Investing Rules

[NilesMike]

I've recently read some posts regarding the purchase and sale of some GDI stocks.

I won't comment negatively on someone's decision, it's their money. However, often times, I cannot understand the rationale. I read the posts for ideas before doing my own research but I am curious of the rules some use here for buys and sells.

Are most of you using hard and fast disciplined rules or something different? Thanks in advance

[fenders53]

I try to be disciplined. I start with what may seem to many as vague rules, but there is generally a price to pay for failure to abide by them. They should apply to buy and sell decisions.

1. Don't allow emotions to take control. Especially fear. Never do today what you wish you had done last week or month. Don't panic on a bad earning reports and dump a stock. Don't be greedy (get FOMO) and chase over-valued stocks with large buys. If you missed your chance to sell or buy, perhaps it's time to re-evaluate the stock, then move forward rationally.

2. Don't fall in love with a stock so much you get in denial and ignore important things. If the dividend is in great danger of being cut on the slightest bit of " bad weather", I look for the exit and try to beat the rush. It's OK to take an occasional loss, but it must be based on proper research. Maybe the story has changed longterm, or I simply just paid too much? I often tell the story of stubbornly holding onto MSFT, CSCO, INTC and PFE for decades after the 90's bubble popped. I think three of them have still not fully recovered. I could have accepted my mistake and bought about anything that wasn't insanely overvalued. Yeah those examples sound outrageous if you bought them any other time.

3. I follow valuation rules, but try to be very patient with blue chip DGI stocks. If they far outrun themselves I try to trim gradually, rather than cash out. Or use covered calls which doesn't always look good in hindsight. I try to never be greedy and sometimes that leads to trimming the winners. I won't go broke taking a profit in a tax deferred account. I move on and find the next deal.

4. I compartmentalize my port and try to treat DGI stocks as long term holds, current income stocks as income stocks, speculative stocks as appropriate. It's not so easy to always keep things as they should be.

5. It's my opinion that blindly buying and holding a large amount of stocks is a recipe for under performing the S&P 500. That's OK if you are here for the entertainment, and I do enjoy this. My investment goals are risk adjusted at this stage of my investing life. I will sell as appropriate and if I underperform the index so be it. It's important to me that I outperform when the sky is black. Some famous old guy said "don't lose money".

6. Never be cashless is another rule I follow. That will help you recover from other mistakes at some point. I will occasionally trim to keep cash where I want it.

Generic rules for sure, but they are working for me when I get it mostly correct.

[crimsonghost747]

(12-12-2019, 08:48 PM)fenders53 Wrote: 5.  It's my opinion that blindly buying and holding a large amount of stocks is a recipe for under performing the S&P 500.  That's OK if you are here for the entertainment, and I do enjoy this.  My investment goals are risk adjusted at this stage of my investing life.  I will sell as appropriate and if I underperform the index so be it.  It's important to me that I outperform when the sky is black.  Some famous old guy said "don't lose money".  
             

Well, the thing is that risk and reward usually go hand in hand. 
Unless you are really good, then logically with a safe portfolio you should lose to the index when times are good and outperform the index when the times are bad. And the other way around of course. 

I'm exactly like you, I don't really care about beating the index when times are good. I want to have a portfolio that can take a punch or two when the times get rough. 

But now, just for the purpose of this post, I checked my historical performance since the end of 2013, which is when I opened my investment account and really started to invest globally. I'm actually super close to the SP500 performance, beating the index just slightly. To be honest I wasn't really expecting this since I have always thought my portfolio to be more defensive than the SP500, which should translate to lower returns when the times are good. 

Though looking at the chart, the more recent downhills that I see are last december and early 2018 and in both of those my portfolio declined less than the index. Who knows, maybe I've just been lucky.

With regards to the actual topic, I don't really have any written rules. I do tend to stay away from large tech companies. I do not like to invest in companies with negative EPS. I want to see a dividend, preferably a growing one. But these are not written in stone and as such I don't consider them rules. More like guidelines.

I buy every month, no matter what. Usually I split the money evenly between 3 stocks. Sometimes it's 2, sometimes it's 5. I really can't tell you how I choose these stocks, mostly it's looking at my portfolio and trying to see what is fairly valued. Sometimes I make purchases purely to balance the portfolio a little bit. I add new companies every now and then based on what I find. But there is no real science to any of this and as I said, no hard rules.

[fenders53]

BTW, my comment was NOT directed at Otter.  Have I stated he owns way more stocks than I ever wish to keep track of?    Yes I have, but his methods are FAR from blindly buying and holding.  He'll put an old dog down if it needs done.  I have met people that clearly just collect stocks though.  They'd be far better off just buying the index.  

Last fall was a good test.  I lost less than half the index.  2018 was actually a decent year.  Nothing like 2019 of course.  Combine those two years and near Index performance years with nowhere near the downside.  That statement will be tested severely some year soon.  I'll take a punch to the face, but I refuse to allow myself to get knocked out again like 2001.  It worked in 2007 and it will work again.

Maybe I listen to a few too many Gundlach interviews. 

Back to the topic, selling is much harder for me than than buying. I hope others will post their methods. I am here to learn.

[ChadR]

I have different rules for each type of account. Such as, my taxable brokerage account will hold a lower dividend yielder than I will hold in my retirement accounts. Stocks that have foreign withholding taxes will be held in my taxable brokerage account. REITS, utilities, and high dividend payers will be held in my retirement accounts. Though these aren't set in stone rules as I do have a few lower yielders in my retirement accounts. Though I don't currently have any, publicly traded partnerships will be held in retirement accounts.

The reason for the high yielders and publicly traded partnerships being in retirement accounts is because I am self employed with 2 kids, some years I qualify for EITC. Playing around with income and expenses at year end can do this. Too much passive income can disqualify you from receiving EITC. No point in giving up a nice credit when you can get it.

[Otter]

I've posted my buy criteria and other portfolio guidelines before, but will restate them here, as someone may browse them here first and find them useful (or not). For all my non-401k holdings, my criteria for buy and hold are:

1. Large or Midcap (size matters if you are looking for stability);
2. P/E or P/AFFO (REITs) 15 or Less (ideal), or below 10yr Average (ok - 10yrs will typically take into account an entire business cycle without data that's too old to be reliable);
3. Chowder Number of 8+ for Utilities/Telcos, and 12+ for all other stocks (a good yardstick for total return in the DGI investing space);
4. 25+ years of dividend growth (ideal), or 10+ (ok), subject to exceptions for quality blue chips like BA (has paused dividend growth, but not cut it);
5. Investment-Grade Credit Rating (BBB+ or better is what I prefer);
6. Dividend Payout Ratio <75% (I will bend this rule for special cases like tobacco companies, which typically have stable cash flows and expenditures); and
7. No obvious outward signs of systemic risk to the company/its business model.

There's always a bear market somewhere with stuff that is on sale. T in the $20s while the rest of the market was booming is a recent example. It's just that more stuff is on sale when the entire market nosedives like in 2008/2009. Those sort of massive draw-downs are exceedingly rare in the market, so my philosophy is you need to always be on the lookout for value. Were purchases I made in October 2018 available cheaper in December 2018? Probably. Do I regret those purchases in hindsight? No. I bought other stuff at great values in December, and enjoyed the brief market-wide sale to pick up some stocks on my list that had been flying high for a while.

I don't always make a purchase that satisfies all of my criteria, but I do try to stick to them. Having them as a handy yardstick is helpful.

As for managing overall portfolio risk, I have rules of thumb for that, too. No holding should generate more than 5% of total dividend income, and holdings should be diversified across all GICS sectors. Satisfying that second rule of thumb took some time. Different sectors go on sale at different times for different reasons. Sometimes it seems like I will spend months buying the same stuff, until those sectors suddenly become favored again, leaving me with different options as other sectors/stocks fall out of favor. I'm buying CNP for the first time in several years, as it had been running hot. Someday stocks on my list like MCD and MSFT will revert to mean, and I can start a position with them, or keep adding to old favorites like ADP, which seems to be able to fly high for years on end.

My goal was to basically build my own personal index fund, which pays dividends, and which bears no fees. Happy with the results so far, and no plans to change course.

[fenders53]

(12-13-2019, 11:03 AM)Otter Wrote: I've posted my buy criteria and other portfolio guidelines before, but will restate them here, as someone may browse them here first and find them useful (or not). For all my non-401k holdings, my criteria for buy and hold are:

1. Large or Midcap (size matters if you are looking for stability);
2. P/E or P/AFFO (REITs) 15 or Less (ideal), or below 10yr Average (ok - 10yrs will typically take into account an entire business cycle without data that's too old to be reliable);
3. Chowder Number of 8+ for Utilities/Telcos, and 12+ for all other stocks (a good yardstick for total return in the DGI investing space);
4. 25+ years of dividend growth (ideal), or 10+ (ok), subject to exceptions for quality blue chips like BA (has paused dividend growth, but not cut it);
5. Investment-Grade Credit Rating (BBB+ or better is what I prefer);
6. Dividend Payout Ratio <75% (I will bend this rule for special cases like tobacco companies, which typically have stable cash flows and expenditures); and
7. No obvious outward signs of systemic risk to the company/its business model.

There's always a bear market somewhere with stuff that is on sale. T in the $20s while the rest of the market was booming is a recent example. It's just that more stuff is on sale when the entire market nosedives like in 2008/2009. Those sort of massive draw-downs are exceedingly rare in the market, so my philosophy is you need to always be on the lookout for value. Were purchases I made in October 2018 available cheaper in December 2018? Probably. Do I regret those purchases in hindsight? No. I bought other stuff at great values in December, and enjoyed the brief market-wide sale to pick up some stocks on my list that had been flying high for a while.  

I don't always make a purchase that satisfies all of my criteria, but I do try to stick to them. Having them as a handy yardstick is helpful.

As for managing overall portfolio risk, I have rules of thumb for that, too. No holding should generate more than 5% of total dividend income, and holdings should be diversified across all GICS sectors. Satisfying that second rule of thumb took some time. Different sectors go on sale at different times for different reasons. Sometimes it seems like I will spend months buying the same stuff, until those sectors suddenly become favored again, leaving me with different options as other sectors/stocks fall out of favor. I'm buying CNP for the first time in several years, as it had been running hot. Someday stocks on my list like MCD and MSFT will revert to mean, and I can start a position with them, or keep adding to old favorites like ADP, which seems to be able to fly high for years on end.

My goal was to basically build my own personal index fund, which pays dividends, and which bears no fees. Happy with the results so far, and no plans to change course.

Good post.  That diversification to include all sectors really can take time if you follow valuation rules for entry or exit.  It's even trickier for me because I almost always enter selling puts.  I might sell multiple puts in the same sector one month.  I often end up buying nothing, but I could wake up with 500 new shares in one sector.  I'm mindful of how defensive a sector is in when I make decisions.  Short of a recession, it's going to take me years to diversify exactly as a desire.  It's sure less complicated when I am just nibbling shares.  Unfortunately I am addicted to the monthly income so it will take as long as it takes.