Most rich investors favor what many would call “boring” investments. These investments pay nice dividends and are usually very solid companies. Typically, they are well-known brands and names. This provides the experienced (and wealthy) investor with a nice safe and comfortable feeling, knowing that these companies are not fads, and that they will be around tomorrow and in 20 years as well.
Why “boring” is good
Many investors like to think of themselves as smart, logical people. Unfortunately, many investors operate on little more than their gut feelings and hope. Most would have a better shot betting on red or black in Las Vegas.
The beginning investor typically craves action. Wanting to always see that there is something new or exciting or newsworthy going in with a company they have invested in is very important. This is how poor people look at the market.
In contrast, an “exciting” company has an incredible story. Maybe that new biotech that everyone is talking about. They are close to inventing a drug which will cure cancer. Everyone is impressed. All the Wall Street analysts say this is something worth watching. Unfortunately, the company is just a research firm. Without any sales, they flounder and eventually go out of business. The same thing is true with small exploration mining companies.
On the other hand, a “real” (or boring) business such as coke has actual sales and revenues. They pay out nice dividends, quarter after quarter. However, the business is not flashy or exciting. In fact, it looks almost exactly like it did 15 years ago. Of course, it is larger now, with a lot more sales, profits and even better returns for investors. Boring, yet very profitable.
Boring means money in the bank
For most investors, investing in a company like Wal-Mart or MacDonald’s seems almost like putting money into a bank or a CD. Fine. The main difference is that this investment can earn double-digit annual returns even over a period of decades.
This is exactly the way most of the world renowned investors made their money. Think of Warren Buffett, for example. His company bought a huge amount of Coke decades ago. Reading the annual report, investors will learn that Buffett’s company today earns more income just from their dividends than their original initial investment in the company.
Mr. Buffett does not seem concerned that Coke is such a “boring” investment. Instead, he gladly accepts those nice quarterly dividend checks. They have been paying for years, and Mr. Buffett believes that they will continue paying for decades to come. All of this is due to a “boring” business model.
When to invest
This does not mean that an investor should simply run out and load up their account with every type of Wal-Mart, Coke and Microsoft like company they can find. No. The price paid for these companies is extremely important. This is the main caveat to investing in such businesses. Their actual stock prices can flounder, sometimes for years.
Investors should focus on the dividends offered. In addition, consider the yield. Obviously, if the stock price is high, the yield will be lower. Investors simply must find these stocks and buy them when they go on sale. After the stock market takes a beating, or the economy is going through a rough patch. These can be great times to find bargains on these “boring” businesses.
Dollar cost averaging
Another strategy which is very appropriate for these types of businesses is to use dollar cost averaging. In other words, determine a set amount of money to invest in this strategy every month or quarter. Then, buy as much of these companies as possible.
The theory is that over time this will tend to even out the price fluctuations. Investors will consistently buy and build a position in a select number of these “boring” businesses. Buy them when the prices are high. Buy them when the prices are low. Eventually, it will be equivalent to paying an average price which is somewhere in the middle of their range.
A smart investor may also attempt to adjust this strategy by buying more when the stock is lower in the trading range. This may involve making a purchase a little earlier (or a little later) than had been planned.
The way to get rich in the stock market is by focusing on “boring” businesses that gush cash and have a regular history of paying solid dividends. This is how almost all the really successful investors operate. Any investor who craves action and excitement will be forever chasing the next hot tip or too good to be true story. Only after learning how to focus on dividends and profits, will an investor have a real chance of becoming wealthy in the market.