3 Tips for Defensive Investors From Warren Buffett’s Teacher

Boost your success in stock investing by following these tips and consider a stake in Pason Systems (TSX:PSI) at a substantial discount.

| More on:
The Motley Fool

Investors don’t lose money because their stocks go down. They lose money because they sell their declined stocks.

Benjamin Graham, the father of value investing, was Warren Buffett’s teacher and a key influencer to Buffett’s winning investing style. Graham offers three defensive investing tips in The Intelligent Investor.

These tips will powerfully boost your overall investment success.

Adequate diversification

Graham suggests holding 10-30 stocks for adequate diversification. Jason Zweig added commentary in the book, stating, “Diversification doesn’t just minimize your odds of being wrong.”

It also maximizes your chances of being right… Money Magazine identified the 30 best-performing stocks over the 30 years ending in 2002… the list is startlingly unpredictable. Rather than lots of technology or health-care stocks, it included Southwest Airlines, Worthington Steel, Dollar General discount stores, and snuff-tobacco maker UST Inc.”

This reminded me of when Air Canada traded at $6 per share back in 2014 — a dirt-cheap price-to-earnings ratio of less than five. Of course, at the time, it seemed like the company was in hot water.

In hindsight, however, it could make sense to allocate a small portion of a diversified portfolio in the industry leader as a contrarian investment. The stock went on to be an eight-bagger, delivering annualized returns of close to 45% per year!

Large, prominent, and conservatively financed

Defensive investors should choose industry leaders, which have large scale and competitive advantages. Pason Systems (TSX:PSI) is an industry leader, though arguably, the industry of oil and gas services equipment has diminished in prominence.

Still, as a market leader, Pason Systems enjoys, well, a market-leading margin. Year to date, its adjusted EBITDA margin was 45.3%. Its profitability has remained remarkably stable despite the lower drilling activity in North America. Although it increased capital spending by 21%, its free cash flow only fell 4% to $66 million.

Notably, Pason Systems’ balance sheet is very solid with no long-term debt to weigh it down, which means it doesn’t have to worry about servicing debt.

A long record of continual dividend payments

Defensive investors should consider stocks that have at least 10 years of dividend payments with no dividend cuts. Pason Systems stock has this characteristic, but it has been abandoned by the market lately. It could therefore be a strong contrarian pick.

Pason Systems has maintained or increased its dividend since 2003. That’s 16 years of continuous dividend payments. Year to date, the company paid out about 71% of its free cash flow as dividends. Management also instilled confidence in shareholders by hiking the dividend by 5.6% earlier this year.

Currently, Pason Systems stock offers a big yield of 5.9%.

Want more tips?

There are many more goodies than these three tips in The Intelligent Investor. Serious investors should pick up a copy of the book and get a pen and highlighter ready.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Pason Systems. The Motley Fool owns shares of and recommends Pason Systems and Southwest Airlines. Pason Systems is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »