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Weekly Q&A: Investors Ask, Clement Answers #1

 

Welcome to the first post in a new weekly series, where our senior analyst Clement Thibault answers investors’ questions.

Even experienced investors may encounter questions they cannot answer, and sometimes it’s good to get expert advice.

For this post, we selected 3 stock market questions, regarding the sunk cost fallacy, the most boring aspect of the stock market, and how to estimate future dividends:

Q: What’s the best way to avoid the sunk costs fallacy when investing in stocks?

A: First, simply being aware of human biases is a good start in avoiding them. So, you got that already.

If you have questions of your own you’d like Clement to answer, please leave them in the comments below or send them directly to Clement via Twitter - @ClemThibault.

Second, understand that losses are a part of investing. There are no perfect track records, losses do happen.

Which brings me to the third and most important point: have a plan to deal with losses.

Every position you open should have a clear price target and a clear stop loss, in case your analysis was wrong. That way, you never get to thinking about the sunk cost - you just execute a predetermined investment thesis, and your psychological biases never come into play.

It’s easier said than done, because things psychologically change when money is on the line. But I’ve found that purposely working with a plan with awareness of pitfalls and fallacies minimizes the psychological mistakes made while investing in the stock market.

Q: What would you say is the most boring aspect of stock trading?

A: Waiting for something to happen.

Once you invest in the stock market, there’s very little you can do to influence your position and the direction of the price action. You just have to wait and let the market do its thing, and see if your analysis was indeed correct. It takes time, sometimes weeks, if not months.

Patience (or the ability to withstand boredom) is one of the most underrated traits of a good trader/investor. Most times, constantly moving money around and making changes and adjustments leads to sub-par returns.

Being able to step away and wait for the market to move in your preferred direction after opening a position is the most ‘boring’ part, but without a doubt one of the most important parts.

Q: How would you estimate the future dividend growth of stocks?

A: This is a tough one. Those are the top things I’d look at:

  1. Does the company regularly give out a dividend? For how many years have they been giving one? The longer the history is, the more stable the dividend is.
  2. Does the company regularly increase the dividend? Many have a yearly increase, which you can carefully extrapolate to get a glimpse of the future.
  3. When was the last dividend cut by the company? If the company recently cut its dividend, you should be very careful investing in it for the dividend.
  4. Is the management committed to giving out dividends? A transcript of a quarterly earnings call should help here. 
  5. Is the business growing? Business and dividend growth go hand in hand. 
  6. Are the bottom line and free cash flow enough to cover dividend growth in the coming years? Take a look at the financial reports, see how much the dividend is costing the company, and if they are likely to be able to keep paying it in the future.

Investing takes time and research, but it can be very rewarding.

If you have questions of your own you’d like Clement to answer, please leave them in the comments below or send them directly to Clement via Twitter - @ClemThibault.

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