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“Non-Heroic” Investing: Sleeping Soundly Through Market Turbulence

“Non-Heroic” Investing Sleeping Soundly Through Market Turbulence

Author and investor Steven Bavaria explains how an “Income Factory” allows us to tune out the noise about market ups and downs and focus on what really matters: growing our income stream.

Conventional wisdom among investment and financial media professionals is that market price growth is the be-all-and-end-all of investing, with success depending on placing “winning bets” on the right securities. This works well as a business strategy for the media by keeping investors’ attention glued to their TV screens, and for the investment industry, which can promote a myriad of strategies for “smoothing out” or hedging market ups and downs.

But many investors are coming to realize that growing their income stream is what really matters to long-term financial security, NOT the arbitrary price the market attaches to the portfolio creating that stream. In fact, worrying about short-term price movements can be counter-productive to maximizing the long-term value of our portfolios.

The first thing many investors do when they get nervous about market price volatility is to “move cash to the sidelines.” Unfortunately many are still on the sidelines when the market starts back up again. That’s like being left on the platform when our train pulls out, with no conductor blowing a whistle to tell us the “market train” is leaving. Missing that train once or twice over the course of one’s investing career can make the difference between a mediocre 5-6% lifetime return and achieving the historical average equity return of 9-10%. That in turn can mean a retirement income several times larger……or smaller.

“Income Factory” investors think of their portfolios the way Ford Motors thinks of its automobile plants. Ford doesn’t worry about their plants’ re-sale values. Instead, it focuses on how many cars and trucks they produce, and how to grow that number over time. If we regard our investment portfolio as a “factory” whose job is to produce income, then it becomes easier to ignore short term price movements and instead focus on the “river of cash” it produces, and how to increase that.

Then we can discard the idea that our investment’s “total return” has to depend on market price growth, instead of being a blend of cash income plus growth. In fact, “math is math” and our total return calculation is indifferent to how much comes from growth and how much is cash yield. We can achieve a 10% return just as effectively from a 10% cash dividend and 0% growth as from a 0% cash dividend and 10% growth, or 5% and 5%, and so on.

That means we don’t have to look for the next Johnson & Johnson or Apple that pays a paltry 1, 2 or 3% dividend while we have to “wish, wait and hope” for the stock to grow at 7 or 8% year after year to meet a 10% growth target. Income Factory investors can stock their portfolios with a variety of higher yielding slow-growth or no-growth securities paying 9 or 10%. By reinvesting and compounding that 9 or 10% dividend stream, they create their own growth even if their assets’ market prices never grow a nickel.

This has two major advantages. First, it removes a lot of the stress and angst of market downturns, transforming them into opportunities to reinvest and compound our Income Factory’s river of cash at bargain prices and even higher than normal yields. That’s why, counter-intuitive as it seems, an Income Factory actually grows its income stream faster during downturns than during bull markets.

Second, it utilizes what we characterize as “non-heroic” investing. Investing in stocks that pay tiny dividends and have to grow in order for our investment to pay off is “heroic” investing. It’s like betting on horses that have to win, place or show for our bet to pay off.

Buying securities that never have to grow their distributions or their market price, but merely have to keep on paying dividends at their current level, with no growth expected at all: that’s “non-heroic” investing. It’s like betting on horses to merely make it around the track and finish the race. And it’s a much easier bet to win.

Income Factory investors have learned they can earn an equity return and sleep better through downturns, all while making bets that are easier to project, model and win than traditional equity bets.

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“Non-Heroic” Investing: Sleeping Soundly Through Market Turbulence

Steven Bavaria has 50 years of experience in international banking, credit and journalism, having worked at Bank of Boston, Standard & Poor’s, and Investment Dealers’ Digest. He introduced the investment philosophy that became The Income Factory: An Investor’s Guide to Consistent Lifetime Returns on the popular investment blog Seeking Alpha.