03-10-2014, 06:22 PM
Where I've found the most use of the "chowder rule" is in narrowing down a list of stocks for further analysis.
For example, I was looking for a decent list of utilities to add to our portfolios. The last time I did this, I think the first cut through the CCC list ended up with about 15 companies to look at. Simply too many to research all of them and, of course, the CCC list doesn't include things like fuel mix, regulatory climate or geographic location. Then you have to factor in the capital projects in progress and non-regulated business results. So, to narrow my choices, I've used the chowder rule to knock down the research list to something reasonable.
To use it to compare different companies in disparate industries just doesn't make much sense to me. I've also noticed as I get closer to retirement, I'm starting to put more emphasis on current yield versus dividend growth. Eric's article he referenced (good article again, Eric!) pointed out the different outcomes where the chowder rule doesn't distinguish between yield and yield growth.
To the point of people using it as gospel, there are worse things they can use to select stocks in which to invest. If a company is on the CCC list and has a decent chowder rule number it will at least have a dividend and growth to it. It goes along with the myriad questions asked whether company xx is a good value at the time. Obviously, they do not understand or trust valuing companies for themselves nor whether it fits their needs or temperment. I worry about them being scared out of their investments the next time Mr. Market gets neurotic leading them to buy high and sell low.
All that to say I don't think it's detrimental to the naive investor but I use it to narrow a list of candidates within an industry for further research.
For example, I was looking for a decent list of utilities to add to our portfolios. The last time I did this, I think the first cut through the CCC list ended up with about 15 companies to look at. Simply too many to research all of them and, of course, the CCC list doesn't include things like fuel mix, regulatory climate or geographic location. Then you have to factor in the capital projects in progress and non-regulated business results. So, to narrow my choices, I've used the chowder rule to knock down the research list to something reasonable.
To use it to compare different companies in disparate industries just doesn't make much sense to me. I've also noticed as I get closer to retirement, I'm starting to put more emphasis on current yield versus dividend growth. Eric's article he referenced (good article again, Eric!) pointed out the different outcomes where the chowder rule doesn't distinguish between yield and yield growth.
To the point of people using it as gospel, there are worse things they can use to select stocks in which to invest. If a company is on the CCC list and has a decent chowder rule number it will at least have a dividend and growth to it. It goes along with the myriad questions asked whether company xx is a good value at the time. Obviously, they do not understand or trust valuing companies for themselves nor whether it fits their needs or temperment. I worry about them being scared out of their investments the next time Mr. Market gets neurotic leading them to buy high and sell low.
All that to say I don't think it's detrimental to the naive investor but I use it to narrow a list of candidates within an industry for further research.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan