Wednesday, August 15, 2012

Loyalty – One Of The Biggest Stock Picking Mistakes I Make

I am loyal to a fault. I will stick with a company that I grew up with and love all the way to the bitter end. While being loyal may be a great trait, it often gets me into trouble as an investor. The Dividend Ninja’s recent recap of his Dividend Growth Index and individual stock picks reminded me of a recent friendly debate that we had. The Ninja is a big fan of PepsiCo Inc, but I personally love and own shares in Dr. Pepper Snapple Group. Like the wise Ninja predicted, that hasn’t worked out well for me over the past six months when compared to his choice.

I mentioned my love for Dr. Pepper and its vast stable of beverages months ago when the Dividend Ninja first mentioned buying shares of PepsiCo Inc. He was quick to point out that PepsiCo has several things going for it that Dr. Pepper unfortunately does not. Pepsi is much more than simply a beverage company thanks to its ownership of Frito-Lay snack food strategic business unit, Quaker Oats, and other divisions that allow the company to diversify into so much more than simply being only a beverage company. Pepsi is also a much larger company than Dr. Pepper Snapple Group aiding in its diversification. Dr. Pepper does not have any food divisions or other units to help it ride out the beverage industry’s troubles. But, I am still very stubborn and loyal to Dr. Pepper.
My loyalty, despite the facts, is one of the biggest investing mistakes that I constantly make. I love my Dr. Pepper and continued investing in it over the past six months despite the facts of the situation and the Dividend Ninja pointing out potentially better options. Whoops! What does the Dividend Ninja know anyway?

He was definitely right. As he pointed out in hisrecap of the Dividend Index’s first quarter, PepsiCo has gained over 8% in the past six months not including dividends that were reinvested. The return is over 10% with dividends. Dr. Pepper Snapple Group is only up 5% not including dividends during that same period. Additionally, there have been worries at Dr. Pepper amongst analysts about lower revenue growth than its peers and fights with its bottlers. PepsiCo on the other hand has been setting up new strategic alliances in China and focusing on emerging markets abroad.

How To Break Your Loyalty Habit

Make It A Financial Proposition – It is not personal. It is business. That is how you have to look at investing. While I love Dr. Pepper, I will just have to wait for the rest of the world to come around before I earn the rate of return that I really want in my investments. You have to separate the two.
Simply Avoid Industries – If you have love for certain companies over others, you may simply need to avoid entire industries to keep your conscience clean. There is nothing that says I absolutely must invest in the beverage section of the consumer staples industry. There are so many other great companies that are equally as good to invest in.
Know Thy Self – As with most investment decisions, it is so important to know and understand what makes you tick. Understanding your personal bias and preferences is half the battle when choosing the right stocks to invest in. Simply knowing that you are loyal to a fault, for example, can help keep you out of bad investment decisions before they even start.
What about you? Are you bias in your investing decisions? Are you too loyal?

This article was written by Dividend Ninja. If you enjoyed this article, please subscribe to my feed [RSS]


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