Hard-Knock Lessons for Individual Investors

Experience is a great teacher, and arguably it's most instructive when you've made a big mistake. When it comes to investing, I've learned a few hard-knock lessons.

Let's start with my investment in Price Club, a warehouse-store pioneer that in 1993 merged with what is now Costco Wholesale (symbol COST). I bought shares in Price Club in the mid 1980s. But when they had barely moved after three years, I lost patience and sold -- even though the company was growing impressively. The stock almost immediately soared. Ouch.

I had a small IRA with a broker in the late 1980s. I loved animated movies, so I slammed every dollar into shares of Disney (DIS). About that time, Disney brought in new management and was starting to ramp up its long-moribund animation unit. Because investors were skeptical about Disney’s prospects, its stock was volatile. I figured I could take advantage of that without tax consequences by trading inside my IRA, so I sold when the stock would swing up and bought back the shares when the price would fall back down. I thought I was brilliant. But then, after one such sale, Disney released The Little Mermaid, which turned out to be a smash hit and was a precursor of a decade that would see Disney’s stock quadruple. I missed it.

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These experiences taught me that I am neither super-patient nor psychic. If I want to make money in stocks, I need to be disciplined. Thus, I focus on a company’s fundamental numbers and try to avoid getting caught up in trends, fads, fear and greed. Eventually those things fade, but companies that can deliver sustainable earnings and dividend growth survive and prosper. As a shareholder, I prosper with them.

My Kiplinger Portfolio

Now back to the Kiplinger portfolio I’m creating. In my previous column I wrote that I had purchased shares of Intel (INTC), Corning (GLW) and Spirit Airlines (SAVE). I also invested in Vanguard Total Stock Market ETF (VTI) to serve as a market proxy. By the close on November 4, VTI had gained 6%; Intel, 3%; Corning, 5%; and Spirit, 16%. Don’t read much into one month’s perform­ance. But so far, so good.

The portfolio is heavy in tech, so I need to diversify. I will buy some of the stocks I recommended in the December issue (STOCK WATCH: 8 Blue Chips to Buy Now), but I need to wait for Kiplinger’s trading restrictions to expire. Meanwhile, as part of my highly unscientific method of identifying attractive stocks, I’m talking to friends, reading financial statements, and clicking through Yahoo Finance to find companies that I think Wall Street is punishing unfairly.

And because I’m basically a conservative investor, I want to hedge my bets by looking for solid dividends that are well supported by a company’s cash flow. (Even if a stock doesn’t appreciate as much as I expect, I can console myself by collecting those quarterly payments.)

I decided on three com­panies: health care giant Johnson & Johnson (JNJ), bought at $65.30; PPL Corp. (PPL), a Pennsylvania-based utility, at $29.63; and KKR Financial (KFN), at $8.43. Kiplinger’s has recommended both JNJ and PPL in the past, largely on the basis of their strong balance sheets, cheap prices and generous dividends. (See VALUE ADDED: 5 Great Dividend-Paying Stocks to Buy.)

KKR Financial is a Lazarus-like story brought to my attention by my 19-year-old son, who just started investing. Founded as a real estate investment trust that invested in mortgages, and operated by Kohlberg Kravis Roberts, the one-time king of leveraged buyouts, KKR Financial got crushed in the 2007 mortgage meltdown. In 2008 it sold off a big chunk of its mortgage holdings and converted to a regular com­pany that now invests in risky debt, from junk bonds to syndicated bank loans. Its strategy may be chancy, but the top execs and directors, including a former Wells Fargo president, Paul Hazan, are top-notch. At my purchase price, the stock sold for 4 times KKR’s earnings over the previous year and yielded a tasty 8.5%.

Kathy Kristof is the author of the book Investing 101. Follow her on Twitter: @KathyKristof.