Anyone acquainted with the thinking at Crawford Investment Counsel (Crawford) is well aware of our appreciation for common stocks. Considering all of their characteristics, we believe stocks are the asset of preference. Taking leave of normal investment language, let’s think for a moment about common stocks in unconventional terms. Let’s call them money machines.
Assume that on occasion you were to encounter two machines side by side. One is labeled a slot machine, the other a money machine. What is the difference? The slot machine is designed for short-term gratification, is highly speculative, and is designed to make you lose money. That’s what slot machine owners do: they design the machine to make you lose money. Have you ever met anyone who achieved wealth through a slot machine? Entertainment yes, wealth accumulation, no. The other machine, the money machine, is designed for success. Its goal is to enable you to achieve wealth, not immediately, but over time. If used wisely, with patience and discipline, the money machine can be a great tool for wealth building.
Let’s take a closer look at the money machine. Like a slot machine, it has two openings on its face. The first slot is for you to put money in; the other opening is for money to come out. In addition to these two slots, there are four buttons on the face of the machine: buy, sell, reinvest, and quality. You put some money in, select a stock, and hit the buy button. In this case you choose a stock that pays a dividend, which is what we do at Crawford. So, you have placed money in the machine, bought a stock, and Bingo! Ninety days later some money comes out in the form of a dividend. Ideally, if nothing else happens, at least you have made some return on your money. And the machine can be very consistent if the stock has been well chosen. Every ninety days it pays something as long as you have not hit the sell button. In many cases the amount you receive each year actually increases. Many companies raise their dividend annually, sometimes for many years.
The second button on the face of the machine is the reinvest button. By pushing this button, you tell the machine to keep your dividend and reinvest it to buy more shares. By doing so, you forego the pleasure of receiving money each quarter, instead having the benefit of owning more shares of stock. It is not just that you own more shares, now more dividends are being paid since every new share pays a cash dividend also. This is where one of the most powerful elements of the machine comes into play: compounding. Leaving the dividends in and acquiring more shares is the best way to enjoy the benefit of compounding, which has been called the eighth wonder of the world by no less than Albert Einstein. Compounding is the surest road to wealth.
The third button on the face of the machine is the sell button. This is a very important feature, for what it provides is perfect liquidity. For any number of reasons it may be necessary to sell a stock. Hit the sell button and very soon the proceeds of the sale pop out. Liquidity is one of those things that is rarely appreciated until you need it and don’t have it. And, unlike lots of investments such as real estate, private equity, and hedge funds, the money machine provides it instantly and at virtually no cost. However, while the sell button is available, we consider it desirable for this button to be used as infrequently as possible. Yes, mistakes can be made in the selection of a particular stock, and sometimes the needs of the owner override the investment function, thus making a sale necessary. But we consider it more desirable, whenever possible, to leave the sell button alone in the interest of long-term investing. The good thing is, it is there if fundamentals deteriorate, the stock becomes seriously overvalued, or should the investor wish to diversify. These are all good reasons to punch the sell button and find another, more attractive stock.
Thus far we have spoken of the relatively safe returns that come from dividends and reinvested dividends. But perhaps, the greatest advantage of the money machine is stock appreciation. This is the last element in the total investment return equation. However, the appreciation side is less assured. To achieve appreciation in stocks, you have to choose them carefully and, as mentioned earlier, be patient. With regard to choosing the right stocks, we advise doing extensive research, adopting an investment philosophy, and then using the fourth button: quality. Punch the quality button and you have limited your options for investment to a smaller group, but in our opinion, to a group that offers a greater chance of success. Quality tends to reduce the range of potential outcomes and enhances the likelihood of a successful investment. Quality includes the following characteristics: very consistent businesses that have increased earnings and dividends over long periods of time, ample resources on the balance sheet, effective and shareholder-friendly managements, high profitability, and often, significant market share in their industry. These are really good companies, and they represent excellent opportunities for successful, long-term investment.
Lest we make it sound too easy, we issue a disclaimer. Stocks as a whole are considered to be in the “risky” category because they are volatile and are dependent on the underlying earnings of the company they represent. All businesses are subject to poor economic circumstances, and corporate earnings certainly can decline, leading to declines in the stocks. But for longer-term investors, these periods actually represent opportunities for using the money machines to their advantage. It is the nature of companies to be organic, dynamic enterprises. These are the characteristics of growth. As companies grow their dividends and earnings, the stocks should follow that upward path over the long term. If you have confidence in the viability of our economy and the resiliency of high-quality companies, then buying on weakness is the preferred route. After all, when buying stocks that are down in price, you receive more shares and more dividends for the same amount of investment.
Even more important than when you buy is if you buy. The first order of business is to get in the game, use the money machine, and get started. Investing in common stocks over the long term has historically been a very profitable exercise, compounding at around 10% over many years. A rate this attractive may not be achieved in the future, but whatever the return turns out to be over the longer term, it is likely to be attractive relative to other asset categories. The key is to find the money machine, put your money in, and wait. Reinvest if you can. And, be sure to push the quality button.
This article is a reaffirmation of our belief in the investment potential of common stocks. We really do believe they are money machines. As we have described the process of using money machines it portrays exactly what we do at Crawford as we invest our clients’ assets. We select very high-quality stocks with the intention of owning them for a long period of time. They always pay dividends, and we reinvest when possible. The sell button has to be used from time to time, but we prefer to hold stocks for longer periods and reap the benefits of compounding. And, yes, we always hit the quality button.
Please reference our related Podcast for more detail:
Crawford Investment Counsel is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford Investment Counsel, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.
There is no guarantee of the future performance of any Crawford portfolio.
This material is not financial advice or an offer to sell any product.
Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
The investment strategy or strategies discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances.
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