“Boys, you never spend the principal, only the interest.”
That was the message from Kevin O’Leary’s mother as she clipped the coupons on corporate bonds or dragged her sons along to the bank to collect regular dividend checks from the stocks she invested in, and it’s sage advice that remains top of mind today.
O’Leary, who visited Forbes just before the start of the current season of ‘Shark Tank,’ says his whole investment philosophy hearkens back to those lessons from mom, who built up a stunningly successful investment portfolio that was largely a secret until her death. When he reviewed the results after she passed, it turned out her conservative philosophy of buying corporate credit and dividend-paying stocks had outperformed the returns of the broader markets and almost any other strategy he could measure it against.
O’Leary, who made his millions when he sold The Learning Company to Mattel for $3 billion during the dot-com bubble, is also following his mother’s example when it comes to providing for his family. Through a family trust, O’Leary is committed to providing for the children in his family through their education, but at that point the funding dries up leaving each to make their own fortune, as he puts it.
“Over the last 40 years, 71% of the stock market’s return came from dividends, not capital appreciation,” O’Leary says, reciting the statistics like a form of gospel. That knowledge is the bedrock on which he built his rules for investing:
- no more than 5% in any one name
- no more than 20% in any sector
- volatility is the enemy, so stick with less volatile large caps and dividend payers
The tricky part came when looking for ways to invest on those principles. O’Leary found that while he liked ETFs, the indexes they relied upon were largely market-cap weighted, meaning most funds would have far too much allocated to their largest components.