Creating An Investing Strategy And Sticking With It

 |  Includes: AMZN, KO, WMT
by: The Investing Engineer

Everyone seems to have the magic investing strategy that will make millions. Maybe it's capturing dividends with covered calls, buying heavily on tech IPOs and selling before the end of the day, or my favorite, putting all your money into Apple (NASDAQ:AAPL). Whatever your strategy, there will always be times when you're tempted to make a move that in hindsight, probably isn't too smart.

After only two years of investing, there were many times when I broke from my own rules and later regretted it. That led me to come up with a solution to this problem; I created an investing charter. I wrote down my goals for investing and the set of rules I would follow in order to achieve those goals. This action made me realize that I was operating on a loose set of principles which put my portfolio at risk. By stating my goal, I could actually create a set of criteria to rate all my stocks against, instead of rating them on the fly. More importantly, it took the decision making power out of my own worst enemy; myself. When I made decisions without a charter, I could justify that once I sell all my stock, put it into Facebook (NASDAQ:FB) on the IPO, and then sell for a profit, I'll invest it right back into my previous holdings. Thankfully this didn't happen because you can't rationalize with a piece of paper and I decided to skip the Facebook IPO.

For those interested in writing their own charters, I'll give the details in mine to use as an example. I started with the goal. In order to have principles to invest by, I needed to know what I was trying to achieve. "To get rich" is not a good goal. You need to be specific so that you can figure out exactly what you need to do to reach your goal and where to set milestones. My goal is to retire by age 62 with a minimum of $150,000 (to be adjusted for inflation) in annual fixed income excluding pension and Social Security. In addition, all my debts will be paid off.

Once I had a goal, I did some research and decided that the best way to get to it was by dividend investing. Under my goal, I added a section titled, "Investment Strategy," in which I stated that I would invest in long term growth dividend stocks, and reinvest the dividends to compound my profit.

With a specific goal and a strategy, I was able to take this information into Excel and work with the numbers. What I found out is that I need to pick stocks with reliable annual dividend growth, such as Wal-Mart (NYSE:WMT) and Coca-Cola (NYSE:KO). In analyzing the numbers, I found that the current dividend isn't nearly as important as the growth rate, so I included a rule regarding historical and expected growth rate into my charter. To ensure that my average dividend yield is always growing, I made one of the rules to diversify when possible. These are good investment principles to follow no matter what your strategy so putting them into my charter made sense.

I finished with a list of rules that looked very Warren-Buffett-esque. In order to pick a stock, I now need to make sure it has a long history of raising dividends, has a low risk of cutting dividends, and I don't already own too many shares of it or other stocks in the same sector. In addition, I have to spend some time thinking about the future of the industry to make sure it won't be obsolete in a few years. This is difficult to do with technology, but other sectors are more predictable. For example, I can't tell you what the future holds for computing, but I guarantee that you'll be able to buy it at Wal-Mart. You'll also be able to buy it at Amazon (NASDAQ:AMZN) but its lack of a dividend and absurd P/E ratio removes it from my list of candidates.

Making an investing charter is not a necessity. I also can't tell you whether or not Warren Buffet or Peter Lynch uses one. For me however, it has been a guide for a difficult path that I'm always tempted to stray from. If you make one for yourself, at worst it might prevent you from making some profit on a few impulse picks, but at best you'll stop yourself from making an uncharacteristic trade that you'll later regret.

Please feel free to tell me what you think, or pass on some of your own investing tenets that have worked for you. I appreciate hearing what you think!

Disclosure: I am long KO, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.