Loyalty – One Of The Biggest Stock Picking Mistakes I Make

Written by Hank Coleman

Dr-Pepper-vs-PepsiI am loyal to a fault. I will stick with a company that I grew up with and love all the way to the bitter end. While being loyal may be a great trait, it often gets me into trouble as an investor. The Dividend Ninja’s recent recap of his Dividend Growth Index and individual stock picks reminded me of a recent friendly debate that we had. The Ninja is a big fan of PepsiCo Inc, but I personally love and own shares in Dr. Pepper Snapple Group. Like the wise Ninja predicted, that hasn’t worked out well for me over the past six months when compared to his choice.

I mentioned my love for Dr. Pepper and its vast stable of beverages months ago when the Dividend Ninja first mentioned buying shares of PepsiCo Inc. He was quick to point out that PepsiCo has several things going for it that Dr. Pepper unfortunately does not. Pepsi is much more than simply a beverage company thanks to its ownership of Frito-Lay snack food strategic business unit, Quaker Oats, and other divisions that allow the company to diversify into so much more than simply being only a beverage company. Pepsi is also a much larger company than Dr. Pepper Snapple Group aiding in its diversification. Dr. Pepper does not have any food divisions or other units to help it ride out the beverage industry’s troubles. But, I am still very stubborn and loyal to Dr. Pepper.

My loyalty, despite the facts, is one of the biggest investing mistakes that I constantly make. I love my Dr. Pepper and continued investing in it over the past six months despite the facts of the situation and the Dividend Ninja pointing out potentially better options. Whoops! What does the Dividend Ninja know anyway?

He was definitely right. As he pointed out in his recap of the Dividend Index’s first quarter, PepsiCo has gained over 8% in the past six months not including dividends that were reinvested. The return is over 10% with dividends. Dr. Pepper Snapple Group is only up 5% not including dividends during that same period. Additionally, there have been worries at Dr. Pepper amongst analysts about lower revenue growth than its peers and fights with its bottlers. PepsiCo on the other hand has been setting up new strategic alliances in China and focusing on emerging markets abroad.

How To Break Your Loyalty Habit

Make It A Financial Proposition – It is not personal. It is business. That is how you have to look at investing. While I love Dr. Pepper, I will just have to wait for the rest of the world to come around before I earn the rate of return that I really want in my investments. You have to separate the two.

Simply Avoid Industries – If you have love for certain companies over others, you may simply need to avoid entire industries to keep your conscience clean. There is nothing that says I absolutely must invest in the beverage section of the consumer staples industry. There are so many other great companies that are equally as good to invest in.

Know Thy Self – As with most investment decisions, it is so important to know and understand what makes you tick. Understanding your personal bias and preferences is half the battle when choosing the right stocks to invest in. Simply knowing that you are loyal to a fault, for example, can help keep you out of bad investment decisions before they even start.

What about you? Are you bias in your investing decisions? Are you too loyal?

14 Responses to “Loyalty – One Of The Biggest Stock Picking Mistakes I Make”

  1. Poor Student

    Apr 11. 2012

    I found it in reverse. I invested in Suncor and now drive past every other gas station until I reach a Petro. Luckily this usually works out for the better after considering the prices and the rewards programs, but I still am much more loyal knowing in some small way that I funded the production of that gas.

    And while I understand that investing isn’t personal, it’s simply business, I like to think about the movie that popularized that expression. In the Godfather two of the people who say that get killed, Sonny and Tessio. I am not saying that it caused their demises, but I think personal considerations must play in business decisions.

    Reply to this comment
    • The Dividend Ninja

      Apr 11. 2012

      Poor Student As Larry Swedroe would say, “Just becuase you know a company or are familiar with it, doesn’t mean it’s safe.” He’s right. ;)

      As Hank points out, sometimes we can be blinded by our loyalty or familiarity with a company, to the point of being oblivious to financials or potential problems.

      Cheers!

      Reply to this comment
  2. The Dividend Ninja

    Apr 11. 2012

    Hank I love this post! Not a question of being right or wrong, it just brings home a point about how our personal biases affect our investing outlook.

    I was lucky with Pepsi. :) Had you chosen Coca-Cola I would have been the clear loser on this one – it’s pumelled Pepsi.

    Regardless the one thing that I didn’t like about Dr. Pepper (and Snapple Group) was the debt and it’s smaller market cap, in a very competitive business. Maybe Pepsi or Coke will buy them out – then your share prices will go through the roof. ;)

    Cheers

    Reply to this comment
    • Hank

      Apr 11. 2012

      Thanks, Ninja. We all definitely have some sort of bias to varying degrees whether we realize it or not, and it creeps into our investing for sure. I hadn’t thought about the buyout aspect….now I can definitely hope.

      Reply to this comment
  3. farcodev

    Apr 11. 2012

    I had bias to… not looking fundamental and financial data of the companies.
    Now (and thanks to DN) I have more loyalty into the reports and the statements than anything else.
    Of course the interest about a company is picked in a first sight but after that, inner data can change the view in the possible investment, and can more or less moderate the call of high yield which can be displayed.
    In fact, it’s like the differences between a one night date and a (possible) long term relationship. :)

    Reply to this comment
    • The Dividend Ninja

      Apr 12. 2012

      Farcodev Always better to have as much information as possible before investing. Know as much as you possibly can about a company before you put your hard-earned dollars on it. ;)

      As my friend Kanwal at Simply Investing says: “Do you understand what this company does? Can you see yourself holding this company for the next 20 years?”

      If you can’t answer yes to those two questions, you shouldn’t be investing in the company!

      Cheers

      Reply to this comment
  4. farcodev

    Apr 12. 2012

    Exactly that.
    You can always make guess and put fantasy shades ahead of your vision but the reality of the things don’t disappear. :)

    Reply to this comment
  5. My Own Advisor

    Apr 12. 2012

    “Know Thy Self”, an excellent reminder.

    Another thing, along the lines of what Ninja said in referencing Kanwal: if you cannot explain to a ten-year old what the company does, and why you’re buying it, it shouldn’t be bought – ever.

    I can explain every stock I own, and what their mandate is, in 10 words or less.

    So far, this has served me well.

    Reply to this comment
  6. Ossa Zebian

    Apr 18. 2012

    Ok, so I want to invest in US companies that pay dividends. Fan of Pepsi and General Mills. Dividend Ninja is right about Pepsi, they are much more than just a beverage company. So anyway. Would it be best to put those stocks in a RRSP and just leave them in there collecting dividends and reinvesting them back.

    Reply to this comment
    • The Dividend Ninja

      Apr 18. 2012

      Hey Ossa as a Canadian investor you will definitely want to hold all U.S. stocks in your RRSP, so the dividends and gains are tax-free. If you hold U.S. stocks in a TFSA or unregistered account, you will be subject to full tax on the dividends – you will not be eligible for the dividend tax credit. However there is an additional tax credit on foregin income. ;)

      Yes you can DRIP the shares in the RRSP, as long as the dividend amount is enough to cover at least one share.

      Before you back up the truck on PepsiCo, please read my recent summary on it:
      http://www.dividendninja.com/dividend-growth-index-2012-q1

      Cheers!

      Reply to this comment

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