Long Term Investing Success Requires Embracing Volatility
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Long-Term Investing Requires Embracing Short-Run Volatility!

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Welcome to our monthly passive-income portfolio (PIP) update—#19 in the series! Before we get to our January update, I wanted to take a moment to focus on the critical role that a proper long-term mindset and investing process play in embracing and effectively capitalizing on short-run market volatilitya role that represents a fundamental requirement for ultimate success!

There’s a reason why we chose to have a public portfolio on Wicked Capital—it serves as a tremendous learning tool for others.

It provides you with an opportunity to sit in the right seat and experience the journey of passive-income investing from a real-world frame of reference. That adds a very important component to your learning process—one you simply can’t replicate from merely reading investing articles.

Stated differently, it provides a real-world laboratory to share insights and lessons with you—providing you with a glimpse into both (1) our investing mindset and process and (2) the real-world of the market. It is our hope that you can take some of those nuggets of experiential wisdom and apply them to your own investing journey.

January provided us with a perfect opportunity to do just that—to highlight the dynamic nature of short-run market volatility and how we are embracing it in terms of our portfolio management.

So, before we dive into the performance details, let’s take a moment to explore how we can embrace and harness the power of short-run volatility through employing a proper mindset and solid process—thereby capitalizing on long-run opportunity!

(As always, feel free to skip down to the portfolio update and then come back and read this month’s message!)

Table of Contents

This Week’s Focus: Leveraging Mindset & Process to Embrace Short-Run Volatility

In January, we saw some significant volatility introduced into our public portfolio—producing a 10% drop in value.

I have no doubt that the ever present and always boisterous trolls will be quick to hammer us on that performance. However, I must confess that I’m actually tremendously excited about it—even thankful for it!

To explain why, you need to step into our investing minds and consider four critical things that are required to achieve long-term, passive-income success:

Legacy Food Storage

Lesson #1: Long-Term Investing Success Requires Maintaining the Proper Perspective

The first takeaway from January is that long-term success with passive-income investing—whether you prefer dividend-growth, dividend-value, or a mix—requires maintaining a proper perspective.

You have to keep your eye on the proverbial ball—the right one!

What really matters? In other words, what is the underlying and overarching driver of your ultimate success?

Investing Success Requires Focusing on What Really Matters

Your answer should be: (1) passive-income and (2) long-term focus.

As such, that should be the ball we are focused on—not short-run capital appreciation.

If we try to measure our progress against the wrong ruler (i.e., our portfolio value over the short run), we are engaging in the fool’s errand of comparing apples to oranges… and we will likely become frustrated at points along our journey!

One of the pivotal keys to long-run investing success is staying in the game.

However, it’s hard to stay in a game when you are unfairly measuring yourself against bad benchmarks or unrealistic expectations.

Understand your game—it’s about building passive-income with a long-term focus—and keep your eye firmly on that ball!

Always keep your focus on what truly matters—the strongest drivers of your ultimate success.

Legacy Food Storage

Lesson #2: Long-Term Investing Success Requires Embracing Volatility

The second lesson from our January update is that long-term success with passive-income investing requires embracing volatility.

As opposed to appreciation-driven strategies (e.g., growth investing), market volatility is our friend—not our enemy to be feared.

As Warren Buffett is found of reminding us, if you’re not prepared to watch your investment drop 50%, then you shouldn’t be in the markets!

I would add that if you don’t welcome short-run volatility, then you shouldn’t be a long-term passive-income investor! After all, it is that volatility that acts as a catalyst (the proverbial oxygen to our fire) to accelerates our passive-income growth when properly captured.

A perfect example of this is our positions in GasLog Ltd. (GLOG) and Hoegh LNG Partners (HMLP). We saw these positions drop 37% and 17% respectively in January due to a perfect storm of short-run volatility.

Both were hit by two negative short-run catalysts: (1) a record warm winter and (2) the Coronavirus outbreak in China (China being a major importer of LNG).

Warren Buffett Investing Quote

GLOG was impacted by additional developments related to its stake in GLOP—of which it is the parent company. Unlike parent company GLOG (with a growing fleet of new, state-of-the-art ships), GLOP has a small fleet of aging hand-me-downs from the parent company. This has led to difficulties in acquiring long-term contracts… resulting in the inevitable (though surprising drastic) 78% distribution cut announcement for 2020 based on degraded forward EBITDA guidance. The market’s reaction was as swift as it was severe, with shares plunging from around $20 to a low of $4.91.

To be clear, we are not—nor have we ever been—high on GLOP (and that’s putting it mildly) and would never have invested in it. However, its market volatility did result in a bleed-over impact on parent GLOG (to be expected).

So, what do we do???

We keep our eye on the ball (see lesson #1) and embrace the volatility. Neither our passive-income nor our long-run investing thesis has changed. We are still bullish on the long-run outlook for LNG (based on long-run supply and demand) and the fundamental positions of both GLOG and HMLP.

Thus, we embrace the volatility—predicated on short-run catalysts—and view it as a beneficial opportunity to lower our cost basis in the long game. In other words, we can now put our capital to work more efficiently—driving more passive-income with less money.

Now, you may completely disagree with our outlook for LNG and our investing theses for GLOG and HMLP. That’s 100% fine… and 100% irrelevant.

Our purpose behind Wicked Capital is not to influence what you invest in. Rather, our goal is to positively influence how you invest—meaning your mindset and process.

We strive to provide you with the tools and fundamental building blocks to develop your own successful investing plan and approach—one that fits your unique personality, situation, and needs.

The lesson here is not that GLOG or HMLP are good or bad… rather, it is that we must keep our focus on the things that actually matter and embrace volatility.

The beauty of passive-income investing is that market volatility has zero impact on our cash flow. Rather, it provides opportunities to increase that flow more efficiently. As such, volatility is our friend—not our enemy.

As long as our passive-income is not negatively impacted (e.g., a dividend cut) and our underlying long-run investing thesis remains intact, we stay the course.

Remember, just because we may be right in the long run does NOT mean we can’t be wrong in the short run. The market may ultimately agree with us… but it can sometimes take a long time for that to occur—further delayed by unexpected and unpredictable short-run catalysts.

When that occurs, we capitalize on the market’s emotionally driven propensity to overreact to those near-term catalysts. That’s our value edge—known as time arbitrage.

However, this is precisely why long-term, passive-income investing is so difficult and so few are ultimately successful with it! It requires a unique mindset and solid, consistent process.

To learn more about the challenge and required mindset, I highly encourage you to checkout our other great articles on this crucial subject:

Lesson #3: Long-Term Investing Success Requires Filtering the Noise

The third takeaway from our January update is that long-term success with passive-income investing requires filtering out the noise.

It is critical that you don’t allow the noise coming from those around us to distract you!

We are surrounded by a plethora of noise sources: the media, social media, coworkers, friends, and family.

Their aggregate noise bombards us 24/7 and can both overwhelm us and redirect us from our investing course—whether through a gentle Siren’s call or harsh criticism and judgment.

Regardless of the source or intention, we can’t allow outside noise to influence us. We must stick to our mindset and process.

Investing is an individual sport. We can’t fall into the trap of comparing our performance to that of others—especially those competing in other disciplines!

That’s akin to being a marathon runner and comparing your 40-meter dash time to that of a sprinter—again, it’s apples to oranges!

Instead, put your nose to the grindstone and focus on the task before you—staying true to your investing plan and strategy. We can only measure our performance over longer periods of time and against similar investing approaches and strategies.

Unfortunately, failure to do so can lead to frustration, disillusionment, and—ultimately—abandonment. You’ll never win a marathon if you quit after the first mile. Stay the course and trust your process.

Our public portfolio is in its infancy. In terms of the lifecycle of a long-term investment portfolio, it was practically born yesterday. As such, noise (and trolls) be damned, we are thrilled to have a great opportunity early on to significantly reduce our cost bases in the short run, with our favorable long-term theses remaining intact!

Filter the noise—ignoring that which adds no value!

Lesson #4: Long-Term Investing Success Requires Taking What the Market Provides

The final lesson from our January update is that long-term success with passive-income investing requires graciously taking what the market gives us.

When it comes to investing, never look a gift horse in the mouth!

If the market is giving you an opportunity—seize it!

Don’t question the value of it based on some misplaced desire for something else (see lesson #1)—simply accept it for what it is!

Furthermore, accept it with a smile of gratitude and appreciation—understanding that, like time, power, and fortune, the market can be a fickle mistress indeed.

Would you rather have some short-run unrealized capital appreciation or increased cash flow (aka real passive-income) over the long-term?

If the market gives you volatility… grab those lemons with both hands and squeeze them for all they are worth! You’ll enjoy that beautiful passive-income lemonade for years to come!

Focus on the right ball and seize opportunities whenever the market is serving them up to you on a silver platter.

January provided us with an opportunity to unleash some of our dry powder—and we welcomed it! We still have a sizeable cash (or cash equivalent) reserve left to be tapped and a lengthy list of potential new additions that are getting close to our targets!

Our January Passive-Income Portfolio Performance Update

With 2020 now well underway, let’s take a look under the hood of our passive-income portfolio and recap our performance over the month of January!

Dividend Growth Portfolio Performance

Our Overall Passive-Income Portfolio Performance

As we close out the month of January and our 46nd week, we currently have a portfolio value of $5,209—up from our starting value of $500 on March 13th.

In terms of market performance, we are down -10.4% since inception, down +7.5% over the past quarter, and down -10.2% over the past month.

Dividend Growth Portfolio Performance Monthly 020720
Monthly Performance
Quarterly Performance
Dividend Growth Portfolio Performance Total 020720
Total Performance
Dividend Growth Portfolio Sector Performance 020720
Total Sector Performance
Portfolio Capitalization 013120

As we noted in our discussion, we encountered some significant short-run volatility during January—reflected in the numbers above.

This was a welcomed development and we deployed around $600 in capital to the portfolio. While that is not reflected in the current portfolio value (due to the volatility), it is reflected in the growth of our passive-income stream—the name of the game.

There’s nothing worse than being a passive-income investor with capital to deploy… but nowhere to deploy it!

As we were noting in late 2019, the pace of our portfolio capitalization growth had slowed significantly due to two related factors: (1) great opportunities had become more challenging to find given current valuations and the market’s PE expansion and (2) we were increasing our cash position on the sideline—waiting for the right opportunities to materialize in 2020.

We are absolute investors. If great value opportunities are not available, we patiently wait (while slowing building existing positions). We don’t settle for relative opportunities based on the potential for continued multiple expansion—possibilities that can quickly evaporate in a game of musical chairs. We have a system and a process—and we stick to it long-term just as we encourage you to do on our website!

January finally welcomed-in some great value opportunities—opportunities that enabled us to start putting our war chest to work.

Dividend Growth Portfolio Dividends

Our Portfolio’s Passive-Income (Dividend) Performance

As we always emphasize, this is both (1) an income-investing portfolio and (2) a long-term investing portfolio. As such, capital gains/losses are only a secondary performance metric. Your focus should always be placed primarily on income metrics!

With a DGI (passive-income) portfolio, our primary goal is to build passive income. Market volatility should simply be viewed as potential opportunities to deploy your capital more efficiently and generate more income over the long run.

Here’s where we are at in terms of income metrics…

We have earned $249.96 in dividends since inception, $117.26 over the past quarter, and $68.12 during the past month.

Dividends continue to trend in the right direction with basically 47% of our earned dividends coming in the last quarter (representing 25% of the portfolio’s lifespan).

Our portfolio currently generates $527 in annual passive-income. Moving forward, we’ll track this trend in our updates—as it provides the best and most fundamental measure of our true performance based on our strategic investing approach.

In terms of dollars, here’s a look at our paid-dividends trend:

Dividend Growth Portfolio Dividends Paid Breakdown 013120
Dividends Paid by Month (Open and Closed Positions)
Dividend Growth Portfolio Dividends Paid for January 2020

We are excited to announce that we hit our year-one goal of $100 per quarter in passive dividend income at the end of 2019. As we mentioned then, our 2020 goal for the Wicked Capital public portfolio is to achieve an average of $100 per month in dividends by the end of the year!

That will be a challenge—but one that we are excited about and feel is completely achievable.

Dividend Growth Portfolio Yield

Our Passive-Income Portfolio Yield Performance & Analysis

Our yield-on-cost (YOC) has increased to 8.9%, while our current yield is at 10.1%.

Below is a graph of our YOC and current yield since inception. From a portfolio-level perspective, anytime YOC is below the current yield, it’s a targeted buy zone—there is opportunity to increase our capital efficiency (i.e., raise our YOC).

We’ve maintained a narrow yield variance, which indicates that we are deploying our available capital about as efficiently as possible with this portfolio.

Obviously, the recent volatility spike produced a jump in current yield. We will continue to tap into that value opportunity—seeking to close the gap.

As we always note, ceteris paribus (e.g., underlying fundamentals), we utilize an opportunity-focused portfolio allocation approach—one that seeks to deploy capital (both new and reinvested) with the greatest efficiency possible.

Dividend Growth Portfolio Allocations

Our Passive-Income Portfolio Allocations

To wrap up, here are our current allocations by holdings, capitalization, asset type, position size, and sector:

Additionally, here are our allocations for our industrial sector that includes two subsets: (1) broad and (2) freight and logistics…

Tastyworks

Conclusion

We hope you’ve enjoyed this month’s update on our public-view dividend growth portfolio and my always-opinionated (but usually valid and hopefully beneficial) discussion!

Always be mindful of these four critical items that are required to achieve long-term, passive-income success:

You can always view our Wicked Capital dividend growth portfolio at https://m1.finance/1zUclN2JL

If you’re interested in starting an M1 Finance portfolio, please consider using our referral link https://mbsy.co/sZVS3 and we’ll both get some free cash!

That’s just one more reason to start your dividend growth investing today! It’s never too soon to start working towards your financial freedom!

If you’re interested in dividend growth investing—you’re in the right place! We focus exclusively on helping others be as successful as possible with this approach and we hope you’ll continue to return to our site to learn, grow, sharpen your skills, and find effective and positive ideas and motivation!

Soak it all in, take and use what you want, modify it to fit your unique situation, and keep building that portfolio with a solid process and winning mindset!

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Featured image background courtesy of Gerd Altmann from Pixabay
Silence image courtesy of Vitabello from Pixabay
Horse image courtesy of Chiemsee2016 from Pixabay
Focus image courtesy of Helmut Strasil from Pixabay

Doug

Doug is the founder of Wicked Capital. He holds an MBA, BBA (Summa Cum Laude), and AAcc from Liberty University and has over 20-years of corporate finance, accounting, and operations management experience--spanning the public, private and nonprofit sectors. He is a member of Sigma Beta Delta International Honor Society in Business Management and Administration, Delta Mu Delta International Honor Society in Business, and Tau Sigma Academic Honor Society. He is also proud to have served his country as a member of the 82nd Airborne Division. His professional wheelhouse is corporate financial reporting, analysis, and forecasting—buoyed by his passion for fundamental analysis and valuation. Doug has been actively engaged in trading and investing for several decades, with a focus on value and dividend-growth investing. He has authored several books and, when he's not busy living the corporate dream, trading and managing investment portfolios, he enjoys playing the drums and spending time with family--especially in the Outer Banks of NC.
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