Reader Mailbag: “I wanted to know your opinion on trading online with the aid of robots. Are they really successful in earning money trading stocks, or is there a better way?”

Dear DTA,

I wanted to know your opinion or advice on trading online with the aid of robots. Are they really successful in earning money trading stocks, or is there a better way?

-Wade B.

Thanks so much for writing in to us, Wade. We value all of our readers and subscribers, which is why we’ve started to respond directly to readers’ questions.

What you’re referring to is essentially algorithmic trading.

You’re using a defined set of rules to mechanically trade stocks when you trade stocks like this.

It takes the human factor – the “emotion” – out of the equation.

However, it’s still trading stocks at its core.

Using defined sets of rules doesn’t change the fact that you’re dancing in and out of a stock market that’s compounded at almost 10% over the last 100 years.

Just think about that.

Knowing the Rule of 72, we can say that the market has roughly doubled every 7 years over the long term.

But when you’re trading in and out of that compounding machine, you’re potentially working really hard to end up with less.

For perspective, let’s remember how some of the world’s most successful investors have built their fortunes.

Warren Buffett, for instance, doesn’t rely on robots.

He instead relies on great businesses to go out and sell products and/or services to the world. These businesses in turn a profit that’s growing all the time. And that growing profit often translates into increasing dividends and stock prices.

This investment methodology has, in part, allowed him to build a fortune worth billions upon billions of dollars.

No robots necessary. Because anyone can do this.

Businesses he owns a stake in include the likes of The Coca-Cola Co. (KO), Apple Inc. (AAPL), Visa Inc. (V).

These are wonderful companies that make gobs of money by providing stuff like beverages, phones, and payment services, respectively, to the world.

And they take care of their shareholders – the collective owners of any publicly traded company – by returning a good chunk of their profit back to the shareholders via dividends. And as their profit grows, so do the dividends.

These three stocks are also dividend growth stocks.

In fact, many of the stocks that Warren Buffett buys are dividend growth stocks.

And you can find more than 800 dividend growth stocks by checking out David Fish’s Dividend Champions, Contenders, and Challengers list, which compiles information on all US-listed stocks with at least five consecutive years of increasing dividend payments.

Indeed, it’s a simple system that doesn’t need to be complicated. No robots are necessary.

I certainly haven’t used robots to build a real-life six-figure dividend growth stock portfolio that now generates five-figure passive and growing dividend income on my behalf.

And I did that in seven years. On a middle-class salary. And I even quit my full-time job in 2014, forgoing a ~$60k salary in the process. If all I wanted in life was more money, the portfolio would be worth at least $100k more.

So you can see that neither robots nor trading are necessary in order to build a relative fortune in life, which would allow you to go about your life more or less as you choose.

Isn’t that what we all want? To be free to live on our terms? To be financially secure?

Well, dividend growth investing can indeed do this, as has been proven over and over again.

In fact, while the broader market has compounded at almost 10% annually over the long haul – a remarkable number – dividend payers and growers have, per Ned Davis Research, done even better than the broader market over longer periods of time.

Better yet, you’re collecting sizable and growing dividends all along the way.

And that’s the real key.

These growing dividends can at first be reinvested. The reinvestment buys even more shares. Those additional shares pay even more dividends, which are also growing.

Guess what?

More reinvestment. More shares. More dividends.

Round and round we go!

And that ride doesn’t stop until/unless you want it to, upon which time you’ll probably decide to live off of your growing dividend income.

What’s really fantastic about that point is that you shouldn’t need to sell any shares in order to generate enough income to live off of.

While traders, robots, and people buying various funds will probably need to remain quite active in order to generate lifestyle income when they need it (e.g., retirement), dividend income is about as passive as it gets.

And if you invest in really high-quality dividend growth stocks – this means companies with durable competitive advantages and great fundamentals – your dividend income should grow faster than inflation, meaning your purchasing power is also growing over time.

Can robots trade for you?

You can surely set up an account with a brokerage that allows for rules to automate things for you. Yes.

But the better question might be: is it necessary or even a good idea to have robots trade for you?

Just because something can be done, it doesn’t mean it should be done.

If you’re interested in learning more about how dividend growth investing works, reading through Dave Van Knapp’s excellent series of lessons on the investment strategy is very much worthwhile.

And then once you’re ready to actually invest some of your money for the long haul, I present a compelling long-term dividend growth stock investment idea each Sunday.

You can do the robot thing. That’s totally your call.

But the other way to do it is proven, tangible, and robust.

Investing in great businesses for the long haul has built massive fortunes for many investors.

There’s no reason this can’t also work for you, Wade.

But long-term investing needs compounding to really get going. And a major ingredient to compounding is, of course, time.

As such, the best time to start long-term investing is today.

I wish you luck and success.

Jason Fieber


Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.