In the July issue of Richard C. Young’s Intelligence Report, Dick Young introduced his Maximizers idea. It’s worth a read for any serious investor.
Royal Road to Riches
Since I began writing these regular monthly strategy reports in 1973, I have emphasized an approach based on dividends, interest, diversification, patience, and compounding. As Richard Russell has advised subscribers since I first started reading Dow Theory Letters decades ago: “Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, to allow the power of compounding to work for you. Remember compounding only works through time.”
Dividends and interest provide fuel for compounding. And dividends and interest through the diversification of stocks and bonds allow all investors to participate in Russell’s “Royal Road to Riches.”
Dick Young’s Maximizers
I have tweaked my original work on dividends and interest, along with my long-time interest in gold (I have held my original 1982 China Gold Pandas for decades), to produce what I call the “Maximizers.” On the stock side, I am including only companies that not just pay dividends, but have increased their dividends to shareholders for at least 10 consecutive years. As we all know too well, knowing how is simple, but actually having the discipline, intestinal fortitude, and patience to bring off a Maximizers compounding strategy is quite another matter. Such a program is admittedly for the select and disciplined few.
In my diversification display below, I combine high-grade bonds, consumer staples stocks (inclined to pay and increase dividends), and gold. I then compare annual returns for this century against the NASDAQ, a speculative group of largely non-dividend payers. As you can see on my chart…my mix has not recorded a single full down year during the new century, which, to date, has featured two horrific crashes.
Win the War, Not Every Battle
The NASDAQ actually beat my Maximizers in 8 of the 15 years profiled, versus 7 outperformers for my Maximizers. A 7-and-8 MLB starting pitcher record would banish a player to the bullpen. But look at the astonishing results over the complete 21st century. MyMaximizers strategy wins the war by a long shot. Furthermore, the maximum deviation between the best and worst year for the Maximizers is a mini 10 percentage points. For the outgunned NASDAQ, the deviation from best to worst year is a breathtaking 91 percentage points. And the bone-chilling NASDAQ record includes five down years, four of which were bruisers. No half-sensible retirement investor is going to sign on for that back-snapping volatility. Remember my cardinal rule of portfolio crafting: “Always analyze risk before worrying about potential returns.” Through the years, I have listed some of the most egregious risks greedy investors take. Just for the record, using stop-loss orders and shorting stocks are pacesetters for those wishing to get regularly whipsawed. Stop-loss orders are mother’s milk for the brokerage fraternity.