10 Questions to Help You Build an Investing Philosophy

In a December post I walked through the Dividend Farming investing style.  The discussion outlined several principles I’ve followed through the years.  While the Dividend Farming framework may or may not work for you I thought it helpful to research investing philosophies and how budding Dividend Farmers might build their own. 

Act as if you're buying the business, not just the stock.

Because Dividend Farming is dividend investing for the DIY I turned to the American Association of Individual Investors (AAII) in my research.  Sifting through great material on the AAII site I discovered an article covering 10 Questions that will Help Define Your Investing Philosophy.  Dividend Farmer responses are aligned with the respective AAII questions for consideration and food for thought as you build your own investing philosophy.

1.    What are your core investment beliefs?

Invest in dividend paying firms with similar characteristics to Benjamin Graham’s (Intelligent Investor, Securities Analysis) conservative investment selection criteria including size, market leadership, history of dividend payments, and financial strength. 

2.    Do you understand your philosophy and why you believe in it?

Dividend Farmer believes in this philosophy because it concentrates on investing as an owner, focusing on margin of safety, and developing a consistent cash flow stream. 

3.    Do you know the potential risks?

The primary risk includes the opportunity / cost of missing a growth oriented stock that goes through the roof.  Secondary risks include lagging the market in stock valuation or falling short of the inflation rate.

4.    Does it suit your personality and individual circumstances?

Optimizing cash flow and minimizing risk are business practices I follow in my work as a technology product manager.  As the head of a single-income household, developing a reliable, passive income stream to supplement my salary is important.  Building slowly, consistently, through time is comfortable and well suited to a farming mindset.

5.    Will your philosophy help you follow whatever strategy you implement?

It has for over a decade and will continue doing so through the rest of my time as an investor.  It’s unlikely I will trend away from conservative, cash generating, investments that provide an opportunity for compounded growth into the future.

6.    What constraints are necessary for turning your philosophy into a portfolio?

Initially, I believed the constraint would be too few issues meeting the conservative, dividend paying criteria with which to build a diversified portfolio.  Courtesy of resources like DRIP Investing and others, that constraint is no longer a concern.

7.    What will you own and why will you own it?

Anything from agricultural firms to financials, manufacturers, health care plays, REITs, telecoms, and utilities are dividend paying stocks found in my portfolios.  I’ll stick primarily to large cap firms with lengthy dividend payment histories, particularly those with a track record of consistent growth in their dividend payments.  These holdings address the passive income stream growth I’m building while limiting risk as much as possible.

8.    What will cause you to buy or sell?

Warren Buffett and Dividend Farmer both have a favorite holding period of forever.  However, when holdings fall well short of investment goals and are struggling relative to the conservative selection methods outlined above, I’ll sell the holding.  GE, which I sold a couple years ago, comes to mind.

9.    What will cause you to make changes to your portfolio over time?

Most of my portfolio changes are additions when a new firm is discovered that has great characteristics and might bulk up an under-weight segment of my portfolio or at worst won’t create a significantly over-weight position by adding it.  Otherwise, sales changes occur per #8 above.

10.  What types of investments or strategies will you avoid?

Investments avoided include IPOs, aggressive growth stocks, mutual funds (except in retirement funds where they are the only option), ETFs, bonds, penny stocks, complex instruments, day-trading, technical trading, annuities, and direct real estate holdings.

These are great questions with which to start building your investment philosophy.  If you discover through this exercise that Dividend Farming is not a fit for you, that’s ok.  It means you’ve learned something about yourself that will be helpful to your investing future.  Alternatively, you may discover that Dividend Farming is a natural fit.  If so, welcome to the farm and value-based dividend investing for the DIY investor!

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.