Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 527

Defence beats offence in investing

Offense sells tickets, but defense wins championships.
- Paul 'Bear' Bryant

The momentum of Nvidia's stock price seems unstoppable. Many are comparing Nvidia’s historic run to a certain stock from the late 90’s, Cisco Systems (I drew the same comparison back in May). And so I thought this would be a good time to revisit a section from my book, Low Risk Rules that compares an early-90s investment in Cisco to a more conservative alternative.

The results might surprise you. With the benefit of this hindsight, how might you build your portfolio today?

In the late 1990s, while the whole world was on offense, seemingly getting rich on the promise of this amazing new thing called the ‘internet’, I debated a friend who refused to play the growth stock game. Steady and stoic, he invested defensively in Canadian bank stocks. “Bank stocks never go down for long” he told me. I mocked his conservatism in what I perceived as stocks more well suited for a retiree’s account. “You go ahead and wait for your measly little dividends,” I told him, “while I get rich".

History, of course, has been very kind to the Canadian banks—a government-protected oligopoly who have just become more entrenched into the economic fabric over time. And not so kind to the internet stocks of the 1990s.

Does boring pay off?

So I became curious. What if, instead of chasing internet stocks back in the 1990s, one had just stuck to this boring approach that the younger me looked down upon?

I ran some numbers—keeping it simple with two very high profile and successful companies.

In the low-risk corner… Toronto Dominion Bank (now known as TD Bank)—a Canadian banking powerhouse that also built a strong US presence with retail branches and discount brokerage.

In the growth corner… Cisco Systems. One of the hottest stocks of the 1990s, and the most valuable company in the world for a brief period of time. It would have been too easy to pit TD Bank against Pets.com, so let’s go with Cisco. An undeniably great company, Cisco is still around (and thriving) today.

I started keeping track in mid-1996, just as the internet bubble really began to pick up steam. This allows us to take fully into account Cisco’s meteoric rise. As you can see in the chart below, in early 2000 the investment in Cisco would have been about 8x as valuable as your investment in the boring, old, plodding TD Bank.


Source: Morningstar.com

However, the subsequent crash wasn’t kind to Cisco at all. It was dead money for a decade, only starting to recover well into the middle of the 2010s. Meanwhile, like the Tortoise to Cisco’s hare, TD Bank plodded along and, except for a scary episode in the 2008-09 global banking crisis, has generally outperformed the faster grower.

There's more to it though

But here’s the thing with the chart above—it’s not quite accurate. It completely ignores the dividends you would have earned on the TD shares. When we take those dividends into account, and reinvest them in TD shares, the picture looks very different.


Source: Morningstar.com

This isn’t even close. Your investment in the ‘boring’ bank shares has outperformed the exciting, high-growth company by more than 2x, and it’s done it with a lot less drama.

My friend who refused to take part in the internet stock craze, who I openly mocked, had the last laugh. He has experienced decades of steady growth in his portfolio of safe, dividend-paying stocks. And meanwhile, I spent far too much time in search of the next great growth company, completely ignoring these massive wealth creation machines because I perceived them as ‘too boring’.

Lest you think I’m cherry-picking, the reality is that I actually gave the growth stocks the benefit of the doubt here. I could have chosen any number of optical equipment makers who languished post-crash, but instead I chose Cisco, a company that since the turn of the century has grown revenue at 4.9% per year and earnings at 8.5% annually for 20 years. That’s a solid track record through several economic cycles, including a crash that laid waste to the industry that Cisco sat at the core of. The problem, and the reason for the underperformance of Cisco, is that expectations were so high, that the odds were stacked against anyone betting that growth would continue.

It took me a few market cycles to finally learn that the simple investment strategy I had mocked is actually far superior to more elaborate, exciting, and seemingly intelligent strategies.

Most amazing of all is that it’s surprisingly easy to follow, as long as you don’t let your biases and weakness get in the way of doing what’s best. Always remember, as the old sports saying goes, defence wins championships.

 

Geoff Saab is the author of Low Risk Rules: A Wealth Preservation Manifesto, and writes a free newsletter at lowriskrules.substack.com.

 

RELATED ARTICLES

Why buying speculative stocks often proves irresistible

Irrational exuberance in growth versus value

What are the key trends in global dividend income?

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Investment strategies

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Economy

US election implications for investors and Australia

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes, trade wars and policy uncertainty. Here's what it means for markets going forward.

Retirement

The rising tension between housing debt and retirement balances

Australians are taking more mortgage debt into their 60s than ever before. Retirement planning assumptions haven’t adapted and could result in future income projections that ultimately disappoint retirees.

Investment strategies

Why megatrends can deliver big upside (and downside)

The magnitude and duration of society's most important trends are often underestimated. While these trends are usually touted as a tailwind, one in particular could have dark consequences for many assets.

Property

Fixing the construction industry house of cards

Australia needs to build new homes like never before but construction firms keep going belly up. Unless regulators act now, consumers will continue to carry the can.

Investment strategies

How investor portfolios have become riskier versus history

Risk in portfolios has dramatically increased as time horizons have shortened and investors have piled into equities. It's resulted in a growing disconnect between what investors need and what the financial industry is delivering.

Shares

The abacus, big data and a brief history of indexing

Equity indices have evolved over time, led by step-changes in our ability to manipulate data. Despite the rise of passive investing, they weren't initially meant to be investment tools.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.