Editor's note: Boring is good... when you're talking about investing. Being a successful investor isn't about cashing in on the latest fad company. It's about generating safe and steady income for years.
Today, I'm sharing an essay from my friend and colleague Brian Hunt about what he calls "one of the greatest investment secrets in the world." Although the essay originally appeared in The Stansberry Digest in 2014, the secret is timeless. And it's essential for anyone who wants to make money for years to come.
Would you like to earn an 18% yield on one of the world's safest investments?
It's something anyone can do.
You simply need to learn one of the great investment secrets in the world.
This secret is part of earning your "master's degree of investing." This secret isn't basic stuff like knowing what a dividend is or what a balance sheet is. It's not a tool you can use every day. It's not a way to value stocks.
Much more important than any of that, this secret is a mindset. It's an enlightened way of viewing business and investment. Once you internalize and implement this mindset, you will advance to a new level of investment mastery.
I call this part of your "master's degree of investing" not because it's complicated. It's actually laughably simple.
I call this a master's-level idea because it takes most people years to grasp it. It's not something new investors grasp immediately. It's something that typically only seasoned investors can appreciate and practice.
Here it is...
When it comes to investing, boring is big money.
Boring causes "investment magic" to happen.
Boring can provide you with financial freedom.
For example, let's study one of the greatest investment stories of all time: Procter & Gamble (P&G)...
Most every house in America has at least one P&G product somewhere in a medicine cabinet, pantry, or storage closet. P&G is one of the world's top consumer-products businesses. Every year, it sells billions of dollars' worth of everyday products like Gillette razors, Pampers diapers, Charmin toilet paper, Crest toothpaste, Bounty paper towels, and Tide laundry detergent.
Razors... diapers... toilet paper... toothpaste... paper towels... laundry detergent.
You could hardly think of a more boring product lineup. It's nothing that will interest the average investor.
But great investors see something unusual in it. They see something that others do not. They are able to see a wealth-producing "golden thread" running through P&G's products.
Not many people can see this golden thread. That's why most individual investors have zero interest in owning such a boring business.
But it's a source of tremendous power. It's one of the great secrets of successful long-term investing.
And it's why seasoned, sophisticated investors have HUGE interest in owning them. For many elite investors, it's ALL they want to own.
They know when it comes to investing, boring is big money.
You see, in 2014, Procter & Gamble shareholders received a cash dividend of $2.52 for every share owned.
Procter & Gamble's dividend in 2014 was 7% more than the dividend paid in 2013. The dividend paid in 2013 was more than the dividend paid in 2012... which was larger than the dividend paid in 2011... which was larger than the dividend paid in 2010.
The dividend increases were no surprise to longtime owners of Procter & Gamble. It was simply business as usual. P&G has increased its dividend paid to shareholders every year for more than 50 years. To P&G investors, larger cash payments are a fact of life.
Because P&G has increased its dividend every year for more than 50 years, a kind of investment magic has happened. P&G is rewarding longtime shareholders with incredible amounts of cash.
An investor who bought P&G in 1994 at around $14.25 (split adjusted) began earning a 2.3% dividend yield on his investment. Since P&G's annual dividend has increased every year and shares have split a couple of times along the way, that same investor is now earning an astounding 18% on his original investment.
Remember, P&G's dividend yield rises every year. It's one of the safest, most reliable income streams on the planet. Earning an 18% yield on P&G is incredible when you consider that many investors take huge risks in the pursuit of 5% dividends. They buy businesses with dangerous debt levels. They buy dangerous commodity investments that can plunge with the price of a commodity like crude oil.
But not longtime P&G owners. They're earning huge dividend yields that rise every year, paid by one of the world's strongest, safest companies. That's investment magic.
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If you're new to investing, you're probably groaning right now. You're likely drawn to stocks with huge growth potential. You're drawn to the hot companies featured on magazine covers and financial television. You're always looking for the opportunity to double your money in months. You spend your time trying to find "the next Facebook" or the "next Apple."
P&G isn't going to increase its revenues 50% with some great new invention... so you probably have no interest in it.
This is the amateur mindset. It's the gambler's mindset. And if you have it, don't worry. You're not alone. You're only human. Starting out, it's perfectly normal to think this way. But as I'm confident you'll eventually learn, it's a reliable way to lose all your money in the stock market.
You can buy all kinds of businesses in the stock market. You can buy bank stocks... gold-mining stocks... retail stocks... biotechnology stocks... semiconductor stocks... and software stocks.
When it comes to choosing which investments to make, people naturally gravitate to companies with exciting stories. They gravitate to companies "poised on a breakthrough" or "set for 50% annual growth." After all, the potential upside with these firms is huge.
But what people fail to realize is that buying these kinds of stocks is playing a low-probability game. For every mega-hit social-media website like Facebook, 1,000 other Internet businesses failed. For every Starbucks, 1,000 other restaurant franchises flopped. Sure, the one company you buy might beat the odds, but it's unlikely. The odds greatly favor you losing money.
But what do you think the chances are that people will continue to buy trusted brands like Tide detergent, Pampers diapers, and Crest toothpaste? What are the chances P&G increases its dividend next year just like it has done for more than 50 consecutive years?
Very high. Nearly guaranteed.
Those are the kinds of odds great investors look for. You can find them in boring businesses like P&G. You can find them in dominant companies that sell candy, like Hershey. You can find them in dominant companies that sell soda, like Coke. You can find them in self-storage businesses (people will always need places to store their crap).
None of these businesses are particularly exciting. They just enjoy the most consistent and reliable cash flows in the world. Great investors looking to make long-term capital commitments are drawn to them because of it.
Although this idea immediately makes sense to most folks, few people actually apply it to their investing when they're getting started. Most folks can only come around to this idea after suffering painful losses in "exciting" investments. Your parents can tell you not to touch a hot stove, but you probably won't learn not to touch a hot stove unless you actually touch it yourself.
I'm a member of the "Hot Stove Club." I learned about exciting stocks the hard way. In 1998 and 1999, I made large investments in some of the most exciting stocks in history: high-tech networking and semiconductor stocks. I was no specialist in tech. I could barely turn on a computer. I bought the stocks because they sounded exciting. I focused on their stories and potential upside. I didn't give any thought to their potential downside.
When the tech bubble burst in 2000, I lost more money in the stock market than I made from my job that year. It was a painful lesson.
Looking back on the loss, I see myself as fortunate. I lost a lot at a young age. Early on, an extremely valuable lesson was seared into my brain: An investment's excitement level is usually an inverse of its likelihood of success.
Nowadays, I'm much more likely to be interested in a candy or beer company that pays reliable dividends than I am in a small biotech company. I'm more interested in the boring, reliable, tax-free income paid by municipal bonds than I am in a small semiconductor stock.
I'm more interested in steady income streams deposited into my accounts than the excitement of gambling on the "next Facebook."
I don't know what the next popular website will be. I don't know who is going to make the next popular tech gadget. But I am confident that no technology will render having a beer after work obsolete. That's the kind of confidence we want in our long-term investments.
Like most any great money lesson, we see this at work by studying investment legend Warren Buffett.
Over the course of his 40-plus-year investment career, Buffett has, for the most part, shunned high-tech investments. He has consistently focused on boring consumer franchises. He has made large investments in Procter & Gamble, candy maker See's Candies, beverage maker Coca-Cola, gum maker Wrigley, and retail giant Wal-Mart.
Buffett buys these types of businesses because new technologies are much less likely to disrupt their industries. They are likely to retain their competitive advantages. A decade ago, Coke was the dominant soda company. It will probably be the dominant soda company 10 years from now. It's much harder to say those things about Internet sites or high-tech businesses.
Also, remember the wisdom of George Soros, who has made billions of dollars in the market. Soros says, "If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."
I'm not saying you can't make money in exciting stocks like biotech, high tech, and gold mines. You're just unlikely to pull it off. If you want that kind of "spice" in your investment life, consider investing like a wealthy friend of mine. My friend is a conservative investor. He keeps the bulk of his portfolio in safe investments. But over the years, he has boosted his overall returns by placing tiny amounts of money in small, speculative, "exciting" investments. Several have been huge winners.
The key is to keep the bulk of your portfolio (at least 90%) in safe, boring investments that throw off dividends and interest. Invest tiny amounts of money in more speculative, "exciting" stocks.
But if you're interested in long-term investment success, train yourself to be interested in things like diapers, mouthwash, self-storage, chocolate, beer, soda, municipal sewer services, and food. These everyday things enjoy constant demand... and the businesses that provide them enjoy consistent sales and profits.
None of this is exciting. It just works. And boring means big money.