Selecting my own stocks… I’ll screw it up, right?

The title states what may be the only thing standing twixt a satisfied DIY stock investor and a person who throws it over the fence to a professional.  Pundits, talking heads, and bold media headlines lead would-be DIYers to believe investing in stocks is rocket science or brain surgery.  It’s not.  It does require effort, but not as much as you think.

Bertrand Russel is recognized as making famous the phrase, “Men would rather die than think.  And most do.”  Dividend Farmers who are value investors and DIYers don’t subscribe to this perspective.  Like regular farming, Dividend Farming requires active participation; consistent and persistent.

An earlier post shared 10 Questions to help you build an investing philosophy.  A philosophy is a good framework with which to start.  Eventually we move from philosophical perspective to the active practice of selecting our first stock.  But how do we do so without screwing it up?

Benjamin Graham, the godfather of value investing offers advice about this in his work, Security Analysis.  In it he summarizes three hurdles investors face when selecting stocks.

First:  Overcoming inadequate or incorrect data.  As a pilot, the phrase, “Good information leads to good decisions,” quickly comes to mind.  Another way to look at is GIGO or garbage in / garbage out.  However you wish to view it, the first thing is to develop solid information.  This means reviewing company data from Yahoo Finance, your brokerage’s online tools, or similarly recognized and trusted sources.  This is the entry point of your selection activity and the first line of risk mitigation.

Dividend Farming: Selecting Investments provides a list of specific steps and resources you may consider in developing your selection information.  Posts about SO, GD, MSFT, UTX, GIS, and DE, offer examples about how information might come together in usable form.  However you do it, take the time to find a method for gathering adequate and correct data that works for you. 

    

Second:  Minimize volatility.  Companies with long records of stable earnings growth are likely to produce similar growth in the future versus companies with abrupt or large-scale fluctuations in market price.  Stable firms with strong histories are less likely to see serious declines as well.  This makes them less risky.  Dividend Champions are great options for minimizing risk and volatility.

 

Third:  Focus on the market weighing machine; not the voting machine.  Weighing a company means assessing its (intrinsic) value.  Voting a company is a popularity contest.  The second is meaningful in high school.  Not so when investing; unless you’re a momentum investor speculator.

 

Focus on value, not popularity.

Assessing a firm’s value usually means estimating the cash it can provide over time (dividends, for instance) and measuring that cash flow against the price the market has voted for the day.  Predicting future cash flows from stable dividend payers is easier than forecasting similar flows from companies with wildly gyrating earnings growth or no dividend payments.  You’ll find yourself focusing on weight versus popularity if you stick with stable dividend payers.

In each case, Graham tells us risk mitigation and margin of safety in our selection process is important.  Graham’s guidance offers a method for selecting our investments without screwing it up.  As Roger Lowenstein said, “Avoiding serious loss is a precondition for sustaining a high compound rate of growth”.  Words of investing wisdom, indeed!

The opinions expressed here are those of the author; not a financial professional.  Perspectives offered 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.