buy and hold growth stocks. And this was the Nifty-Fifty.

Many investors ignored the extremely high valuations, which subsequently crashed and underperformed.

Next, during the 1980s, you’ve the Roaring Eighties. Remember the IPO boom? The unstoppable private equity raiders that bought over leverage companies. And everyone went ballistics for concept stocks like biotech companies.

After that, who could forget the dotcom mania during the 2000, global financial crisis in 2007, COVID-19 pandemic and the latest fancy “high growth” stocks that crashed in 2022, as the Ukraine War started and interest rates spiked.

In fact, I’ve had friends and Dividend Titan readers who told me they lost over 60% of their portfolio during 2022.?

Even in Singapore, we’ve had the "Blumont, Asiasons, LionGold" rally that suffered horribly.

Also, the recent GameStop surge.?

The Money Trap is this: we get carried away by the rush of stock prices, that we need to feel the need to pile on to these stocks. Otherwise we're scared we could miss out on the "next big thing".

I found this to be riskier than buying into dividend traps. This is because, such stocks can go up like rockets.

And come down like a… rocket too.

I mean, look at the CNN Fear & Greed Index. This will tell you how greedy or fearful the stock market is.?

How to manage The Money Trap?

First things first, I always set an investment blueprint. This means, I want to know how much annual returns I want to target (check out Issue 1 how to do this).

I probably stay away from “the next big thing”, or penny stocks that look like could make you a “quick buck” overnight.?

Look, there are just over 9,000 stocks across the stocks markets to invest in – the US, China (H-shares), and Singapore market. I don’t have to chase fancy stocks. And I’ve a lot of opportunities to dig for hidden gems in the corner of the stock market.

What’s crucial is to look for companies that align with your portfolio strategy.

Can This Market Rally Continue?

I’ve absolutely no clue. But I know over the last 14 years of my investing journey, stocks will sell-off, and that’s going to cause some pain.

What's more important isn't looking at the price going up (or down). I prefer to stick to fundamentals: as long as the businesses have a durable competitive moat, the management is sound don't overpay for its stock. We should do fine.

Gautam Baid wrote it best in his book, The Joys of Compounding:

That half a century ago, the best investors were the ones with a strong information age. But today, with the internet, social media and the spread of information so quickly and fast, the best investors are the ones with a behavioral edge. This means that to do well as an investor, it’s less about knowing more than others about a specific stock, but more about the “mindset, discipline and willingness to take a long-term view about the business value.

One of the biggest challenges today is not so much about finding a competitive advantage, or informational advantage. What’s important today is to have a behavioral advantage.

Charlie Munger says:

A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.

You could tell me to be careful about dividends traps. I'd say worry more about The Money Trap.

What do you think? Happy to hear your thoughts!

Sometimes, investing can be simple.

Willie Keng, CFA

Founder, dividendtitan.com

P.S. I plan to write a weekly newsletter to document this journey of my smaller portfolio. Do hit "Subscribe" to Grow Your Monster Dividends to follow my investing journey.

#dividendgrowthinvesting #themoneytrap #getstarted