Dividend Growth Investing, Retirement Income, Stock Market Investing

The 2nd Principle: Know What to Buy

I recently wrote of the First Principle: Always Know What Market You are In. There are only 3; the Bull, the Bear and the Transitioning Markets. If you know what each looks like, you can always have a very good idea just what market we are in. Beyond this First Principle, the Second Principle is to Know What to Buy. What should you buy? Wall Street says that there are micro-cap, small cap, mid-cap and large cap stocks. They tell you that there are growth stocks and value stocks… they have essentially told you NOTHING! They don’t want you to know anything. Wall Street wants you to believe that they are the experts, and to just trust them and send your money to them. It’s a great business!

Here’s the truth: Corporations are formed to MAKE MONEY. The real issue is simply whether a corporation is making money, or not. Beyond that, questions like, how quickly does it make money, how consistently does it make money, and how much money does it require to make its money… these are all questions that require an answer. And, fortunately for us, there is a way to find the answers to those questions. Because, you see, Wall Street actually pays Certified Financial Analysts obscene amounts of money to do one simple thing. Wall Street’s analysts are paid to foretell the future!

There are a lot of analysts on Wall Street. All of them are attempting to foretell the future, and they actually attempt to foretell the money-earning future of each individual company listed on the exchanges. The only real problem is, (besides trying to foretell the future, that is), is that Wall Street does not readily share what their analysts produce with anyone else. But, THIS is the data by which Wall Street makes its own investment decisions. Knowing that, I found a source of that data, and my investment decisions are largely made by charting 10-years of this “analysts’ consensus of forward-looking earnings estimates.” With that picture, I can tell a lot.

What I want to see when I chart this forward-looking estimate data, is I want to see the smoothest, upwardly trending line, from the lower left of my screen, to the upper right. Beyond that, I want for it to at least triple during that period. Charting similar data for the companies in the S&P 500, I can see that it is not very smooth, and it barely doubles in the past 10 years. Now, why is a smooth, tripling line important to me?

The importance, to me, of a smooth, tripling earnings estimate line is that it tells me that the company I am examining is not easily influenced by outside economic forces, but, instead is more capable of “writing its own check,” as I like to call it. The business model of that company can succeed in seemingly just about any economic climate… especially like the one of ’08 and ’09. You see, what I want more than anything, is a safe-dividend grower. And, any company that was able to maintain its business and growth, and its dividend payout, along with attendant dividend increase “pay raises” through ’08 and ’09 is precisely the very kind of company that I want to buy-and-hold, hopefully, for life!

I know this: I want to harness compounding growth to my portfolio. I know that will best come about by means of an ever-growing dividend income stream. I know that the only way to have an ever-growing dividend income stream is to acquire shares in the companies demonstrating the most consistent, reliable, reasonable and sustainable earnings growth. I know how to find MY companies possessing the very “prettiest” forward-looking EPS lines! I know what I want to buy….

Here’s to your investing success!
Harold F Crowell


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