An Interview With Bill Spetrino on Profitable Dividend Investing for Retirement and Decoding Warren Buffett
The following interview is extracted from my book, Breakthrough Strategies of Wall Street Traders. Similar to Market Wizards, within it I interview 17 remarkable traders and investors for their investing stories and unlike other investing books, get them to actually reveal the trading-investing rules and techniques they use as well as what they tried that didn't work. If you want to learn trading and investing, start with these systems.
 
Bill Spetrino, editor of The Dividend Machine newsletter at Newsmax.com, has over 80,000 subscribers following his dividend stock picking methodology. Primarily a long-term dividend investor, Bill has achieved a very successful 20+% CAGR track record as recorded by The Hulbert Financial Digest. Through his investing he has achieved the investor’s dream of retiring early. If you have ever wanted to learn how to combine value investing (aka Warren Buffett) with dividend investing and long-term dividend reinvestment strategies, this is a man whose methods you should study.
Starting with just $8,000, Bill attempted to learn the principles of Warren Buffett’s style of investing and ended up creating a perennial compounding machine comprised of strong dividend stocks that throws off so much cash that he could walk away from his 9-5 job and retire at the age of forty-two. He now lives comfortably just on the income from his investments alone. A less risky and slower investing technique than day trading, options trading, growth stocks or high flyer momentum trading it achieves its profits by acquiring valuable assets at bargain prices if and only if the company is deemed a long-term winner able to continually throw off cash.
Bill firmly believes that if you are just getting started with investing then you should start with a basic technique like buy and hold, and the best stocks to buy and hold are strong consumer goods stocks, purchased at bargain prices, that throw off dividends. Even if you want to become a trader, he advises that you learn how to be an investor first and that you especially learn how to value companies and buy bargains where there are situations of “imaginary fear.”
Bill, let’s start with how you got started in stock market trading and how that moved into dividend stock investing.
I graduated from John Carroll University with a degree in accounting. I was an accountant and then I started buying and selling sports memorabilia. Then I started buying and selling tickets. All my life I wanted to build something where I didn't work and I got paid. I thought to myself, “There has to be a better way.” From the start I was always focused on how to become financially independent so that I could retire.
I wanted to get into real estate but the problem with real estate was that you needed a lot of money to start. Interest rates were 10-12% at the time and I didn’t understand it so I didn’t get into it.
With my accounting background I bought a stock, Phillip Morris, and I started to receive dividends from it. I remember my first dividend check was for $44 back then. My dad said, “What are you going to do, buy a Happy Meal with this?” But things have now progressed to where my last dividend check is now three to four times what I made as my annual salary at my first job.
Getting into dividend investing was a gradual progression. Most people look at investing as they are buying something so that they can flip it real fast. I thought of it as, “I’m going to be buying a business that is spitting me out money and I just want the money coming. I want that check coming every quarter.”
I looked at the cigarette business - at the time Philip Morris owned Miller Beer and Kraft - and I thought, “Geez, this is a great business.” My investing mentor told me before he died, “If people can’t eat it, drink it, smoke it, fuck it, watch it, wear it or bet on it then forget it.”
So I was in a position with Kraft. They had brands like Kool-Aid, Oreos, Philadelphia Cream Cheese. They had the brands. They had Miller Beer, Marlboro and all the big brands that controlled 50% of the tobacco market in the United States and 10-12% in the world. I just thought, “This was a good safe place to put my money,” and I just kept buying more shares and kept reinvesting.
Every dollar that I saved I just kept putting into that stock. It was funny because in 1996-1998 everybody was buying a stock for $20 and it would go to $50 by the end of the day. My stock kept going down but I wasn’t focused on that. I was focused on a goal. I knew that my goal was to be able to get $26,000 or $27,000 a year and then my house would be paid off. I thought, “Okay, when I get to that point I can retire.”
You ended up only investing in one stock?
At the time I was invested in that one stock and later I was buying other ones, but in 1998-1999 there weren’t a lot of good bargains. When I started there was a whole bunch of good bargains and then there were none. I stayed in a couple of big stocks like Abbott Labs, Budweiser, McDonald’s – things I could understand. Those are easy stocks to understand. When anybody is starting out in investing they should start out with stocks they understand.
You’re saying that you started out as a buy and hold investor? You weren’t a trader?
Absolutely, absolutely. Buy and hold was the way I went. I started trading as I got older and learned more. Investing is kind of like learning how to ride a bike and trading is like learning how to do wheelies or stunts on your bike.
I’ll tell you that most people who trade lose. They are just like gamblers. You are going to lose. I started investing with three people and they all faded out. I’ll tell you why.
I was gambling since I was three years old. When you are out of money then you cannot play anymore. When you are wrong they take your money. When you bet for the short term you can have many losers. I know some of the best poker players in the world, including some of the famous ones like Doyle Brunson. They have all gone broke at one time or another in their career because they got a bad run of cards whereas if you are investing in buy and hold the story can be different.
I had a tobacco stock that dropped 50%, but I sat there and just kept buying more of it at a lower price. People were worried that tobacco was going to become illegal but the government got too much money from taxes. If you go to a state like Kentucky, Tennessee or even Virginia, you will see that there are people who grow tobacco. Tobacco cannot be illegal. The government needs the revenue from it. It was Napoleon who once said, “If I could figure out a better way to raise tax revenue then I would make smoking and drinking illegal,” but he wasn’t $17 trillion in debt like we are now.
Okay, so you started out in investing rather than in trading. You made that decision from the very start. However, was this dividend investing from the very start or were you originally using some other form of investing model to guide your decisions?
Yeah, it was dividend investing from the beginning. There weren't a lot of books that explained things back in pre-internet days. Today, there are tons of investing and trading articles. You couldn't really trade until the internet came.
I bought my first stock when I was in college. I made a $2,000 investment and was charged a $75 commission to buy it and $75 to sell it. That's an 8% commission. It was too expensive. You couldn't trade with those costs. Today, you can buy a million dollars worth of stock with a market order costing $5. You couldn't do that back in those days. When trading did pick up in the late ‘90s a lot of people got into it, but I was building my dividend machine.
I switched to doing some trading because I can do it now. Once you learn the basics of investing then it’s much easier to trade. Warren Buffett can trade and Carl Icahn can trade. The reason they don't is because they have billions of dollars. They can't quickly get in and out of large stock positions but if you want to just trade with a hundred thousand dollars you can do that.
I have an account at StockTwits and I put two trades on yesterday that each made 1½% within a couple of hours. Now I didn't actually do the trades myself because I'm in a higher tax bracket now. I have what I want right now. I don't need to do it, but I know how to do it.
When you started out it was too expensive to actually do in-and-out trading so you ended up investing instead. Did you focus on a special investment style like Warren Buffett’s or John Templeton’s?
I was a Buffett clone. I followed Buffett. I bought some Coke a little bit after he did. I followed him into silver. I followed him into quite a few investments because at the time he knew more than I did and I wanted to know why. I needed to understand how he was thinking. There wasn't all the information there is now.
Investing is like anything else. It's a learning process. I remember Templeton saying to buy at maximum pain and being a gambler all my life I knew that you couldn't do anything obvious. If you bet football, if the outcome was obvious then everybody would make money. However, with a computer that finds things if you factor in enough data then you can make money.
I often combine long-term investing with trading. I'll put on a trade but if I have to keep it on a long time then I will because no one can predict what is going to happen in the short term. They can predict what is going to happen in the long term. It's easier.
Each person has their own skill set. My job as a dividend investor is to find imaginary fear. Like yesterday, for instance, I went long USO and long an energy stock named RIG, which is Trans-ocean. The reason I went long is because Prince Alwaleed came out and said, “Oil will never be a hundred dollars.”
Well, first of all, Prince Alwaleed is one of the worst investors in the world. He was born rich. He bought Citigroup when it was way overpriced and then he bought it again right before the crisis telling everybody, “Yeah, I’m getting a bargain.” He's not Warren Buffett. He didn't earn his money. He was born on third base and thinks he hit a triple. He was a pinch runner in the game. I put the trade on knowing that and then Boone Pickens came on the air and basically said, “I've made a billion dollars investing. Oil is my business and oil will be higher by the end of the year,” and then the price of oil went back up.
I anticipated that would happen. I didn't anticipate Boone Pickens would come on TV. I just knew that because of Prince Alwaleed dummies were sitting at their TVs going, “Oh, I got to short this,” while smart people are sitting there going, “I have to go long.”
It's like when you are playing cards - if you're at the table for half an hour and you don’t know who the sucker is then that means it’s you. I try to combine street smarts and book smarts. I have an instinct I’ve developed. I've been gambling since I was five or six years old buying and selling things and if you're wrong then like I said they will take your money. That’s what happened to my friends.
People ask me all the time, “My kid wants to be an investor, where do I send him?” I say, “Teach them how to gamble” because if you don't know how to get the odds in your favor then you aren't going to make money.
How do you teach them to gamble?
Well, what you would do is this. Let's say the kid likes baseball. You can get the odds off the computer and tell him, “Okay, I'm going to give you $3,000. I want you to pick what baseball team is going to win today.” For instance, let's say the Yankees are playing the Red Socks and the odds are that the Yankees are 7-5 favorites, meaning if you like the Yankees you lay 7 to win 5. If you like the Red Socks you lay 5 to win 6. The difference in there is for the bookie.
When you do this for the kid he will start learning how to figure the odds. He'll start thinking, “Well gosh, if this guy pitches then ...” or he’ll figure out various scenarios that affect the odds. For instance, when a team loses three in a row and they come back from a long road trip to play at home the kid will come up with scenarios like this to start figuring the odds. He will start thinking.
The trick is that you are now thinking and that you are developing a system that works for you. If I had a system, which I don't (though I have parameters that I use), but if I had a system I would never publish it because then everybody would be using it. I would destroy my advantage.
For instance, there was a theory in the old days in the NFL that if you bet against a team that played on Monday Night Football then you would win so many percent of your bets because (1) they had a shorter week and (2) they were on TV so people would overestimate them because they saw them on TV. That theory worked for a while until the bookies figured it out and then they started changing the line around. Something will work until it doesn't work.
John Templeton will tell you and Warren Buffett will also say to be greedy when others are fearful. Templeton will say to buy when there is maximum pain. You have to be able to spot imaginary fear and real fear to do that.
When the J.P. Morgan Whale incident happened I bought J.P. Morgan immediately because the fact that a trader lost money isn't a surprise. When you make big bets you are going to make mistakes the same way Michael Jordan is going to have a game where he doesn't make all his baskets. Those are the odds.
Were Warren Buffett and John Templeton your two gurus?
They were my two key gurus. I followed Buffett and I followed Templeton.
I'll tell you a funny story about Buffett’s Berkshire Hathaway. I phoned them back in the old days because I wanted to buy Berkshire Hathaway stock. I called because you could get the annual report by phoning. Well, they didn't send it to me so I called them and I said, “Hey, I called previously. Please send me the report.” A man answered the phone, which I now realize is Warren Buffett because he only had eight or nine people in his office. I had never heard his voice back in the old days but I've heard it now so I recognize it. He said, “I'll take care of that” real fast and before I could say thank you he hung up the phone.
I would read his annual report and my gambling background helped me because of what he said, “Be greedy when others are fearful and fearful when others are greedy,” which was very helpful. He told everybody to read The Intelligent Investor by Benjamin Graham. To be honest, I hated that book. I'm an accountant and I couldn't follow it. It was very dry. But there were two chapters - chapters 8 and 20 - that were great.
In the book Graham talks about “Mr. Market.” Mr. Market is here to serve you, not guide you, meaning that if you know what the price of something should be and everyone else doesn't know then you have a big advantage.
Just like right now to be long on oil stocks. If you believe oil is going to remain at this price for two or three years then you shouldn't be long oil. But I think that it’s just not realistic that the price of gas is not going to stay this low. I just don't believe it. A gallon of gas should not sell for three times less than a gallon of milk. Something is not right about that. My instinct is contrary to the people going out onto the air saying there will be $13 oil. I don't listen to that stuff. If they really knew they wouldn't be telling anybody or they'd have billions of dollars like Carl Icahn or Warren Buffett.
Right now Buffett's down big on IBM. If you buy IBM at $150 you are going to be fine. You're getting it cheap. You are being his partner but you're getting in cheaper than him.
What I'm trying to get at is the origin of your investment philosophy. How exactly did you get into dividend stocks as your primary investment methodology? You said you were following Warren Buffett. Are you talking about in the ‘80s or the ‘90s?
Oh, no. When I started investing in the late ‘80s and early ‘90s I started following Warren Buffett by reading his annual reports because back then the famous investors would write a book only occasionally. I couldn’t get information any other way than by reading his annual report. Peter Lynch wrote One Up on Wall Street, but Buffett never wrote any book. As a matter of fact, the first book that I read about him - and it is the best book - was called The Making of an American Capitalist, by Roger Lowenstein. It exposed his relationship with Kate Graham and talks more about his personal life.
What I got from him were the principles of what you need to do. As time went on it was trial and error that produced my investing style. For example, some people talk about book value. Book value in a bank is very important. However, for a regular company or consumer goods company, it isn't important. Each company is different, just like women. There is no set way to deal with women. You could say one thing to a particular woman and it would make her upset while saying the same thing to another woman would make her happy. It’s the same thing with stock investing so what you have to do is stick to what you know best.
What I know is imaginary fear and real fear. I also know what the price of something should be and I can feel when it’s wrong. I’ll think, “It’s just a wrong number,” and I can feel it. I'm not always right, nobody is always right but in investing you have to consider the odds.
When you trade you are considering something in the short term and then the probabilities are “maybe it will and maybe it won’t.” However, long term is different. Over time a stock like Apple will do more business five years from now than it will now because the company has money in it already that they are going to invest. If your cash coming in is a billion dollars more than your cash going out every week and you already have two hundred billion dollars of cash sitting in your company then you probably will be worth more in the future. If I ask you personally, “Are you worth more now than you were five years ago?” you probably are worth more now. If you go back another five years, you are still probably worth more now than at that time because you've had the power of compounding working for you.
I’m still not getting what I want. Let’s pick up it up again on how exactly you got started in trading. You said that as a kid you got into gambling and then you bought some Philip Morris stock that somehow led to this particular niche.
I did sports memorabilia and then entered into the stock market. I started in stocks when I had $8,000, but once I had more money I couldn't put the money into tickets and sports memorabilia anymore so I went into stocks. It made sense to me. What I like about stocks is that once you put your money in then it doesn't cost you anything else.
But why did you get into dividend stocks specifically rather than growth stocks or any other philosophy of investing?
Because I wanted to retire. The object of work is so that you can retire. When you have enough money then you can retire. The reason you are working right now is probably because you need more money. I can't say that for sure because I don't know you, but 98% of the people are still working because they need more money and until you have enough money coming in from your investments you cannot retire.
Let's say you have a stock portfolio with a million dollars in it. You don't know what it is going to be worth tomorrow. Even if you have that money, a million dollars is not going to last you the rest of your life. Not if you're going to live thirty or forty more years it isn't, so you have to know what you’ve got to do with that money or you are going to tap it all out.
I started investing in dividend stocks for the reason that I wanted to retire. Most people invest for the wrong reason. They want to become rich. I'm all about cash flow. I want the cash to be coming in from my investments.
Now I will trade and I will buy stocks that don’t pay dividends. I will do that now because I've got the dividend machine already in full gear, but for 99% of the people they should be investing and not trading. They don't know that.
I want our members to understand that you started out investing with only $8,000, but you retired at age forty-two because you were able to build up a dividend machine.
Yes. Once you start seeing the dividend checks come in you get motivated. When I saw the first check of $44 I was like, “Wow! Imagine if I can start putting more money into these stocks.” What I would do is get an idea like cutting my lunch budget from $5 to $3 so that I could put the extra money aside and invest it. Then I'd say, “Okay, I’m going to get free samples at the mall” or “I'm going to shop for my car insurance.” I was so much more aware of saving money to invest because I was very focused on building my income. And when my stock dropped, I didn't get mad like other people. I was happy because I could buy more of it.
You never worry about the dividend being cut?
Well no, because in a stock like Altria or a consumer goods company … let me state right here that that's the type of stock everybody should be starting with because they are simple. That's why consumer good companies are so expensive now. People are finally realizing that they are the right place to be. That's why utilities are doing good now. It’s because people are realizing that, for instance, if you're a New York resident then you have got to go with Con Ed. You cannot go without it. If you’re in a Coca-Cola or Pepsi Cola then it doesn't matter what the economy does.
There are some stocks that are risky, like if you buy energy or you buy banks or you buy things that are cyclical then that's a different story. You have to be able to buy some stocks at the right part of the cycle. You might have to wait years for your trade to work out whereas with the consumer goods stocks, as long as you are buying them right you are good and you should just keep adding to it.
I just kept seeing the quarterly dividend checks come out and they were bigger and bigger and bigger and bigger. I became addicted almost. And then I started using margin because I could borrow money at a certain percent. The first time I used margin was in 2000. I borrowed money at 7% and I was getting a 10½% dividend. I had an interest only loan. I didn't get it with a broker. I got it on my house. I got the 7% in the beginning when I started using margin and then I pledged my stocks off.
In other words, you looked at the whole thing as like a business where you were buying assets that were throwing off cash. You didn't really care that those asset values bobbed up and down in the marketplace as long as you knew you would be holding them for the long term and deemed that they would keep throwing off that cash flow into the future while retaining a good deal of their value. If that was your conclusion, you’d even borrow money to buy the stocks if the difference between the dividend yields and margin interest rate led to what you considered was a safe net rate of return.
Bingo. You nailed it.
Then you said, “What businesses are going to consistently do that?” That’s why you focused on consumer goods stocks.
Right, because that was the easiest thing. Figuring out McDonald's or figuring out Coke or figuring out Pepsi … they are not complicated businesses so I could understand them.
Now I invest in things like Herbalife and different things. For instance, I took a position in Herbalife because I was in network marketing. I know a bunch of attorneys and I don't think that network marketing is going to be deemed illegal by the FTC especially when the guy who was the Deputy Assistant to Obama, Alan Hoffman, appointed these people. He left Pepsi to go to Herbalife. A former FTC commissioner, Patricia Harvard Jones, left her lucrative law firm to go work for Herbalife. Obviously, these people know how the political winds blow. Plus, Eric Schneiderman and Kamala Harris are the attorney generals of New York and California and have been silent about the company as has been Elizabeth Warren.
To me, Bill Ackman is trying to scare a whole bunch of people into thinking that Herbalife is doomed. When people that look at charts just say, “Oh. The chart's broken,” they aren’t thinking. The minute the FTC rules then that stock is going to go up if they don’t get closed down, and it will go down if they get closed down. No chart will tell you that. No financial report will tell you that. I have just done my own analysis. After doing this for thirty years I figured out the odds and I'm betting with Carl Icahn, William Stiritz, Soros, and Daniel Lowe who was in on it.
I listen to other people, too, but invariably I have to make the decision myself. But yes, to answer your question this is a business that I do. It’s no different than owning a property except the beautiful thing is that it is easier. With a rental property you have to know how to fix things, you have taxes and you must do upkeep and maintenance. You also have to worry if somebody doesn't pay you. Not with stocks.
What's the chance that Apple is not going to pay their dividend or Altria? People will object and bring up to me, “Well what about Eastman Kodak, Bill?” Bill Gates pronounced Eastman Kodak dead in the ‘90s. The stock still ran up. It was a slow death for them. If I can see that Altria is losing share to Reynolds then I'll worry but until they start losing market share I've got a money machine that is just printing me money.
Let's consider somebody who also wants to start with investing rather than trading. Do you believe that dividend investing is the best initial road for general investors rather than growth stock investing, pure value investing without dividends, momentum investing and so on?
Absolutely. It’s the only way for them. There are different ways of investing. You can momentum trade, you can try to buy high and sell higher, … all these different things. The problem with them is that you are just starting.
My philosophy is that when you are starting out you don't know what you are doing so you should go with something basic. The most basic thing in investing is to buy a company and hold it, watch it and study it.
Do you have a pet? Let's say you have a dog. That dog knows you well. You know why? Because you feed it and it’s dependent on you. If you watch one company in the beginning you should watch it and learn as much as you can about it. Then you can move to another one. After that you move to another one. It’s just like weight lifting or like anything else. You should have a gradual progression of making progress.
The problem is everyone gets in it to get rich quick and there are a whole bunch of charlatans telling you that they are going to make you 2% or 1% a week. If they could do all that then why are they writing a book? What do they need to do a service for? They should be rich.
I think you should start out with that and work your way up. You have to start small and build yourself up. See, that's the thing with investing. My way is boring and you are not going to get rich fast but this is the way to get started. If you want to be a trader then you need to learn how to be an investor first so you can understand what the hell are you doing.
That’s fantastic advice. Now let’s move to your actual stock selection process. What criteria or methodology are you using to pick your stocks?
For the rest of the interview, pick up a copy of Breakthrough Strategies of Wall Street Traders (an average interview includes 20+ pages of techniques) on amazon.com.
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