Let's Talk about Investment Strategy - Part 1

I want to talk about investment.  I do.

I just get bogged down in the details.  Do I tell my story first to give you the context of why I made what decisions, when?  Will that take too long?  Shouldn't I review a book before I reference it?  ...and on and on.

Someone should invent this.

I want to talk about investment.  So I will.

Investment, by definition is buying value and then earning a profit.  Even the Black Swan strategy of Mr. Taleb, the investor who is a true original, still involves buying low cost options and then earning a profit (provided that the economy happens to totally tank).  This makes sense - if you are spending money and not earning a profit you do not have investment, you have a hobby.

What a contrarian derivatives strategy might look like.

So the meaty chunks in the investment strategy stew are figuring out what is "valuable" and how to profit from buying that thing.  That's why investment strategies can range from keeping money in a bank account to buying Bitcoins.

One involves putting your faith in an unaccountable entity until such time as the inevitable crash comes,
and the other is a digital currency.

As a side-note - you will never, ever, find here a recommendation that anyone buy a real, tangible item as an investment.  EVER.  It's really a whole other post, but basically: if you are spending money and not earning any income, you don't have an investment - you just own something.  Most of the time, if you own a thing, you own a thing - it's not an investment.

Except for my beanie baby, which is totally an investment, you guys.

Of course, you're free to do what you want.  But I'll be over here, recommending investment in dividend-paying stocks.

Yes, dividend investing - using your investment money to buy stocks that pay cash to their shareholders at regular intervals.  You've got another boring dividend investor on your hands, joining other old boring people like Warren Buffett and... here I was going to list at least two other famous dividend investors.  

The only other famous investor I know of is Bernie Madoff, but he is not famous for being a dividend investor.

Pictured - The mug shot of NOT a famous dividend investor.

For want of a broader base of celebrity gossip from the finance world, it's me and my buddy Warren, sharing an investment strategy.

Warren and me, chillin' on our piles of money.

Or, to be more accurate, Warren, me, and Warren Buffett's zillions of rabid investment fans who watch his every investment move with fascinated interest.

Or maybe they're just trying to steal his money.

Now it's time for an admission:

I was going to do that thing where I slowly explain bits and pieces of investment strategy until it comes together as a cohesive whole.
  

I realized how stupid that idea was.  I am a person who gets easily bored; I demand that what I read is quick to get to the point.  Why write something that I as a reader would find annoying?

For this reason, I will start this series by getting to the point.  For the edification of those who are similarly impatient, the rest of this article is a picture-less overview of the investment strategy that I champion.

Buy quality:
1 - Reduce the playing field.  Only buy stocks that give dividends.
2 - Reduce the playing field more.  Only buy stocks that have given dividends consistently over a period of time.  5 years is a good number, some people use 25 years.

Buy value:
3 - Make a list.  List all of the stocks that meet the conditions above.
4 - Analyze the list.  Download relevant stock information about each of the stocks on the list.
5 - Compare and contrast.  Use a ranking system to give all the stocks a score.
6 - Narrow the field even more.  Using the ranking system, find the top 10% scores.
7 - Pick.  Decide which of the stocks in the top 10% is the most interesting.
8 - Buy.  Buy as much as possible.

Sell duds:

9 - Never sell.  But, if a stock lowers or cuts its dividend, sell it. 

So that's what I do, in the nuttiest nut-shell of them all (get your minds out of the gutter, people).  

A peanut.  Because, why not?

I wanted to expand and to add sub points and sub-sub points and then maybe a few explanatory paragraphs, but I stopped myself.  I shouldn't expose myself to the liability of someone getting mouse-scroll-related tendinitis if I get too wordy.  My lawyer tells me that I should stop here.

(Note: I don't have a lawyer.  I'm also not a lawyer.  So... don't ever take legal advice from me.)

*** 

 Please realize that "Let's Talk Investing" is not authored by a financial planner, adviser, or a professional investor in any capacity. As such, this is not expert advice in legal, taxation, financial, or any type of information that may be provided. The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this information.

Let's Talk about the Stock Market

What do you know about the stock market?

The stock market is given to be, by many well-coiffed market reporters, a lean well-oiled machine that takes as input all of the information in the world and spits out a value (or series of values) that accurately judges the state of the collection of people and business that make up the economy which balances perilously between prosperity and doom.  

Or is already doomed, depending on where you source your news.

You might imagine the market like a race-car, driving along economy road reacting instantly to hairpin turns with tight handling.  

Vroom vroom (TM)

Pages and pages of theory has been written on how clever the market is at reflecting the current global financial condition.

Hiring is down... yay?

Same day, same news, different result.

"The market made me do it!"

They're wrong.

So let's say that the "market" is a vehicle.  

Don't ask about the mileage.

It's big and cumbersome and can pretty much go where it wants.  Who's at the wheel?  These guys. 

Everyone.
Even that guy who's sleeping.

And who gets the biggest input where the vehicle goes?  THIS guy.

Yeah, the one with the twitchy hands and the wild eyes.

This guy.

The drivers can't really see where the road is; the market's not set up very well for visibility.  They just aim where they think they should go, and don't let reality get in the way.

Nyeeerow.

Whee!

Inevitably someone realizes that they're off track.

So the drivers keep a steady hand on the wheel and re-adjust their course to intersect with the road.

Just kidding.  They panic.

THAT's the stock market.

***

"So where should I invest my money?" you might reasonably ask.

"The stock market."  I would say.

"But that doesn't make sense!" you might reasonably respond.

"I'll tell you about dividends."  I'd say.  "But that's a whole other story."

*** 

You must realize that "Let's Talk Investing" is not authored by a financial planner, advisor, or a professional investor in any capacity. As such, this is not expert advice in legal, taxation, financial, or any type of information that may be provided. The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this 
information.

Let's Talk about Investment Books - The Wealthy Barber

"So one month, when the stock market is really struggling and your mutual fund is [stocks are] suffering accordingly, don't look at the situation and say, 'Darn, my holding is down.'  Look at it and say, 'Eventually the market will go up and take the value of my holding with it, so in the meantime I'm going to pick up shares at a good price.'  Dollar cost averaging is great stuff!" 

--David Chilton, The Wealthy Barber.

(modifications by me, because I don't like mutual funds) 

The Wealthy Barber by David Chilton holds a special place in my life as the first book on Finance that I ever read.

It's a Canadian book, one that I don't think has really left the country.  Finance books don't travel well between different countries, because taxes and investment tools vary so much.  So, I should probably mention at this juncture that I'm Canadian.  I hope we can still be friends, everyone else.

The book is old, written sometime in the 80's, when a conservative estimate of interest rates was 10%.  Reading it, as I did early in the 2000's, I decided that the author was pretty much crazy, which coloured my view of the rest of his investment advice.

The book is written about a fictional barber who is wealthy.  He is wealthy because he saved money, 10% of his after-tax money to be exact, to have 'fun' in retirement.  "Retirement" as described by the wealthy barber is sort of a misnomer, the barber in the story wasn't yet retired.  He spills his wisdom only when the protagonists agree to pay him to cut their hair.

But! I am making it sound like I hated the book.  I did not; I like this book a lot.

I've never read a better summary of the psychology of tricking yourself into savings.  He says that you should "pay yourself first" - meaning, have an automatic deduction that gets withdrawn the same day as your paycheque hits the bank that goes directly to your savings.  He recommends that you pick a number (10% or higher) to start off your savings with and then... just do it.  He says that after a while, you'll adjust to your new reality, and the savings won't even seem like a burden.

It's so true... just ask the zillion other books that say exactly the same thing.  This one's really good, though.

He also does some interesting talking about math (dollar cost averaging, share values, interest rate calculations)... the kinds of things that really bring out the engineer inside of me.

At this juncture, I should probably mention that I'm an engineer.  I hope we can be friends, everyone else.

The author (through our friend the barber) also specifically cautions against trying to do your own investment.  Why?  Because it's hard.  Instead, he outlines a very complicated strategy of looking at past money management returns to make sure that these returns will continue into the future.  In his sequel, he comes to his senses and informs the world that this advice was wrong.  But investment is still too hard, guys.  So you shouldn't do it.

I ignore that part.  I also ignore his chapter on insurance.  It's really boring.  If you feel a gaping insurance-related void in your life, maybe read it.  If you're young and looking to start on investing, it's completely pointless.

For me, this is where it began.  I started saving ten percent of my money.  I just didn't put it anywhere, because I really didn't like the idea of mutual funds... it just didn't jell with my unconscious vision.

Yes, engineers have unconscious visions.  They involve math... and spreadsheets.

***

 You must realize that "Let's Talk Investing" is not authored by a financial planner, adviser, or a professional investor in any capacity. As such, this is not expert advice in legal, taxation, financial, or any type of information that may be provided. The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this information.

Let`s Talk about Getting Started

How do you start something new?

Everyone's different.  Sometimes (but not always) I am full of angst over a beginning.  I am afraid to make the first pass across the canvas; what if it's not the right one?

My angst with beginnings comes from perfectionism, my inherent belief that if something is started perfectly, then everything else must unroll perfectly.  The extension of this belief is the assumption that anything that unrolls wrong is my fault, a signal of a bad beginning.

My experience with investment has been totally different.  I read a book and then I just... started.  It is almost 6 years ago that I bought my first stock.  Since that time, I've read many books.  I've read many websites.  I've varied and refined my strategies.  I've had fun.  I love talking about investing with interested people.

"Let's Talk Investing" is to be a place to share ever-evolving investment strategy with interested people.  It is to be a place where I will make sweeping statements in the hope that someone will explain to me why I'm wrong.  It is to be a place where I will share what I know so that others will refer me to what they do.

To my friends, I would never say, "Let's talk investing!"

I'm dying to, but I don't.  I've learned that investment as a topic of conversation among friends is toxic.  Money, and what you do with it, is as personal as who you vote for or who you pray to.

When I do broach the topic, I try to do it in as non-judgmental a way as possible.  

(Note: The person in Orange isn't a caricature of any person that I know... or even of anyone that I've ever met.)

 

If things go wrong, though, I'll say things to mitigate any possible conflict.

"Everyone does things differently - it's not like there's only one right way to do things!"
"Your situation is probably so totally different from mine that my way wouldn't even work for you!"
"What with your different priorities, I can understand how my method would cause issues."

Don't think that I judge anyone.  Everyone does with their money what they think is best after they have done as much research as they feel is necessary.  I know that I haven't stumbled upon the divine route to riches, I know that there really isn't one.  I don't think less of anyone for how they choose to invest their money.

So to the reader, I offer the above words as a peace offering.  New investors, or old hats, we all have a place at this table.

Let's Talk Investing.

***

Please realize that "Let's Talk Investing" is not authored by a financial planner, adviser, or a professional investor in any capacity. As such, this is not expert advice in legal, taxation, financial, or any type of information that may be provided. The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this information.