Ten Thoughts About Do-It-Yourself Investing

Should you do your own investing?  Pretty easy question to ask, not so easy to answer.  Do you have the aptitude and the attitude?  These are prerequisites if you decide to be your own investment manager.  Maybe a list will help with the answer.

  1. You need access to the market.  That used to be a bigger problem than it is now.  On line brokerage services are good.
  2. You need to be error conscious and fussy.  Buying 1,000 shares of XYZ Corp online is only slightly harder than buying 100.  Know what will happen when you make a typing mistake.
  3. You will need a lot of time and some of it will be to keep record keeping from becoming a tax issue.
  4. You must have a method for deciding what to buy.  I don’t know how many stocks you could buy, but I would bet there are more than 50,000. Warren Buffett claims that you won’t need more than 6 or 7 for good diversification.  But which 6 or 7?
  5. You need some ideas about research.  Financial statements are not easy to understand and it is very hard to compare two companies in the same industry.  Even harder across industries.
  6. Cash and cash flow tend to be real and so does the liability list.  The rest of the numbers are opinion.  Microsoft does not get a slip at the end of the year that says  income for the year is $X.  They calculate it.  There are many decisions.  How much is inventory really worth?  Obsolete, slow-moving, damaged.  What is a fair depreciation rate?  Should depreciation be less if we spend more on maintenance? Should we write off research as we incur it or should we capitalize it and write it off over the time we use it?  How long is that?  How about advertising? It benefits future periods but we pay for it now.  What receivables will be uncollected?  After hundreds of estimates, opinions and guesses, income per share results and is calculated to three decimals.  Despite the precision, it is still a guess. You need several years worth of results and look for the dynamics of the income statement.  Pay attention to free cash flow.
  7. Read the letter to shareholders.  It will give clues to what is really happening.  I know one fund manager who reads it first and if he sees challenges or challenging in it, he throws the statement away.  You only need a few stocks.  Why deal with challenges?
  8. You must know when to sell.  A sale is the mirror image of a purchase.  With a purchase you have the money then the stock.  With a sale, you have the stock and then the money.  It is important to notice that when you buy, you give up your money. You have the ability to turn your stock back into money, but your money is gone.  That leads us to the hold condition.  A decision to continue owning a stock is exactly the same analysis as deciding to buy it.  You have a choice between the money it would sell for and the stock.  Same as the money it would cost to buy it and the stock.  Knowing what you know about a stock in your portfolio if  you would say I would not buy at this price, then you should sell.  Take into account, tax, brokerage costs and how close to maybe I would buy it.  The money or the stock.  Which do you prefer. 
  9. Be sure you like doing it.  It is not fun for everyone.  It requires passion to do anything well.  Hear Warren Buffett’s partner Charlie Munger,

    You’ll do better if you have passion for something in which you have aptitude. If Warren Buffett had gone into ballet, no one would have heard of him.

  10. Finally your emotions.  Most people need an emotional anchor.  Our emotions hurt us more than the absence of knowledge.  Someone to talk us in off the ledge when things go wrong.  Someone to prevent euphoria and a master of the universe complex when things are good.  A conscience that reminds us about goals  and resource allocation to other parts of our lives.

There is a cost in time and skill to be your own manager.  If you lack passion or aptitude or have trouble managing emotions, compare it to the cost to have someone to help.

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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