I’ve been investing in the stock market for a few years now and despite my ridiculous lack of knowledge I have surprisingly done alright. I mean, I haven’t lost any money, which is nothing short of a miracle — someone should really call the Pope or something.
My strategy up until very recently has been fairly simple and I want detail it here. That being said, in no way do I suggest you follow these points, since that would not be in your best interest. I couldn’t think of a better example of the blind leading the blind. That also being said, I thought it would be entertaining to describe them here for posterity sake — for the future me (and the current you) to laugh at my naiveté.
1.) First point: I identified how much money I was willing to lose
The first thing I did was calculate how much I was willing to lose on any given stock. Although I was perfectly happy to admit my complete ineptitude when it came to investing, I also believed that the best way to remedy this was to dive right in. From the start, however, I wanted to minimize my risks. Identifying just how much money I was willing to donate to Wall Street was a big part of that. After some careful analysis, I came to the conclusion that I could realistically lose $1000 and still resist the desire to commit a felony. Since I figured stocks rarely lose 50% of their value at any one time, I doubled this amount and decided that I would limit my individual investments to $2000. Thankfully I still have a clean criminal record.
2.) Second point: I only bought dividend-paying stocks
I knew from the beginning that I wanted to limit my stock purchases to those that paid dividends. The reason for this wasn’t because I wanted free money (who wants that?), so much as I was pessimistic about my capacities and saw dividends as a kind of insurance against the likelihood that my stocks would lose some of their value. What I wasn’t doing at the time was looking for dividend growth. If the dividend stayed at $100/year for perpetuity, I was okay with that. The only thing I looked for in a stock was a yield of 3-5%. Anything less than that wasn’t “enough insurance” and anything more brought out the skeptic in me (although I did buy into a REIT once that purportedly paid 12% dividends to see if those yields were legit — it was, however, a purely scientific endeavour).
3.) Third point: I bought stock in companies that I knew and begrudgingly used
I think it was Warren Buffet that once said, “invest in what you know”. Regardless of who actually said it, it always struck me as good advice. Consequently I limited my selection of stocks to companies whose services or products I regularly used. My rational was that if a company was able to convince a cheapskate like me to willingly spend my money on their products, they were obviously doing something right. Given my dividend criteria, this largely meant that I was buying Canadian banking stocks (Bank of Montreal, CIBC, etc) and telecommunications companies (Bell Canada, Telus, etc). Even so, I sometimes would buy something outside of my comfort zone to diversify my portfolio. Which brings me to my fourth point…
4.) Fourth point: I intentionally diversified my portfolio
By diversifying my portfolio, I knew I was making myself less susceptible to industry specific downturns. It’s a good thing, for example, that I didn’t invest all of my money in Canada’s Oil Sands since I would be a very poor man today. More importantly, however, I also made a point of buying Canadian and American stocks (usually maintaining a 50/50 ratio). Not only are there more choices in the American markets, but the currency exchange provided a sort of secondary type of insurance. The Canadian dollar was historically high at the time and, despite loving my country very much, I knew our dollar would crash and burn eventually (which it did). This fact saved my butt quite a few times.
5.) Fifth point: I prayed
Alright, so I didn’t actually pray (ok maybe I did a little). Instead I made sure to consult the opinions of various oracles and temples to see what the market-gods were saying about the specific stocks I was thinking of purchasing. I knew there was no way I could do all of the required research myself and that getting a second, more educated opinion was the prudent thing to do. But I also didn’t want to spend money on an actual specialist. Instead I solved this problem by relying on the Globe and Mail (a Canadian newspaper) that provides an aggregate of sorts comprised of rankings given by a swath of market-gurus — all for free! So whenever I found a stock that had a good number of analysts saying “buy”, my confidence in that particular stock would grow proportionately.
And that was is it. The rest consisted of forgetting about the stocks and checking in on them every couple of weeks. My involvement was very minimal.
Now I’m sure most would call my strategy “speculating” instead of actual “investing” because of how little research I did before buying stocks. I wouldn’t necessarily disagree with this assessment. On the flip side, I don’t really believe you can entirely eliminate the speculative aspect of buying stocks. If you think about it, stock prices reflect the sum total of millions of human actions, opinions and decisions. Anyone of those events can make or break the value of a stock. For example, unless you were an insider or some kind of deity like Warren Buffet, there’s no way anyone could have known that Volkswagen was using special software to fool US emission tests on their diesel engines — an admission that cost the company nearly 40-50% of its perceived value.
Since first applying these five steps, I’ve learned more about investing (like the importance of dividend growth). But I’m cognizant of the fact that I still have a long way to go. One thing I have done since starting this adventure was to take a few financial accounting courses so that I could read income statements and balance sheets like a pro (more like total amateur). If you can, you should do this too. There are also quite a few books sitting on my bookshelf (read Kindle) that are waiting to further educate me about the riveting joys of investing. So despite my lack of expertise, I’ve learned quite a bit about how money works just by “diving in”. But more importantly, I’ve had a lot of fun experimenting and learning about this often misunderstood aspect of our society. If there was anything to take away from this post, however, it would be this: don’t invest like I do. Honestly.