Income Investing Secrets

Income investing is your key to financial freedom and a worry-free retirement.

There’s one problem.

The only problem with investing for income is that people keep mixing things up. You have buried in your thinking a program called “Investing for Capital Gains.”

They keep forgetting how and why they’re investing. They look at the bottom line.

They should look at the kinds of stocks which pay high dividends: utilities, established consumer brand names, financial stocks, Real Estate Investment Trusts, and Master Limited Partnerships.

Investing is a time when you should NOT look at the bottom line. It’s an ever-changing distraction.

You should focus on:

A. The number of securities (shares of stocks or Exchange Traded Funds, numbers of bonds, and even numbers of shares of mutual funds.

That number will not change every day. It should go up in time as you: 1. Add to your portfolio from your ordinary income and 2. Reinvest the income from your portfolio.

B. The amount of income coming from your portfolio.

This should normally go up as the number of securities goes up. That’s because companies try to not reduce their dividend payouts. Instead, the best companies increase them every year. And bond interest payments should remain steady.

The  market prices of securities changes constantly even while the New York Stock Exchange, NASDAQ and the others are closed.

For Income Investing, Market Price is a Foundation of Sand

How can you depend on prices which constantly fluctuate?

You can’t.

The old excuse that price drops are only “paper” losses is true, except that these days it’s recorded electronically.

And the reverse is true, though people don’t like to think like that. They want to believe that the increases in the market prices of their portfolio means something.

Get over it.

If you buy one hundred shares of IBM today for $1,000 and tomorrow it goes up to $1,200, you have NOT “made” $200. You bought one hundred shares yesterday and today you still own one hundred shares. Their market value is irrelevant unless you sell them. And then you don’t have them anymore.

What do you have?

Cash. Cash is not a bad thing. If your purpose was to raise cash for some need, then you have to do what you have to do.

However, cash is not appropriate for a long-term retirement portfolio, and that’s the goal here.

You  should have enough cash in a money market account to pay for at least six months of expenses, as an emergency fund.

You should also keep in cash any money you expect to need in the next five to ten years.

For instance, maybe you’re saving for a big vacation, college education for your kid in high school, a wedding yours or a child’s), a downpayment on a house, or something similar.

That money should not go into the stock market.

Income Investors Do  Not Depend on Market Prices

If you’d put such money into the stock market in early 2000 at the height of the  Dow Jones Industrial Average of 11,700, it would soon have dropped a lot in value.

Or if you’d chosen October 2007 when the Dow hit 14,000 — and then slid to below 7,000 in March 2009 thanks to the financial crisis.

The ordinary  long-term investor tries to ignore such market drops. They comfort themselves with the buy and hold mantra that the market always goes up in any twenty year period.

Unfortunately for them, that’s usually true but not always. It took the DJIA over 25 years to regain the high it hit in August 1929. It didn’t see that mark again until late 1954.

Besides, just because something has been true in the past doesn’t mean it always will be. A lot of things have happened that are unprecedented.

The bull market of 1982 to 2001 was longer than any before, and the high tech boom of 1995 on beat all over market crazes and bubbles.

And the financial crisis of 2008-2010 was unprecedented for how it destroyed the value of all assets. There was no safe haven in those years, though many income-oriented securities got hit a lot less than others.

All market commentators who advocate long-term investing rather than short-term trading agree that people should not put money into the market for any less than five years (I  personally prefer twenty.)

I Tried Many Things Before I Discovered Investing for Income

I spent many years trying to get rich quick, and instead succeeded only in blowing my funds on biz op schemes and scams, learning about businesses I was not suited for — such as real estate and multi-level marketing — and in general wasted a lot of time and money, though I do believe that background is helping me now.

I studied commodities trading in depth, before finally realizing that it would take both a great system — which seemed quite elusive — and more spare funds than I could afford to risk just to get started. Not to mention all the electronic tools and trading platforms that were needed, not to mention all the books from Windsor Press and others that I still felt I should buy and read. And commodities books are much more expensive than most. Apparently because the publishers assume their customers have a lot of money to spend — or they shouldn’t be in commodities to begin with — and expect to make even more.

I studied investing in the stock market, but never could get traction with that. I needed a lot more detailed data about 1,000s of companies than was available except through special services.

I even studied penny stocks. But by the time I paid high commissions to buy on the Vancouver Exchange, I couldn’t make a profit.

I studied options. Options are fascinating because they seem to offer guaranteed ways to make money. However, I eventually realized that the fatal flaw to options investing is still knowing what the market is going to do.

Options books say that, “if you are bullish on the market then you buy calls.” When they get to more complicated spreads for people who realize they can’t predict the  market’s direction, they say, “if you believe the market will remain within a trading range, then you put on this trade.”

I did that for Treasury bonds in the summer of 98, figuring that Treasury bonds were such a boring investment of course they’d remain within that particular range. Fortunately, I did listen to the advice to hedge my trade, or I’d have lost even more money when the Russian stock exchange lost ninety percent of its value in a short time and, fearful of a repeat of the Asian currency crisis of late Ninety-Seven, everybody in the developing world sold their jewelry and cashed in their local securities to buy Treasury bonds, sending their index through the roof — certainly through the top of the trading range of my trade.

Just What is the “REAL” Value of Stock at any Given Moment?

I spent hours puzzling over the “intrinsic” stock value question.

Efficient market advocates maintain that the value of any particular stock is its market price. That sounds logical in many ways. Whatever the market will pay, is what it’s worth. But that fluctuates constantly. What kind of “intrinsic” value changes every second?

Does the intrinsic value of a company change every second? That makes no sense. Yes, over time, company values go up and down. General Motors is certainly not as valuable to the American and world economy now as it was fifty years ago.
But to say its intrinsic or “real” value changes by the second makes no sense.

“Value” investors led by Warren Buffett carrying the baton of Benjamin Graham maintain that there is an intrinsic value of a stock that’s different than the market value.

It can be higher than the market price, in which case it’s a bargain you should buy.

Most of the time the “real” value is under the market price, which means it’s too expensive to buy.

These investors also maintain that in the “long run” the market price will reach the intrinsic value.

The Long Run Last Longer Than Our Lifetimes

But how long is the long run? Coca-Cola is one of the stock exchange’s great companies, no doubt. And it’s been in business a long time. Yet its stock price still fluctuates second by second. So it still hasn’t reached its “long run” yet.
In fact, there is NO stock on the exchanges that maintains a slowly changing price in recognition of its “real” value.
Benjamin Graham never told us how long the long run is.

The market still haggles over the price of Coca-Cola, and always will.

There is  no universally agreed upon method of valuing stocks. If there were, investing and trading would be so easy nobody could make money with it. The  market price would always be the fair value, because nobody would sell for less or buy for more.

At Last We Get to Investing for Income

John Williams Burr came up  with a concept that on its surface makes a lot of sense. The present value of a stock is the present value of all expected future income streams from dividends and its sale price.

But yet there are a lot of unknown variables in that picture. You can’t know all the dividends a company is going to pay out in the future. Indeed, the company may last and pay dividends forever, in which case its future payouts are infinite and therefore so is its present value.

But we can’t afford to pay an infinite amount of money for a share of stock. Even Bill Gates doesn’t have that much money.
And we don’t expect to live forever to receive all those dividends anyway.

And it’s fine to “expect” to sell a stock at a certain price, but you have no guarantee that will be possible when you wish.
If stock traders and investors always got what they “expected,” this would be Heaven, not the real world.

And different investors/traders can have different goals and expectations.

It’s claimed that for every stock transaction, there’s a winner and a loser, but is that really true?

What if I own 100 shares of IBM that I paid $20 for, and it’s now at $100. And I need to raise some cash to pay off a loan. I may be happy to get the money I need while making a $80 per share profit. Because of that loan, I’m not interested in IBM’s future price increases. You bought it because you’re sure that at $100 per share it’s a bargain and will go up, and it does.

Seems to me that in that transaction both buyer and seller were winners, though for different reasons.
The assumption almost all market commentators, stock buyers, brokers and everyone else makes is that you buy to sell for a profit at some later date.

But what if you buy to hold the stock forever, while collecting dividends?

Income investing changes the entire ball game.