Hi folks,
after I polled the Getquin community, there was another very close race between biofuels and the "older" topic "Why I am a dividend investor" came about. The dividend topic won by a very narrow margin. At this point, a big thank you to everyone who voted - your opinion is important to me. I will definitely be discussing biofuels on my YT channel - if you want to see it here on Getquin - let me know :)
The topic of dividends today, like that of veganism on the trading floor (https://tinyurl.com/364sdnc5) is very emotionally charged and in many financial forums there is a lack of objectivity. Therefore, I would like to present my opinion here as neutrally and information-based as possible.
IMPORTANTThis is not investment advice. It is also not an invitation to buy/sell financial products. I am merely expressing my opinion here. You are responsible for your own decisions.
In the following, I will first discuss my personal investment goals, then present my stock market strategy and thirdly, critically examine other investment philosophies and compare them with my opinion. The almost philosophical headings are:
Who am I? (Introduction)
2. what type of investor am I? (Influences on my investment decisions)
3. why am I not...
1)...70/30 investor?
2)... ACWI investor?
3)... Exclusive single stock investor?
4...My flirtation with other investment strategies
1)... why I ended up with Core-Satellite
2)... why I use dividends
As the topic will be relatively extensive, I will separate the topic blocks from each other - so theoretically you can jump between the blocks if you are only interested in my opinion, for example.
Who am I?
So let's start with me. I'm BASS-T, 29 years old and have been active on the stock market since 2010. If you count back, I was 17-18 years old in 2010 and, due to my fascination with BMW and Apple, I was often up to date with the latest developments in these companies. I enjoyed reading up on the business analysis of new products and making connections with the economy around me. However, I soon realized that many people had a rather dim and elitist image of capital markets and financial products. I personally found this very unfortunate.
So I did some research and came across the Deutsche Telekom share crisis during the dotcom bubble of the 2000s. On November 18, 1996, the Telekom share became tradable on the stock exchange in Frankfurt and went into the pockets of private investors for just under €15. An increase in value to 103.50 in 2000 was the high point and seemed to justify the grandiose advertising campaign with well-known stars and the image as a "people's share". However, as a result of an overvaluation of real estate and the dotcom bubble in March 2000, the share price fell by 90% to below €10 (see (1), (2)). This was the basis for all statements such as "You only lose money on the stock market" and "Savings accounts/pensions are safe". Even today, such claims make the hairs on the back of my neck stand up, but even then I tried not to pay too much attention to this opinion against the backdrop of the huge speculative bubble and exaggerated advertising slogans of the time. It was obvious afterwards that such promises should not have been made to a largely inexperienced public with capital market issues.
Nevertheless, I was already aware at the time that with a deposit interest rate of around 1.4% and an inflation rate of 1.1%, the gap was no longer too great and that it must be possible to earn more money better and faster with the money (see (3), (4)). So I started to look up well-known companies on the Internet, looked at the companies that produced everyday foodstuffs and slowly dipped my toe into the stock market. One of the first stocks I looked at was NVIDIA and Square Enix in direct comparison. I was also interested in companies like Unilever as they were often available and very prominently placed in the supermarket. Pretty much every supermarket had products from this manufacturer in its range, so I also started to look at this company. With a vague basic understanding of turnover, profit, share price and dividends at the time, I looked at the individual charts. Although many parameters such as the ominous "P/E ratio" didn't mean much to me and the information available at the time was still rather sparse, my interest in shares was definitely piqued. I started reading specialist literature in the library to gain a basic understanding in preparation for my studies (see (5), (6)).
But how did I end up with my dividend investments?
2.What type of investor am I?
I received my first dividend around 2011 - 18 cents per Square Enix share. Not a particularly high amount. Nevertheless, I liked the idea of participating in the company's success. Collecting the dividend as a payout from a company's annual profit was both reassuring and fascinating for me (see (7)). It should not be forgotten that the population had little confidence in shares due to the dubious "TELEKOM - Da mach ich mit" campaign mentioned above. I felt this several times, as every disadvantage, no matter how unreal, was pumped up into an over-represented fact - "Yes, and what will you do if prices fall?", "My money is safe in my savings account - I don't need the stock market" was often heard even among those interested in economics in secondary school. I only criticize these sayings because they are not based on analytical reasoning, but are a relic of old thinking.
Unfortunately, this relic still carries a lot of weight, especially today, if I take the study by the opinion research institute Civey as a basis. Here, 5,000 citizens were randomly asked about their attitude to the equity-based pension and asked to rate it as "I am positive about the equity-based pension" or "I am negative about the equity-based pension". The respondents were then assigned to the federal states, so that a 43%-48% rejection of the equity-based pension can be observed in eastern Germany in particular. The text of the study seeks an explanation in general disinformation and a lack of knowledge about the functioning not of the equity annuity but of the stock market in general. The resistance is therefore largely based on a lack of willingness to research or a general lack of interest on the part of those involved. Unfortunately, an exact percentage breakdown of who exactly voted due to a lack of education or fact-based rejection is not provided. I would love to tell you that the study was only carried out online and that perhaps the wrong people were simply approached - unfortunately, however, the study is significant and representative when the statistical error is taken into account. In my view, this is a major sign of the almost convulsive adherence to the outdated pension model and ignorance of demographic trends (cf. (2), (8)).
Even when I was doing my A-levels, Germany was in second-last place in a comparison of countries, with only 2.9 contributors per person of pensionable age (in our case = pensioners). At that time, it was calculated that by 2050 there would only be 1.5 contributors per pensioner in Germany. Of course, further developments came onto the scene in the 2010s and the study and its calculation need to be updated. Nevertheless, it seemed critical to me at the time to rely on pensions. To this day, I can still hear Norbert Blüm's saying from the 80s. More precisely: from 1986 in the election campaign for the CDU - in conversations with citizens concerned about their prosperity again and again (cf. (9), (10)). The actual, perhaps unspectacular, starting signal for my start on the stock market actually came to my mind on a bus ride:
Pensions may be secure - but when and on what terms?
I started researching - especially as I have always been interested in economic and social issues. Back in my day, between 2010 and 2016, investment on the capital market had taken a nosedive. In 2010, just 8.4 million Germans were invested in funds, shares, ETFs or a combination of these. Although this figure may seem relatively high for Germany, a country that is not fond of shares, we were already at one and a half times this figure in 2001. At that time, just under 13 million Germans were 56% invested in the capital market in the form of funds/ETFs, 20% in a mixture of both and 24% exclusively in individual shares. This represented the largest absolute share of Germans on the capital market up to and including 2020 (see (14)).
In contrast to this, numerous university parties literally stormed into welcoming events to take in the potential new first-year students. I will probably never forget how easy certain parties made it for themselves and how little was done to counteract their brazen actions. I don't have a problem with the promotion of party content - but I do have a problem with the use of commercial incentives not even to join a party, but simply to vote for it. Forming a political opinion is very important to me - but taking advantage of the poverty or low income of new students has struck me as negative on several occasions. Since not every course of study and every route to the Abitur provides for a practical basic economic education, promises and simple statements such as "The rich are doing too well, we have to act", "BAFÖG must remain compulsorily linked to parents' income, otherwise rich people will study here at our expense" and my personal favorite: "The stock market is only for speculators - the state must look after its citizens" fell on open ears. Suddenly the world in the university cosmos was very simple and there was a strong spin in a specific political direction, which I don't want to go into here. I also formulated the individual statements in a strikingly more intelligent way than I heard from the future students. Against the background of the above figures from (14), my impression at the time can be confirmed that a lack of interest in the stock market mixed with simple "the rich should pay via tax" rhetoric promoted the anachronistic and anti-equity opinion (cf. ibid.).
As a result of not coming from a wealthy background, but knowing that wealth must be earned, I stayed out of the political cosmos of university. I allow everyone their own opinion, but when I look at how unwelcome opinions are already being "canceled" at university campuses in the USA, i.e. virtually suppressed via exclusion, defamation and other undemocratic means, I hoped and still hope for a more intelligent discourse in Germany.
So far I have been disappointed.
In 2017, I heard on the sidelines that left-wing autonomists presumably wanted to stop Christian Lindner from the FDP from speaking at Ruhr University Bochum. It was thanks to his sheer rhetoric that his presentation did not have to be canceled. The videos of his appearance can still be seen today and still raise many questions for me. One sign called for free education for all - a popular mantra of the FDP (whether you like them or not) is that everyone can achieve something with a little effort. Neo-liberalism, moreover, was equated with the adjective "anti-social". I can only make assumptions, but obviously freedom of expression was probably trampled on at the time. In 2019, he was also banned from appearing on the premises of the University of Hamburg (see (11),(12)).
I don't want to promote the FDP here. I could also have presented other parties such as Freie Wähler, AFD or Die Linke. However, I was already aware at the time that a) our ailing pension system and the caring state with high expenditure for b) the social system and what I consider to be c) far too high a tax rate cannot finance this left-wing thinking for our generation. The FDP in particular, with its party program, therefore seemed striking to me (cf. ibid.).
Furthermore, at the time I was already feeling alienated from the idea that the state had to look after me 100% with a corresponding tax rate. Even though I had very little money at my disposal, I invested in promising tech companies and went to work in demanding part-time jobs in addition to my studies. I was interested in personal performance, which is why I particularly liked the taxation of retirement savings on the capital market in the USA. I liked the capital gains tax less, even though it was still irrelevant to me at the time (see (11)).
I would also be happy to write a contribution "Retirement provision USA vs. Germany". I would be happy to receive feedback in the comments column.
As I wanted to continue to take my pension provision into my own hands, I looked into the stock market. But why did I end up with the dividend strategy of all things?
3. Why am I a dividend investor?
Dividends were and are a great thing for me - both in the short term as a motivation booster and in the long term to secure a good return at favorable conditions. I myself started investing around 2010, for example, and at that time I was looking more at the long-term growth prospects of various markets (see (13)).
3.1 So why am I not a 70/30 investor?
The promotion of the 70/30 strategy by, among others, Finanzfluss and other channels around 2019/2020 has often led to me being asked why I considered a fund + dividend solution in my time from 2010 onwards. The stocks from back then still exist, but I have adapted my strategy over the course of my investing career. To make it easier for you to imagine, imagine the following simplified portfolio. I deliberately do not mention any names so as not to advertise:
Funds at industrialized country level (approx. MSCI World)
Funds at Tach level as a sector bet (approx. NASDAQ 100)
Individual stocks (Apple, BMW, Square Enix ...)
With this portfolio, I was able to a) participate in the significant economic growth of the 2010s decade, b) bundle my interest in Tach companies as a fund and c) take advantage of the dividend growth effect for software companies that were growing at the time. Due to my still rather limited experience and my low income as a student, this seemed to me to be the ideal way to do this.
Over time, I came to understand the world of equities better and better through my involvement with shares and the gains from my studies. A few years ago, I was faced with the choice of investing only in the above-mentioned funds or spending my free time researching companies that interested me. I opted for the latter.
It was and is important to me that I only invest in companies whose markets and special features I understand. So I researched the current consumer electronics market and quickly came across Apple, Square Enix and Sony. While Apple has paid a dividend since 2012, the amount was less than one dollar until 2014, Apple was rather irrelevant to me because of the dividends (see (15)).
The dividends received from BMW, Square Enix and Sony etc. also did not play a particularly important role for me at the time and I regarded them more as a contribution to my savings plans.
However, that changed in 2016 when I suddenly received around 30 cents for my 90 Square Enix shares instead of the usual 10 to 20 cents per share. A small increase, but I noticed the dividend growth effect for the first time. As I had bought the shares for around €11-15 (fluctuating around JPY 1,500) due to additional purchases, an average purchase price of €13 and a dividend of 30 cents resulted in a dividend yield of 2.3% for a tech company. This was in 2012. In 2016, I also received this amount of dividend, but the share price was no longer JPY 1,500 but JPY 2,500. In addition to the dividends, I had thus achieved price gains via book profits, which in my opinion is one of the best combinations on the capital market (see (16), (17), (18)). One might argue that my dividend yield has not increased, as Square Enix kept the dividend the same in 2012 as in 2016. Nevertheless, I was able to generate a lucrative additional income and invested the dividend in other shares such as Sony.
At that time, I already realized that I was very enthusiastic about this effect of continuous cash flow plus active share price performance. As Square Enix is a software company from Japan and therefore an industrialized country, I found the involvement with neighboring and emerging countries such as China, Taiwan and India quite exciting at the time. Many people may be surprised that the number one hater of emerging markets would say something like that. But I found emerging markets very interesting due to their economic importance. Combined with the above-mentioned comments on the shrinking German population, I came to the realization relatively quickly that future purchasing volume would probably not rot in industrialized countries. This rather simple consideration was due to the fact that I was still at the beginning of my investor journey and was assessing markets purely on the basis of the parameters I was familiar with. Of course, I was not an expert in market assessment at the time and only came to this conclusion because of Square Enix.
So I started researching the emerging markets. For those who don't know: Emerging markets often have a fluctuating definition between different brokers and even banks and so this time I just want to explain them with a macro definition. Basically, emerging markets were countries in the process of modernization. This speaks for an alienation from their own agricultural culture towards industrial standards when participating in the global market. To put it bluntly: fewer raw materials for export, such as wood, wool or natural gas, in favor of processed products such as sweaters from China at low prices. Governments themselves often have an interest in ensuring that citizens are better off by means of these standards, for example to increase the low per capita GDP income. That sounds terribly complicated again. Again, to put it bluntly and perhaps not 100% academically: every family should be able to afford a television, for example, or at least be free from extreme poverty. This is often not yet the standard in many emerging countries, even if extreme poverty was/is supposedly declining, at least in China. Here, at least the last 9 out of 832 counties in extreme poverty were upgraded in 2020, meaning that extreme poverty no longer exists in China according to the government. This results in strong volatility, strong growth and the option of strong profits. This triangle is one of the key growth drivers for emerging market equities (see (19), (20)).
Sounds really great, doesn't it? People are doing much better and I'm making a killing on their markets. So can we pull up our chairs and go home? Am I getting intoxicated with EM ETFs now?
Unfortunately not.
As indicated in the Chinese government's fight against poverty mentioned above, the government has a major interest in the positive development of the population. To this end, specially defined key figures are collected in order to make the success quantitatively tangible to the population and the world. The Chinese government sets a figure of $1.90 per day for this, as well as access to food, clothing, school and medical care, among other things. According to this calculation, the above-mentioned poverty reduction is successful. However, if an external assessment is made by the World Bank, China is fixed as a country with a low average income. This is important because the threshold is then not $1.90 but $5.50 per day. This is almost three times that of the Chinese government. If one follows this line of argument, 25% of China's rural population still lives in poverty: that is 373 million people (see (20)).
Why should that bother me?
1) Ethics: As an investor, I am responsible for my own investment decisions. Whether I want to support weapons, tobacco, alcohol, oil, child labor or anything else is an ethical decision. Even at Getquin you come across different values. I myself draw the line at weapons and child labor. Everyone is free to decide whether he or she wants to end up in the emergency room due to alcoholism or lung cancer. I am less free to decide whether I want to be shot or enslaved in a textile factory in war zones and emerging countries. This is not an ethical judgment on you, just my personal opinion.
2) Information flow & quality: Probably the most important feature of all components for the rational investor is: Am I getting my data? Can I trust the data? Thirdly, what do I derive from the data I receive?
I deliberately chose the example of China and poverty reduction. It shows that the quality of information in countries with different state regulation is often more difficult to assess from the outside. In principle, we do not know exactly whether it is not possible to live well with $1.90 in China. It also remains unclear whether the Chinese government's relocalization measures from the rural population to the urban population make sense and how exactly it affects the productivity of the Chinese commodities sector (see (20)). Ultimately, it's all just globally determined values imposed on a large economy. I don't like the fact that I can't really trust the stated achievements of the respective governments and that not all information can be verified externally. This lack of information quality has always bothered me about investing in emerging markets.
But this dark field doesn't just remain at the level of figures - even if his yacht has since reappeared off Mallorca, the disappearance of Jack Ma, the founder of the Alibaba Group, a good year ago was an absolutely dubious action. It is unclear to me why general criticism of the financial authorities has resulted in the extensive caning of an important industrial magnate and why there is not enough room for mutual discourse with important personalities. I am aware of the difference to a democracy, yet the sudden absence of important personalities in your company can provoke significant economic damage (see (21)). While the Alibaba share was still at around €250 in October 2020, the share price fell continuously to €150 in October 2021 following the departure of Jack Ma. There are certainly other factors at play, but a ship without a captain is worse off in a storm than one with a present leader. I strongly dislike this volatile risk in EM (see (21), (22), (23)).
Unfortunately, the Chinese yuan is not immune to current inflation, energy worries etc. either. In 2019, the Chinese government therefore lowered the interest rate for one-year loans to 2.75% from 2.85%.
Not itching? Understandable - because that's not true. It wasn't in 2019 but now on 15.08.2022 (!). In my view, the problem with emerging markets is that the engine of growth must always be running - the looming global recession means that emerging markets have a responsibility to keep "stepping on the gas". In order for companies to be able to borrow money more cheaply in this environment, the above-mentioned interest rate is being lowered. That sounds good, doesn't it (cf. (25), (26))?
Not quite.
According to DCF modeling, falling interest rates result in a higher value for tech stocks such as Alibaba, Baidu etc. in particular. Your future revenues are discounted less, leaving you with more inherent value for your shares. However, this comes at the expense of the counterpart of inflation, so more cheap money to borrow means more volume available on the money market, which ultimately drives up prices. I don't want to hold an economics discussion here, but this example is intended to underline the fact that monetary policy in emerging markets is often driven by the primacy of eternal continuous growth and does not adequately reflect macroeconomic disadvantages. A silly practical example: you buy a house with a loan above your comfort zone. Because interest rates are low, you believe that you can somehow manage it just on the edge. But now the follow-up financing is due and the interest rates are suddenly higher. The big problem is suddenly there. This also affects governments in emerging countries, which now have to react retrospectively to potentially misinterpreted project volumes (in your case, the house purchase). Often, supporting projects for key economic sectors such as tech in China are then on the verge of being deregistered and can collapse accordingly. In the words of Martin Hüfner, a prominent chief economist: "(Investors) are suppressing the long-term consequences. That is dangerous" (cf. ibid., (26)).
I could go on at this point about emerging markets, especially China. In conclusion, my opinion today is similar to the one I expressed around 2016 - TLDR: "Countries lack transparency, decisions too fixated on growth, ethically difficult, etc." I have to say that apart from the stock market, China holds a great fascination for me - the culture is very sublime and the Chinese people I know personally are very friendly and prudent. Nevertheless, I separate personal experience from the investment case and am therefore not directly invested in emerging markets.
I have thus shown in outline why emerging markets, using China as an example, are not an option for me. If you would like to read or watch this in detail via video, please leave a comment.
3.2 If you don't like the emerging markets - why not reduce their share via ACWI?
If I don't like French fries with mustard, why only take a small portion of mustard?
Theoretically, the idea of the ACWi is not wrong - one investor, one ETF, one savings rate.
However, the problem here is somewhat more complex. While the above-mentioned 70/30 portfolio at least allows me to continuously manage fries and mustard or MSCI World and EM in a fixed ratio over the years, an investment in the ACWI means total dependence on the global economy. If we combine this with the comments on the economic growth engine and its compulsion to run, the 100% dependence on the emerging markets becomes apparent, which I cannot escape. Even if the EM share of the ACWI is currently only around 11% and 2,900 different companies are included, what I don't like about this variant is the lack of dividend payouts and the fact that the benchmark index has returned 130.36% over a 10-year interval. That sounds like a lot of return and, judging by my approach to portfolio design, it is. Within the framework of my strategy, I evaluate return plus options for action against risk and effort (see (27), (28), (29)). According to the statements made, the effort is low, as only the savings plan date and amount have to be determined. The risk is relatively low when 85% of the global market capitalization is represented. I therefore do not see my exclusion criterion on the negative side. Where then (cf. ibid.)?
In the above-mentioned return and action options.
I can neither go for the proven economy in the short term, nor can I intensify my risk component. Even my first portfolio mentioned above with an industrialized countries and NASDAQ 100 focus offered more adaptive investing. I am only criticizing this against the background of my own investment philosophy, which I will outline again at the end. The only thing that is important to me is that in the time frame from January 1, 2012 to today, the NASDAQ 100 is up about 402%, while the broad ACWI is up about 118%. I am aware that comparing a broad market index with a sub-selection is always difficult - nevertheless, the comparison with the MSCI World (i.e. its industrialized country component) shows hardly any difference. We are thus comparing 113% of the MSCI World with 109% of the ACWI index. Basically, on the basis of the comments made in 3.1, I decide that the simple investment philosophy of ACWI investing does not really inspire me.
3.3 Why not be an exclusive single stock investor?
Now that I have compared two well-known types of investment in the form of 70/30 and the ACWI and hopefully outlined their disadvantages succinctly enough, I would like to conclude with my opinion on stock picking. In principle, I also use stock picking - but I am aware of my focus and the potential dangers.
One particularly clear danger lies in the study by S&P Dow Jones Indices (2019). They virtually analyzed the performance of actively managed funds compared to their passive counterparts. The result could not be clearer:
85% of actively-managed funds with a large cap focus reported worse results than the S&P 500 as a passive representative. This was not based on short-term performance to promote passive ETFs. Instead, it was based on a 10-year cycle. After 15 years, as many as 92% trailed their passive S&P 500. So you invest a large part of your money in active products only to get lower returns after brokerage and acquisition costs. It's like the meme with the bicycle and the stick in the wheel. Although you could easily set off, i.e. start with passive products, you put a stick in your wheels (= above-mentioned costs) at the beginning of the journey due to false promises (see (31), (42)). So where did this come from and why did it affect my portfolio?
Firstly, the likelihood of any of us being the next Warren Buffet with "magical" stock-picking skills is low according to the above study. The fund managers studied were professionals in what they did on a daily basis and had quick access to various data streams. Even with this high quality of information, it was obviously not possible to beat the market on a large scale. The idea that a collective of market information, investor decisions and passive products can be permanently beaten using one's own intellect is therefore unlikely (see (31)).
On the other hand, access to these markets has been greatly simplified. Almost everyone is familiar with neo-brokers such as Trade Republic or Scalable Capital. This lowers the barriers and more intelligence flows into the market. Combined with the above comments on financial flows and the ETF boom, ever larger investor flows with the corresponding knowledge collective are forming (see (14), (31)).
This is by no means a small investor problem. If you look at the performance of Berkshire Hathaway with Warren Buffet in charge between 2004 and 2019, Buffet's "fund" delivered an annualized return of 9.4% per year. The very broad Vanguard Total Stock Market Fund delivered 9.1%, narrowly beating Buffet's strategy. This sounds like a victory for stock picking at first, but long-term comparisons with the S&P 500 from 1985 to 2004 show that Buffet achieved 23.5% and the S&P 500 only 13.2%. The gap is therefore getting smaller and smaller (see (31)). This becomes clear when the comparison is made over the last 5 years. It doesn't take much - a simple Google Finance analysis of the indices shows two quasi-parallel price movements until the end of 2021, when Berkshire Hathaway in particular suffers a massive loss in value and both achieve the same performance in February 2022. Since then, the price movements resemble an oscillating behavior and an outperformance can no longer be clearly identified (see (32)).
I do not presume to be able to assess the market better than professional stockbrokers. I therefore only invest in individual stocks that match my preferences in terms of dividends and their quality. I have explained exactly how I analyze these stocks against the background of dividends in the article on BMW and various YouTube videos. You can find the article here:
https://app.getquin.com/activity/gyAOfApOoq?lang=de&utm_source=sharing
So far, I have explained why I am not a 70/30, ACWI or pure single stock investor. I don't want to attack anyone with my comments - it's my opinion (and not investment advice, of course). So why am I focusing on a core-satellite strategy?
4.1 My flirtation with other investment strategies and why I ended up with core-satellite
In 3.1, I explained why the emerging markets in particular bother me about the 70/30 portfolio. In addition to political risks, I highlighted the low growth of the overall investment strategy and ethical conflicts, among other things, and presented 70/30 as rather characterless for me (see 3.1). In 3.2, I focused in particular on the absolute underperformance compared to my old portfolio and the 70/30 strategy and the lack of a second lever for the emerging markets and ventured a comparison with my risk component in the form of the NASDAQ 100. Compared to the risk component of the emerging markets, the NASDAQ 100 delivered top returns for the most part in the 2010s with comparatively high volatility. Even though the comparison may not have been entirely fair to the NASDAQ 100 in terms of volatility and the number of companies included, I came to the final decision to exclude the emerging markets despite my knowledge of their contribution to global economic growth (see 3.2).
In 3.3, it was important for me to present the new world of stock picking using the example of Warren Buffet as the figurehead of stock picking. We discussed the fundamental dangers and the fact that there is much more collective knowledge available on the stock market. In particular, I emphasized that only dividends that meet my requirements motivate me to pick stocks. I rejected an investment decision based on overconfidence and a fixation on returns (see 3.3).
In summary, I was able to learn something from dealing with and researching each of these investment strategies. While I was not convinced by the EM risk component of the 70/30 portfolio from 3.1, I wanted my portfolio to be sufficiently flexible and not resemble an immobile oil tanker in a storm like an ACWI portfolio. I also did not want to underestimate my personal investment risk and overestimate my capital market knowledge, so pure stock-picking was and is out of the question for me (see 3.1, 3.2, 3.3).
The combination of 3.1 and 3.3 struck me as positive. While I spent a lot of words on the EM component in 3.1, there was hardly a critical word about the industrialized countries focus of the MSCI Worlds. I'm sure you noticed that. Nor did I absolve myself 100% of the temptation to achieve price gains plus dividends through individual stocks. I would also like to remind you of my example of Square Enix at the beginning of chapter 3, where I achieved both dividend income and high book profits over a long investment horizon and this motivated me a lot.
So I started to take a closer look at my insights and desires and built a core-satellite portfolio. However, I did this unconsciously and only had an understanding of the above-mentioned investment strategies. As a result, I did not implement a world portfolio with satellites, but built up various satellites around my MSCI World. But what exactly is a core satellite portfolio in the classic sense?
A core-satellite portfolio is defined as a composition of an investment strategy such as 70/30, ACWI or government bonds in the core, which reduces the volatility of its satellites with a high weighting due to broad diversification or the bond principle. Why didn't I write individual stocks instead of satellites? There are various configurations, so I will briefly list them here with 80% weighting 70/30 (see (33):
70/30 with individual shares = "classic variant"
70/30 with crypto = "crypto variant"
70/30 with sector bets = "ETF variant"
70/30 with individual shares and sector bets = "Staggered variant"
Government bonds in the core and financial products (leverage, options, knockout certificates) as satellites
If I should go into more detail here in a future article, I would be delighted to hear from you :)
Within this cluster, I chose variant A and lowered the emerging markets weighting to 0% and plan to increase the MSCI Worlds weighting to the full 80% for the reasons given. It was important to me to reduce the volatility of my portfolio in order to use a security for the corresponding cash flow burden through dividends.
4.2 Why I use dividends as part of the core-satellite portfolio
This cash flow burden is due to the discount on the ex-dividend day. On this day, the share is bought and sold on the stock exchange without its dividend - i.e. "ex" meaning "outside, without, excluding". Theoretically, this has no direct influence on the value of the share if we leave out taxes for the time being. If I am above my tax-free amount, I pay the almost 29-30% capital gains tax on the dividend I receive, depending on the federal state. So why accept this in order to be massively disadvantaged against no dividend after the tax-free amount? A not insignificant reason lies in the companies' fixation on the dividend and thus quasi as an offer for dividend investors. Various studies have shown on the basis of the principal agent theory that there is a compulsion to waste less money because of the dividend (cf. (34), (35)).
Online and in Getquin forums, the "gut feeling" or positive confirmation of dividends is also often presented. So if I regularly receive dividends, I am more willing to endure nasty crashes like the one on Friday 23.09.22 and perceive the money received from the companies as "compensation for pain and suffering". As mentioned above, I personally select my dividend companies with the intention of generating high-quality cash flows in the long term and am therefore much more dependent on the stability of the companies than on their economic growth. I am therefore less interested in growth companies than in stable but boring dividend payers. I am willing to accept a possible underperformance in favor of cash flow generation (see (34), (36)).
I personally consider the alleged disadvantage of the "very limited selection of companies" to be too much of a focus on the here and now. What I dislike about the mere mention of this fact in (36) is that the key driver of the dividend growth effect and the product life cycle at company level is ignored (cf. (36)). Most people with a background or interest in business administration or marketing in particular will remember the product life cycle model. I certainly remember it because I also like to apply it to companies. If we take a company like Altria, for example, we see that the main sales are cigarettes. It's unlikely to me that outside the emerging markets cigarettes are going to increase much in sales volume in the developed world. So this product is somewhere between the "cash cows" with high sales and little growth and the "poor dogs". As Altria makes almost 85% with these tobacco products, I can also attribute this market position to the company. Altria would therefore be a cash cow in this respect and irrelevant for growth investors without future innovations or possibly a new division with several products. For me, however, the high dividend yield and the predictable product model make it worth a second look in terms of cash flow (see (37), (38)).
That was the simple example. I have already published a brief analysis of this on YouTube.
It becomes much more exciting when we examine the "dividend suitability" of typical growth stocks or companies without a previous focus on dividends. As mentioned above, this may make sense for companies that are no longer able to cope with the dynamic growth environment and increasingly want to focus on dividends instead of growth. This would transform the company from a "star" to a "cash cow" if the majority of its products can be assigned to this category in terms of sales and market significance (see (37), (38)). Possible candidates based purely and blindly on dividend increases would be BMW, Mercedes-Benz or various other DAX companies. They have increased their dividends sharply despite rather weak figures in relation to their actual new products and, in the case of BMW, they are currently at >7% (cf. (38).
But is that really true?
From my point of view: No, because we have not looked at this on a macro level. I have already discussed in the article on BMW why BMW is suddenly throwing out such dividend yields and is generally rather piqued by the accusation of sluggishness in the e-sector. The fact that the used car market and its moon prices currently account for a significant proportion of profits is only briefly mentioned here. For more information on this topic, I recommend my BMW article for those interested (see "BMW vs. e-mobility - a half-hearted love affair"). What is clear is that the dividend is not sustainable in my view and cannot be derived from a repositioning of BMW in the market against the background of the above-mentioned marketing product analysis. The dividend yield is therefore not sustainable for me and irrelevant for my portfolio.
I also enjoy such valuations on a larger scale as they a) reveal dividend potential and b) deviate from the tenor of perpetual growth. One of the biggest advantages of the dividend strategy is often presented as its biggest disadvantage: As markets rise, fat dividend ships will not be able to compete with the powerboats of tech companies (see (34), (39)). I find this metaphor and depiction very successful at the moment, as a storm is brewing in the form of inflation, the energy crisis and rising interest rates, which will eliminate many unprofitable tech companies. The general MSCI World 2020 fell significantly more than the MSCI World Quality in the Corona Crash. I'm not happy about this - because I'm also a tech investor. Nevertheless, I feel that I am well positioned thanks to my split into the dividend core satellite and tech portfolio Pur and would not want to change my orientation (see (40), (41)).
Finally, I will summarize my almost 7,000-word analysis at the macro level: I also only found the perfect investment strategy for me through a continuous process of dealing with stock markets and especially their crises. For me, the continuous inflow of dividends and the core ETF in growth phases offer the best of both worlds (see 3.1 and 3.3) and provide me with maximum options for action (see 3.2). The reliable and flexible additional income provides me with a continuous injection of motivation, so that at least I don't see all of my profits disappearing in tough times like now.
Ultimately, I come to the conclusion that perhaps everyone has to go on an almost esoteric journey through times of crisis to find their true investment strategy. It often depends less on the extent of the crisis than on personal perception. I have never regretted my choice - but I can only speak for myself. Here's to the dividend!
I hope you enjoyed my article, which is almost three times as long this time. I only realized this afterwards, but each of the components of my post was incremental to understanding my investment strategy and motivation. If you enjoyed this little journey and/or would like to see some more clear posts, please let me know what you think.
Your BASS-T
IMPORTANTThis is not investment advice. It is also not an invitation to buy/sell financial products. I am merely expressing my opinion here. You are responsible for your own decisions.
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