Investing On Your Own

Most people’s investments will be well served by index funds, ETFs and managed funds.  An advisor can help them keep their investments, saving plan, tax plan and the events of the day in some perspective and so add significant value.

Most people is not all people, so what should the others do?

If you invest on your own using an online account like TD Waterhouse, you will have chosen to add the burden of stock selection to your life.  It will take a several hours to look, even superficially, at an opportunity.  Here are some things to notice.

Does the business have a natural franchise?   Consider:

  1. How hard is it to compete with them?
  2. Hard to replace product or service. Digital is easier to overwhelm suddenly.
  3. Cost leadership.  Lowest variable cost producer
  4. Pricing power.  Charge what they want or need
  5. Capital leadership.  Last survivor position.  More money than others to withstand temporary adversity.
  6. Market share.  First, or second and growing
  7. Innovation in the sense of responsible new product additions and improvement of old lines.
  8. Price discipline.
  9. Scalability.  The business can grow into new markets or product lines without changing its fabric.

Does the business operate for shareholders or for management.  Consider:

  1. Management remuneration and equity positions
  2. Spending on superficials – planes, yachts, golf tournaments and other  sponsorship, flashy quarters
  3. Employee satisfaction

Financial factors.  Consider:

  1. Net free cash flow.  Cash tends to be real.  Income tends to be opinion.
  2. Dividends.  Growing dividends or share buy backs are a form of  management discipline.
  3. Debt equity ratio.  Less is better but notice long term low rate debt.  Someday when rates go up, that may be good.
  4. Working capital.  Plenty of it means people pay attention to it.  Notice the quality.  Old receivables and inventory can distort the ratio.
  5. The target adds to or diminishes the diversification in your portfolio.

Personal experience.  Consider:

  1. If you use the product and like it, others likely do too.
  2. Brand history and reputation
  3. Try customer service.  I enjoy TD Waterhouse because they work at being helpful. I quit using Blackberry because they were not.

There are many more and the list may be different from one company to another.  Be a little creative. Notice Charlie Munger’s question. “Could an idiot run it, because sooner later one will.”

To decide to invest is the end of a lengthy process.  You will likely buy fewer than one in five of the businesses you investigate.  Each investigation could take upwards of 20 hours.  If Warren Buffett is right though you only need six positions to be adequately diversified.  He further claims that no one has ever achieved wealth with their 7th best stock.

Investing successfully is a time consuming and technically difficult process.  Be sure you have the time and skill to do it.  If you still want to go on, be sure you have someone who can help you temper your emotional baggage that is automatic in this endeavour.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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