Each month, Dividend Stock Analysis will interview an investment blogger. Instead of simply making a list of the top dividend investing blogs, we thought you would have more fun reading about the author prior to read his blog. If you have more questions about the blogger of the month, write your question in the comment section.
Dividend Monk Profile
December’s Dividend Stock Analysis contributor is Matt Alden from Dividend Monk. In my opinion, Matt’s blog is one of the most interesting and useful dividend blog of the internet. I’m almost jealous of his lengthy and detailed stock analyses on his blog! Engineer by day, dividend blogger by night, Matt’s investing advices are always welcomed. He also wrote a great book for any investors who wants to start buying dividend stocks: The Dividend Toolkit.
Questions Asked to Matt
#1 When did you start investing?
I started investing in equities in 2005
#2 Why do you invest? What is/or your investing goal?
I was always intrigued by economics and finance, despite going into the engineering field rather than into a financial profession. Warren Buffett was the largest influence on me, as he showed a deep knowledge of investing rather than just being a good stock picker.
My investing goal is to build a diverse passive income stream, from a collection of dividend stocks, MLPs, REITs, and bonds, that surpasses my annual expenses with a margin of safety and that grows at a faster rate than inflation.
#3 Tell me about your best trade
In ancient Greek lore, there was a story of the philosopher Solon and the King of Lydia, Croesus. King Croesus considered himself to be the happiest man in the world, but Solon cautioned him with the intriguing quote, “Count no man happy until he’s dead.” What he meant by that, and what many Greek philosophers believed in general, is that you can’t make a judgment about a person’s life until the whole story is complete.
I view investments in a similar manner. Some of my best investments are the ones I’m still holding, such as Brookfield Infrastructure Partners (BIP). I can’t make a complete judgment about them until I sell them and actualize the increase in wealth, or until such a time when the accumulated dividends provide such a large yield on cost that the existing holding is only a small part of the total investment.
If I had to pick a single investment as the ‘best’ during the relatively short run of the Dividend Monk blog thus far, it would be Harleysville Group. It was a smallcap insurance company approaching its 25th year of consecutive dividend increases with a solid 4% yield. I had owned it for a while, had a fairly large position, and it was a good value play. They were experiencing flat performance due to the financial collapse and low interest rates. Then in 2011, large storm damages resulted in a fairly bad quarter, and it was the month they were about to hit their 25th dividend increase. The stock dropped fairly significantly to having nearly a 6% yield.
I published an article pointing out some details of their business that showed that essentially all of their sluggish performance was due to macroeconomic trends rather than poor management, and that therefore they would rebound. I also argued that the bad quarter was ephemeral and the company would easily rebound, based on its history. Specifically, I pointed out that the company was trading below book value for the only time in at least a decade.
Shortly after that article, the company ended up being bought out by a larger insurer for a very large premium which validated the premise that it was undervalued, and it resulted in a very strong market-beating rate of return from the purchase to the sale, and it passes the Solon test because the story is complete.
#4 Tell me about your worst trade
Back in early 2009 during the U.S. market bottom, there were opportunities everywhere. I dabbled in some small cap value Chinese stocks. The great thing about them is that if you go by their numbers, they were ridiculously undervalued. The bad thing about them is that financial standards aren’t as strict over there, so fraud is a big risk. You have to buy them at very undervalued prices to discount for that extra type of risk.
My approach, therefore, was to diversify a small part of my portfolio across around 5 Chinese small caps, with the premise that if one or two were fraudulent in some way but the other three or four were legit and therefore doubled or tripled over the next five years, then it would be a strong investment pool. It was value investing rather than speculating because I was investing entirely based on their presented fundamentals and with the intention of holding for the long term.
The funny thing was that all of them ended up being fraudulent in one way or another. They overstated things, they made questionable acquisitions, etc. I sold one of them after it tripled but before it was found out they were fraudulent, so I actually got lucky there. I made a bit of money on two of the others and lost a bit of money on the other two. Overall the pool of investments ended up producing a good ROI, but it was all luck. The investing premise that at least 3 out of 5 of these small Chinese companies trading on American exchanges would be legit was incorrect.
#5 How do you describe your investing style?
I focus on long-term value investing, and specifically in companies that pay growing dividends. My primary method of valuing a stock is Discounted Cash Flow Analysis, and specifically the Dividend Discount Model (DDM).
#6 What are your favorite sources of information for investing?
I regularly read other dividend blogs, Seeking Alpha, Google Finance, and Morningstar as my top sources of information.
#7 What is your #1 investing rule?
To only buy solid businesses, and only with the intention of holding for the long term, when I calculate them to be trading below their intrinsic value based on conservative growth estimates.