Reframing your investment blueprint

My wife sent me this arti­cle on what makes peo­ple dis­rup­tive, said it describes me. I think it also describes a bit about what I’m doing with Elephant’s Paycheck, so thought I’d share.

The insight

I kept com­ing back to this quote in the arti­cle:

…when he went to work at a gas sta­tion and learned he could earn $5 a week just for ship­ping in oil from far away, he vol­un­teered to help his boss…

Malcolm McLean expe­ri­enced the sys­tem (of how gas sta­tions worked) and real­ized there was an oppor­tu­ni­ty to earn more than he was doing today and he vol­un­teered to learn more.

For me, the insight was about mon­ey earn­ing mon­ey.

I have so few mem­o­ries of child­hood that every sin­gle one that I do have must have had a real­ly big impact on me.

I remem­ber real­iz­ing that if I had mon­ey in a sav­ings account, at the end of each month (or quar­ter, I for­get) I could go to the bank and have them stamp my pass­book with my new, high­er bal­ance.

It was free mon­ey! Money I could “earn” with­out work­ing. Simply hav­ing mon­ey would get me more mon­ey. 

At the time it was pen­nies, but even then I real­ized that per­cent­ages mat­ter more than absolute val­ues. If I could only earn pen­nies on what I had, I just need to save more and then I’d earn more.

For the past few years inter­est rates on sav­ings accounts have been min­i­mal. Fortunately, I dis­cov­ered div­i­dends. Dividends should play an impor­tant part of your invest­ing blue­print.

Dividends

When I became a teenag­er, I got a gift of a five shares (of com­pa­ny stock) in a util­i­ty.

Dividends are reg­u­lar pay­ments com­pa­nies make to their own­ers. These pay­ments often come from prof­its, but not always. For rea­sons beyond this post, some­times com­pa­nies with­out prof­its pay div­i­dends (or pay more div­i­dends than they have prof­it).

The point being that own­ing a part of a com­pa­ny instead of keep­ing mon­ey in a bank is anoth­er way for mon­ey to earn mon­ey. Another way to earn mon­ey with­out work­ing.

The div­i­dends I was earn­ing were more than that same mon­ey would have earned in a sav­ings account (had the gift been cash). I’d soon learn why. (Investing in stocks is more risky.)

In fact, the best part of the gift was not the div­i­dends them­selves but the oppor­tu­ni­ty to learn about the stock mar­ket (habit #4 of the wealthy in the linked arti­cle).

You see, the util­i­ty com­pa­ny I was a part own­er in (albeit a small part!) went bank­rupt after a bad invest­ment in nuclear ener­gy. I’d lat­er come to learn of the deep amount of luck that I had to have to own a util­i­ty that went bank­rupt. They were con­sid­ered the least risky of invest­ments (because they’re high­ly reg­u­lat­ed). But, I digress.

Even at about 15 years old, I was able to learn a lot from this expe­ri­ence. You get a high­er return with div­i­dends than with inter­est because there’s more risk. You can lose your mon­ey if you invest in a com­pa­ny that doesn’t do so well.

How do you pick a good com­pa­ny?

The disruptor

The part of the ‘what makes peo­ple dis­rup­tive’ arti­cle that I relate to is the sec­tion on “refram­ing the prob­lem”. Reframe the prob­lem and you can iden­ti­fy oppor­tu­ni­ties that oth­ers either don’t see, or can’t artic­u­late as well because they don’t have a good back­ground for the sto­ry they need to tell.

Elephant’s Paycheck is the lat­ter.

The Elephant’s Paycheck Blueprint uses invest­ing tech­niques that I’ve been using for… well, since I’m 13. I’m sim­ply refram­ing the prob­lem of ‘how to invest to build wealth’.

The answer is not set­ting out to pick com­pa­nies whose stock price will go up. Instead look for com­pa­nies that will raise their div­i­dends.

Companies with a his­to­ry of rais­ing their div­i­dends will very like­ly do so again. Specifically, com­pa­nies who have increased their div­i­dends every year for decades will very like­ly do so again this year.

There is a small group of com­pa­nies with this dis­tinc­tion. Dividend Aristocrats have raised their div­i­dends each year for at least the past 25 years. That doesn’t mean they’ll always raise their div­i­dends, but it’s a real­ly good bet.

Of course, it doesn’t do us any good if the div­i­dends are raised but the shares lose their val­ue. The thing is, that over time, the div­i­dend pro­vides a “floor” to the stock. Meaning, that com­pa­nies keep their div­i­dend yield rea­son­ably con­sis­tent over time. As the div­i­dend goes up, to keep a sim­i­lar yield (with­in a range of a per­cent­age point or two) the stock price must go up.

So Elephant’s Paycheck reframes the prob­lem from one of find­ing stocks whose share price will increase to one of find­ing stocks whose div­i­dend will increase. Then, we’ve built a Blueprint for how to use these com­pa­nies to cre­ate wealth (and a pay­check) over time.

Interested in more? Take the course (it’s free). And, I hope to pub­lish at least the first ver­sion of the book this year (2015). There’ll be advanced notice and dis­counts pro­vid­ed for peo­ple who’ve tak­en the course.