• Matt Wolodarsky

My top 9 wealth creation and investing lessons from 2019


As 2019 comes to an end, and the stock market gets ready to close the books on a record setting year, I decided to take time to reflect on what I learned this year.


Like any discipline or skill, wealth creation and investing prowess need to be honed. 2019 provided me with no shortage of wealth creation and investing lessons. Here are my top 9 for 2019.


1. Be honest with yourself about your true motivations for achieving financial freedom

Setting goals at work and in my personal life has always been something I’ve strived to do. It’s no different with my personal finance goals. I’m a big believer in setting personal finance goals that go to your core. They must go beyond the vague and purely materialistic. “I want to be a millionaire” just doesn’t inspire me to do the hard work of building my investing knowledge or staying on course with my savings goals.


Your personal finance goals must touch on that life aspiration or human emotion that can motivate you, over the course of your working life, to go into overdrive in pursuit of an important goal. Whatever financial freedom would inspire you to do – be it pursue advanced education, volunteer, travel the world, philanthropy, leaving a financial legacy for your kids; you must choose your wealth goals carefully. They will help to keep you motivated on the journey to financial freedom.


My personal finance goals took on new meaning for me this year. As my two sons turned one and four respectively this year, their dreams and aspirations became a little more real for me. My oldest started junior kindergarten this year and I can already see his curiosity of the bigger world beyond his mommy and daddy take shape. I hope that curiosity continues to grow and I want to support him and his bother in their pursuit of new learning opportunities and down the road, advanced education. It’s a huge motivator for me in my pursuit of financial freedom to be able to provide my two sons with the means to realize their academic goals.

2. Always stick to your hypothesis when buying and selling a stock

I’m a big fan of hypothesis driven investing, the act of investing in a stock based on a sound and specific premise, and this year I was rewarded for this approach.


Earlier this year I set out in search of under valued Japanese public companies. I saw an opportunity to invest in strong Japanese companies that were being unfairly penalized because of the overall poor sentiment towards the Japanese economy. Japan suffers from poor demographics and a stock market that has mostly remained stagnant for three consecutive decades.


I wanted to find undervalued, publicly traded Japanese companies that derived the majority of their revenue from international markets, have been growing earnings, and had limited debt risk. After screening through the 2,292 Japanese companies that trade publicly today I settled on Tokyo Electron (OTC:TOELY), a semiconductor production equipment manufacturer, as they were undervalued and protected from Japan’s poor demographics. The majority of their revenue comes from outside of Japan.


When I purchased Tokyo Electron in July 2019 its forward P/E ratio was 15.77, and when I issued my trade to sell on November 18th 2019 its P/E ratio had increased to 21.65. My original hypothesis of the company being under valued had been realized and I exited the stock.

There was no emotion and no timeframe involved in my decision to sell, just a simple binary check on whether my hypothesis had been realized.


This year I learned not only to always have a strong hypothesis for buying an equity, but to also sell when something changes from the original investment hypothesis that led you to buy the company in the first place. In the case of Tokyo Electron I felt it was more fairly valued at the time I sold.

3. Don’t try and time the market but know where you are in its cycle

The current US bull market run, which began in March 2009, turned 129 months old this month - the last month of the 2010s decade. This is the longest bull run in the history of the US stock market. The second longest bull run started in 1990 and came crashing down 113 months later with the bursting of the dot-com bubble.


With new records being set I reflected this year on where we are currently in the market cycle and therefore what action, if any, I should take with my investment portfolio. I feel famed value investor Howard Marks captures this sentiment the best:

"We never know where we're going, but we sure as hell ought to know where we are. Where is the market in its cycle? Is it depressed or elevated? When it's depressed, the odds are in the buyer's favor, and when it's elevated, the odds are against him. And it's really as simple as that. You should distinguish between markets that are high in their cycle and markets that are low. You should vary your behavior on that basis. You should take more risk when the market is low in its cycle and less risk when the market is high in its cycle."
- Howard Marks, OakTree Capital

I love a great party but I also know when its time to look for a ride home. The market is clearly in a sustained period of elevation and I took action this year to realize some profit in some notable high fliers, including Shopify and The Trade Desk. I did NOT sell my entire position in any of these stocks as I remain a big believer in their respective visions and business models. I simply decided to acknowledge that like all other bull markets this one too will end. I don't know when, but I wanted to prepare for it by shifting some of my investing dollars from likely over valued equities to either cash or into more defensive equities that have a strong dividend growth track record.


I have since opened up positions in Houlihan Lokey, and Fortis, among other strong dividend plays I made this year. I will continue to look for reasonably valued dividend stocks, while keeping about 5-10% of my portfolio in cash on the sidelines ready to invest when the market inevitably depresses.

4. While not easy, there is a method to the madness of picking high potential growth stocks in the tech sector.

Investing in the tech sector has always been a favorite destination for my investing dollars ever since I began my career in technology 23 years ago. It’s a way I can exercise my knowledge of the space I work in to find companies worth investing in. I am just following the advice of onetime mutual-fund star Peter Lynch who said:


“Use your specialized knowledge to hone in on stocks you can analyze, study and then decide if they’re worth owning.”

2019 was a good year for my picks in the tech sector:

  • Shopify: 173.4% YTD return

  • The Trade Desk: 126.4% YTD return

  • Apple: 79.5% YTD return

  • Facebook: 57.2% YTD return

  • Splunk: 43.2% YTD return

All of the above stocks outperformed the stock market in 2019 (as of December 20th, 2019).


To continue to improve my batting average in selecting tech stocks I took some time this year to analyze what tech multibagger stocks have in common to see if I could discover some patterns that would allow me to pick the next set of big winners in the tech sector. I published my findings in a recent post called How to pick tech stocks that deliver wealthy returns. Spoiler alert, I believe it comes down to five key characteristics: Companies that i) are riding a megatrend, ii) have a better mouse trap, iii) have optionality, iv) have lots of market capitalization runway to grow, and v) have strong leadership.

5. Your personal savings rate is the most important determinant in being able to grow sustainable wealth over time

For me personally, and for good reasons, I was not able to save this year. While the stock market hit new highs, and many of the stocks I hold did the same, I missed out on some opportunity as I did not have net new money to invest.


This lesson might be the most controversial on the list. This axiom makes it seem that investing performance doesn’t matter. Of course it does. Certain extreme investing strategies, such as buying penny stocks, will have a materially negative impact on your net worth and invalidate my statement. Plus, the idea that we have to do a lot of the heavy lifting ourselves by making sacrifices today so that we can save and invest for our future can be annoying to say the least. Realistically speaking though, for most people, it is the truth. Unless, of course, you have Warren Buffet investing prowess or are the next Mark Zuckerberg with a can’t miss business idea.


Looking at the table below from Pension Partners you can see my main point. This table assumes a net income of $50k and no taxes or inflation. If you achieved the 5.5% saving rate per year over 30 years in the top right of the table, you'd only need a 1% return to exceed the amount accumulated over the same 30 years with a 9% return on a 1% savings rate.


Source: https://www.pensionpartners.com/whats-more-important-saving-or-investing/

The other objection I’ve heard to this idea, that your savings rate is the most determinant factor of most peoples long term wealth, is the belief that the current bull market we are on will continue. Sure, if the stock market were to continue this year’s approximately 25% return rate, savings wouldn’t matter as much as long as you participated in the stock market. Alas, this current bull market we are on will come to an end.


Assuming a more "typical" return of 8% - 9% you can start to see how savings rates make a big difference. Can some people do better than the 8% to 9%? Absolutely. If you have the time to learn and research, investing horizon and risk tolerance you should try to beat the average. Plus, you can do a lot worse than 8% to 9% chasing easy money thru things like penny stocks. But 8-9% is "most likely" based on historical stock market performance.


In the most likely scenario of an 8% to 9% annual average stock market return, your savings rate will make the biggest difference in wealth accumulation. In case you were wondering, I believe investment allocation decisions are the second most important wealth creation determinant for the typical investor.


Accepting this idea that your savings rate is the most important factor in long term wealth accumulation does not necessarily mean that you need to make extreme sacrifices that impede your enjoyment of life. As outlined in my Top money saving tips for wealth accumulation post, there are money saving practices that can be used without feeling any major squeeze. It is the difference between being cheap and being frugal. What is needed is to be more strategic and frugal in your spending, so you can deposit a set percentage of your income automatically into an investment account each month.

6. Dividend growth investing is an incredible wealth creation machine

This year I renewed my love affair with dividend growth stocks. What’s not to love? This year my annual dividend income increased 25% year over year without me lifting a finger. This annual raise came via a combination of dividend payment increases from the dividend stocks I own and share re-purchases made automatically through the Dividend Reinvestment Plans (DRIP) I subscribe to.


There are a lot of reasons to love dividend growth investing, not the least of which is that high dividend yielding companies outperform those with low to no dividends [1], but annual raises earned without putting in any extra work is one of my top reasons.


To share my obsession with dividend growth investing I recently published a Guide to Dividend Growth Investing that covers the basics of dividend investing, how to evaluate and select the right dividend paying companies, and a blueprint for building a dividend portfolio that over time can become a significant passive income stream. I also published a Top 10 Dividend Stocks report at the end of October, which as a portfolio of stocks is off to a good start (as of end of trading day December 19th, 2019 the collection of the 10 dividend stocks I recommended is up 11.6%).


[1] The Enduring Qualities of Dividends, Lyle B. Schonberger, May 21, 2013; Ameriprise Financial

7. Let your winners run

This year marked the 7th anniversary of Facebook’s IPO. It’s a memorable date for me as I was lucky enough to purchase shares of the social media giant on its first trading day ever. My optimism was tested quickly though as the stock quickly proceeded to halve in value following what many called a botched IPO. Well, my emotions with this stock were tested again at the beginning of this year. Leaving 2018 down 27%, the Facebook stock price left me questioning a long standing belief I held about letting your winners run. Thankfully, still after many dubious headlines about Facebook and its privacy setbacks, I held onto the stock and have been rewarded for my patience. The stock is up 64% (as of Dec 19th, 2019) from its low point of 2018.


It was tempting to sell my position in Facebook last year with all of the negative publicity surrounding the company and its stock price decline. A 300%+ return on my original purchase price of Facebook shares is still pretty amazing, but I’m very happy I did not sell. Not only did I realize a gain from Facebook’s strong performance this year, but it reaffirmed my belief in the investing truism of “letting your winners run”.

8. Be the CEO of your financial freedom

As I become more active on social media with my personal finance musings I’m getting a lot more unsolicited messages from financial advisors. I definitely see value in financial advisors who are competent and have motivations that are aligned to yours. That disqualifies some of the sales people out there positioning themselves as financial advisors.


I am also being asked more for referrals to financial advisors. My first question back to them is what role would you like a financial advisor to play for you? I’ve gotten lots of different answers. The one response that is most concerning is the idea that one can outsource their financial planning and investing entirely. This is a recipe for financial disaster.


Nobody cares about your money and financial future as much as you do – Nobody! Whether you decide to be a do-it-yourself investor or work with a financial advisor, if you want to build wealth it starts with you being the CEO of your financial freedom.


9. My voice in the personal finance space has a niche

This was a big year for me sharing my own personal finance strategies and insights. 2019 was the year I launched my personal finance blog, The Wealthy Owl.


My focus on “no nonsense, all encompassing, wealth creation” seems to have a niche. While not setting records I have seen traffic growth and have 125 monthly newsletter subscribers so far. Not a big number, but also not too shabby for just getting started. I’m humbled that 125 people took the time to submit their email address in order to receive my monthly musings. It’s enough interest to re-energize my efforts to share my lessons and perspective on wealth creation. I will continue to build The Wealthy Owl as a resource for learning and building competency in all facets of wealth creation, offered to you in an accessible, actionable and pragmatic way.


Here’s to a prosperous 2020 in wealth, happiness, health and learning.


-The Wealthy Owl


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