The beach volleyball set (The Financial Athlete #68)

In beach volleyball offense is not just a matter of hitting the ball over the net. Make it difficult for your opponents to return the ball with a spike. Produce a spike with a ‘set’. In a hand set, a teammate throws up her hands above her head to toss the ball high in the air to enable her teammate to spike the ball over the net. The spike is the best offensive weapon, but up against great players most spikes are returned or blocked. It may take several sets and spikes before a team wins a point.

As an investor, I have learned to wait for a set (low valuations) before I spike the ball (invest). Without a set, I rarely spike the ball. And I have learned that despite hitting good spikes staged from a nice set, the ball may come back again and again because the opponent (the market) is a tough player. I stopped underestimating the power of the market. Years may pass before substantial capital gains can be realized, if ever. That’s why I switched from being primarily an investor chasing capital gains to one chasing dividends from stocks and distributions from real estate leases; and buying these assets only at low valuations relative to intrinsic value.

My favorite analogy of investors who invest principally for cash flow vs. capital gains is from Robert Kiyosaki. His “rich dad” character calls investors who milk dividends and distributions “dairy farmers”. Investors who chase capital gains he calls “cow slaughterers”. He recommends investors to be “dairy farmers”. I couldn’t agree more.

One caveat: before you buy a stock paying a dividend, read both the dividend yield and the payout ratio (dividend per share/earnings per share). The lower the ratio, the more secure the dividend. A stock price reflecting a low valuation plus a low payout ratio makes for a good ‘set’.

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