As we get towards the end of the year I thought it spend a few moments on how my investment journey has evolved through the course of 2016.
It’s hard to believe that another year is almost done. I wanted to share some observations on how my investment journey has evolved over the last couple of years and in particular the evolution of my thinking and strategies in 2016.
I started out largely focused on dividends from large-cap stocks. This strategy was progressively augmented with accumulation of broad-based large-cap indexes such as the S&P 500. The combination of these two things largely makes up the bulk of my investment assets.
I started to become a bit more adventurous overtime and noticed that the steady increases that my large-cap dividend stocks provided could likely be magnified by looking at earlier stage companies that adopted a progressive dividend policy.
My reasoning was that given the growth of these businesses would be greater than that the more established large caps that I could accelerate my dividend growth income growth even faster through these investments. I had some measure of success in deploying this strategy eventually that led me to consider a policy of looking at earlier stage businesses to provide dividend income growth and also capital gains.
At that point I started chasing earlier stage dividend income paying businesses. Unfortunately after a few of these investments didn’t pan out I realized that it’s not enough for a business to pay dividends. To be assured of consistent dividend income growth, the fundamental business model needs to be robust enough to ensure consistent cash flow generation and ever-increasing operating income to best provide for consistent dividend growth.
Then I went on a journey to be more thorough and holistic in my investment choices. At this point I realize that dividends were just one pathway to financial independence but owning the best businesses and picking them up at the right price likely provided the best prospects for long-term capital appreciation and income growth.
That led to a more concerted focus on the best businesses in my investment universe. My aim was those companies that were strong cash flow generators experiencing secular tailwinds that would help propel them for at least a decade of growth. I also wanted companies that had high returns on invested capital that could mean the deployment of incremental capital at high rates of return to provide a consistently compounding machine.
This was the time I realized that my search on dividend paying companies was more fundamentally about finding the best businesses that were awash in cash and either pay that out in the form of dividends today or could compound that cash create incremental value for shareholders through buybacks and on near-term growth opportunities and then ultimately pay that out in the form of a dividend later on.
This realization resulted in my ambitious Project $1Million which is focused on high-growth high ROIC businesses that can provide meaningful capital appreciation over the next decade.
The next major point of self-discovery for me curiously stems from some of the comments that Robert Kiyosaki had made in the media. Now while I don’t pay a lot of heed to some of the things that he says one statement that he’s consistently made was something that I mulled for a period of time.
He saw he argues that the best path towards long-term wealth creation isn’t owning a basket of individual stocks or investing through 401(k). Rather he argues that real wealth is created through owning your own business. Now I happen to sit back and mull over that point in more detail over the course of 2016 and I realized that there is something to be said for that philosophy.
While owning a broad-based basket of stocks through a major index will get you consistent growth in appreciation it’s never going to make you significantly rich. That’s largely because holding such a broad-based basket of mature companies is going to result in diluting the performance of the companies that do well, while of course insulating you from the ones that do poorly.
As a result your performance is always going to be mean reverting and perhaps consistent with a high single digit type return. Now while one could certainly become quite affluent just following that strategy for an extended period of time it’s unlikely that one is going to be rich just investing in the broad-based index.
Given that I still have a considerable amount of time on my side, I gave more active consideration to this advice. My fundamental problem with what Kiyosaki’s advocated is that building your own business isn’t necessarily a pathway to guaranteed success.
The concept needs to be so unique that you can keep competitors at bay over a long time and also be able to grow in scale your concept over the long term. That’s easier said than done!. The rate of failure amongst small businesses, early-stage venture capital firms and even blogs in the marketplace is testament to that.
However I thought to myself, what if one was able to identify an earlier stage concept that had a long runway for growth and become a meaningful silent partner in that business by deploying a large chunk of capital in something that had a good pathway to success.
It was this idea that led to my experiment “if I was a start up employee”. See start up employees effectively have that kind of mentality when they throw their lot in to work with an early-stage startup. They often sacrifice wages benefits and quality of life for the short to medium term, in the hope of generating substantial capital accumulation.
I also resolved to try such an experiment myself the only reason. The only reason I felt comfortable pursuing that path was that I happened to come across a couple of promising early-stage concepts that I believe have far greater prospects for long-term success and substantial capital appreciation than anything that I could build on my own.