Saturday, December 5, 2009

The Less Lazy Investor

Warren Buffett has been asked a number of times to provide advice for the lazy long term investor- ie. the investor who doesn't want to spend a lot of time researching companies but wants to profit over the long run. His recommended solution is a market index fund. I would speculate that the two reasons he recommends this route are:

  1. Studies have shown that a phenomenally high percentage of mutual funds can't beat the general market, so why go that route?

  2. The MER, or management costs of these type of vehicle are very low compared to mutual funds.
Other solutions for the lazy long term investor have been suggested such as greenblatt's methodology, dogs of the dow and the list goes on.

Defining The Less Lazy Investor

I think some of these are great solutions for the "truly" lazy investor. I have come to realize that there is no black and white, their is instead a spectrum with many things. The same hold true with the lazy investor, there are some lazy investors who want to do absolutely nothing, while their are others willing to partake in some research- they just don't have 30 hours a week to look at companies. I often hear from these investors; they want recommendations of where they should be spending their limited time.

Advice for the Less Lazy Investor

For the what I am calling the "less" lazy long term investor I would recommend something slightly more involved than a market index fund. The less lazy investor should instead spend their limited time performing analysis of companies listed on Standard and Poor's Dividend Aristocrat List. In order to be listed here a company must meet a series of criteria:

  • Market Capitalization. The security must have a market capitalization of at least C$ 300 million at the time of the review.
  • Universe. A company must be a constituent of the S&P Canada BMI.
  • Listing. The company’s security must be a common stock or an income trust listed on the Toronto Stock Exchange. In the event that a company has more than one class of common shares listed, the more liquid class will be used.
  • Dividends. A security must have increased ordinary cash dividends every year for at least five consecutive years. Only ordinary dividend payments are considered. The 12-month period ending November 30 and all dividend ex-dates are used for the dividend analysis. The index is weighted by indicated annual dividend yield. To prevent the index from being concentrated in only a few names, the methodology incorporates limits in index weights so that no individual stock represents more than 8% and no income trust represents more than 5%. In aggregate, income trusts are capped at 30% of the index weight. The index is maintained by the S&P/TSX Canadian Index Committee. Comprised of four members from Standard & Poor’s and three members from the Toronto Stock Exchange (TSX), the Index Committee meets on a monthly and as needed, basis for review.

Sustained Dividends for the Lazy Long Term Investor

By selecting this index or investing directly in companies from this list the less lazy investor has garnered a margin of safety. Selecting companies on this list promises to give the investor, at minimum, a company that in the past has cared about its dividend. The odds have it that these companies will continue to care in the future which can be a huge benefit to the long term investor. By only doing research against these companies the less lazy investor has substantially improved their odds of profiting over the long run.

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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