Frankie’s Investment ‘F’hilosophy

So far I’ve introduced you to the First Few Fully-Franked Dividend Shares in the Fund, and hopefully through those posts on Virtus Health, Telstra and Prime Financial Group, you’re getting a Flavour for the way I invest. But it’s probably worth taking a quick time out to highlight my ‘F’hilosophy of investing a little Further.

Let’s start with a Few key points:

1) I’m a big Fan of Index Funds

I mentioned earlier that one of my very good buddies is a hard-core Indexer (I’ll introduce him very soon!). Index funds (or Exchange Traded Funds – anything that essentially follows ‘the Market’) have some excellent advantages:

  • They provide instant diversification across a large number of stocks and markets
  • They take the worry out of selecting individual stocks
  • They keep going Forever – poor performing companies end up Falling out of the Index, and are replaced by other (hopefully better performing!) companies. No worrying about whether the company you’ve invested in will go bankrupt and vanish overnight

But given my background, my keen interest in businesses and stocks, and perhaps just a touch of competitiveness and restlessness, I can’t just sit back and let ‘the Market’ run its course with 100% of my Funds while I do nothing.

I also love the ability to tailor my portfolio exactly how it suits me, and not own what the index tells me to own (yeah, I’m such a rebel!). I can decide to not own any banking stocks, even though they make up over 30% of the ASX 200 index.  There are plenty of companies within ‘the Market’ that I’d prefer not to invest in.

But one of my biggest reasons for Focusing on individual shares is my views on the nature of markets…

2) Frankie Feels the Market is not Fully eFFicient

There’s plenty of theories out there about how markets work, and varying degrees of belief about how eFFicient the Market is.

But it’s hard to argue with the Fact that emotion and herd behaviour plays a huge role. As a result, there are times where the traded prices of certain businesses or assets just don’t make any sense.

Now the Market does what it wants to do, and just because a company ‘should’ be valued more or less at any point in time doesn’t mean the Market will agree. But from my experience, the Market usually comes back to reality at some point – when this happens and for how long is the big unknown. Patience is absolutely critical if you play this game!

And the upshot of all this means…

3) Certain Shares are out of Favour at any given time

This is particularly true when there’s something much more exciting happening, like tulip bulbs, dot.coms or bitchama-bob-coins. People lose interest in other industries and businesses that seem less exciting.

This also happens when the Market Focuses too much on the short term. A profit announcement that doesn’t ‘meet expectations’ can have impatient investors dumping shares, regardless of whether it impacts the longer-term earnings and value of the business.

The Future is impossible to predict, of course. But more often than not, all it takes is a little bit of good news (or less bad news) for the Market to get excited again, lifting the value back to where it ‘should’ be – or beyond as often happens.

But even if that doesn’t always eventuate, and the Market doesn’t play along as it should (or you’re just plain wrong!), throwing in some Fully-Franked dividends provides a Fantastic Foundation….

4) Fully-Franked Dividends provides Fantastic tax benefits – especially for Frankie

It’s always tricky talking about ‘long-term average returns’ for shares, as it all depends what specific shares you measure, and where you measure from and to. But let’s run with a ball park figure of 9% per annum for arguments sake.

If you’ve passively invested in some solid Fully-Franked Australian dividend shares, with an average yield of say 5.0%, that will have made up for more than half of your returns. But add in the Franking credits, and you’re looking at a 7.1% yield (see here for a quick summary of how Franking works). That extra 2% might not sound like much, but run that through a calculator over 10 or 20 years and you’ll see a ‘F’henomenal difference in your Future Funds. Especially if you are Fortunate enough to have an account in the low or nil tax threshold.

Combine this with some sensible investing in a market you understand, and you’re looking at a pretty compelling investment case from my perspective!

But all of this means nothing if you don’t…

5) Focus! It’s too easy to slip up in the Investment Game

For me, this is by Far the BIGGEST reason most people don’t invest successfully on their own. There are just Far too many traps to Fall in to… and most of them are of our own making.

Being impatient. Getting greedy. Freaking out and selling at the worst possible time. Jumping on (or being pulled on) a bandwagon. Along with some of the other wonderful biases we humans seem to exhibit when investing:

  • Confirmation bias – hearing what we want to hear, and ignoring all the other useful information
  • Self-attribution bias – “Wow, the stock price went up because I’m such an amazing investor!” / “Damn the stock price went down thanks to that stupid [external Factor not at all related to the investor]”
  • Anchoring – making decisions based on an arbitrary reference point, such as the price we paid or the all-time high stock price
  • Hindsight bias – looking back and believing events were predictable (e.g. “my stock went up, and I knew it was going to happen! Prediction is easy! I’m putting all my money in this next stock because I know it will go up too!”)
  • Endowment effect – valuing something more just because you own it (making it harder to let go of something you perhaps should)
  • Disposition effect (or Framing) – not wanting to sell ‘losers’, and preferring to lock in ‘winners’, all because of the labels we use
  • And on the examples go….

It’s a Mental Minefield out there.

Yes, it’s easy to think you won’t Fall for these. But the Fact is, we are just wired this way.

Awareness is the First step in figuring out how best to stop yourself doing some of these stupid (but perfectly common) things.

Focus also means tailoring your own investments to suit you. As you know by now, my Focus is undervalued or unloved Fully Franked Dividend shares, and companies where I can at least attempt to understand its value. I don’t go chasing speculative stocks, and don’t invest in bonds, commodities, Fine art or collector coins (or their new Fancy digital counterparts).

In Summary…

The Fully-Franked dividend shares are merely my Foundation. If I can identify undervalued shares that also pay these Fully-Franked dividends, there should be two major benefits:

  • Eventually the ‘Fair value’ of those shares will be recognised by the Market, resulting in an increase in share price and valuation (assuming I’m right, which I won’t always be!); and
  • While I’m waiting for the Market to return my shares to ‘Fair value’ (or beyond!), I’m receiving Fully-Franked dividends with an annual yield in the ballpark of 6% to 9% grossed up (Fully-Franked).

If the share prices go nowhere for years, in theory I will be happy with an average Fully-Franked dividend yield upwards of 6% as a (hopefully) worst case scenario in the long run. Sure beats the cash deposit rate!

And as you’ll have guessed by now, I expect the Fund to do better than the Market.  I absolutely love this stuff, but not enough to stick with an under-performing portfolio for the Fun of it!

It helps that I’m not charging myself any exorbitant management Fees, and I don’t consider the extra time spent to be a major opportunity cost – there’s enough room for this in my life, and time for everything else important to me.

If you stick around for this ride long enough, the proof will be in the Fully-Franked Fudge Pudding either way! I look forward to sharing the Fund’s performance with you all, as well as hearing about the Fortunes of your own Funds!

 

What’s your investment ‘F’hilosophy? Are you a hard-core indexer, or love the challenge of beating the market? Do you try to time the market, or prefer time IN the market? Do you dabble in the speculative stocks, go for growth stocks, or prefer a solid dividend paying portfolio? 

10 Comments

  1. Hello Frankie. I primarily focus on US based dividend growth stocks as the core of my investment philosophy. I let funds and ETFs do the bulk of the work in other areas like fixed income and non US based stocks where I don’t have the time and expertise to do it effectively. One rule I never break is, everything I own must pay a regular dividend. If it doesn’t, I won’t buy it. Regardless, it’s important to have a philosophy to base one’s investment decisions on. Looks like you have a good one that works for you. Tom

    • Frankie

      Hey Tom, absolutely agree you have your own philosophy that suits your style and works for you. That’s what makes a market after all – if we all did exactly the same thing there’d be problems! You seem to have a pretty solid framework, and a good rule about the dividends. I’m pretty sure I’ve bought a few shares in the past that didn’t pay dividends, but at this point in time I’m sharing that rule of yours!

  2. hey Frankie. cool site. I like your landing page. Like you I like individual stocks trying to buy some that are out of favour at the current time.
    keep it up the site looks good.

    • Frankie

      Thanks PassiveCanadianIncome – early days here so appreciate your comments! Gotta love when the Market gives you an opportunity to buy out of favour stocks – your recent Canadian Utility purchase sounds like a great example.

  3. I definitely like index funds, but I have always had a love for picking individual stocks. You have a great philosophy and I think it will serve you well. Right now, I am looking at adding a bigger position on Reality Income Corporation. I think this is a great company. I primarily focus on US Stocks.

    • Frankie

      Realty Income sounds like good value from what I’ve seen – and it pays monthly dividends! Along with a very nice yield. The US is a great market to invest in with some very different (more innovative!) businesses than Australia. I’ve held a couple of US stocks in my personal account, and Realty Income is a tempting one to consider! But it’s hard for me to go past those big, fully-franked dividends we get here – the tax benefits are a very nice bonus.

  4. Those biases made me laugh 🙂

    They’re so obvious but everyone does it!

    Our approach is similar to yours – sort of a value and income bent. Investing in good quality LICs and individual stocks that provide good income and prospects for dividend growth over time too.

    Whatever happens to the share price is out of our control, so I try not to pay attention to it. Just income plus income growth. Eventually the price follows the earnings/dividends anyway. But most people put the cart before the horse and focus on the prices.

    • Frankie

      Yup, none of us are immune!

      You’re right that the price eventually follows earnings and / or dividends – that’s the number 1 driver of value at the end of the day. I do like paying attention to the share price when it starts moving well below a reasonable valuation though….

  5. Nice philosophy Frankie and I liked the biases that you listed. If you’re aware of them then you can fight against them in some way. I’m certain you’ll beat the market with your fhilosophy 🙂 Good luck!

    Mr DDU

    • Frankie

      Thanks Mr DDU – I’m certainly hoping luck has a positive part to play too! I’ve spend many years trying to learn to fight against those biases, but I’m not sure whether I can say I’ve fully ‘defeated’ them yet…

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