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I am a private investor who has invested in individual stocks for over a decade. I have a BBA from the University of Texas at Austin. I am retired and living off of dividends and distributions from a portfolio of BDCs, consumer staple stocks, MLPs, regional banks and REITs.
  • Proverbs That Guide My Investing 5 comments
    Jun 7, 2014 8:09 AM

    The topic of religion makes people uncomfortable. It should not - but it does. I should be able to discuss what I believe and why I believe it without setting off your defense mechanisms.

    It is my expectation that what follows is nondenominational. It is my perception that there is not a Catholic way to invest that differs from the Baptist, Jewish, Methodist, Mormon, or the Presbyterian way.

    It is my expectation that the Biblical content is not the stuff that will make you uncomfortable. It is (1) my interpretation of this guidance for investors in individual stocks; (2) the high expectations in this interpretation for "what due diligence should be"; and (3) the tying of the authority of this Biblical guidance to those high expectation that close to none is meeting.

    We all know that we are - to some degree - slackers. We all have too much to do and too little time to do it. It gets uncomfortable when an exterior source renders a perception that you are slacking while using a Biblical basis for that assessment. You can interpret what follows as doing that. But I do not want you to. I want you to see that the proverbs (and my interpretation or implementation) point you in the right direction to get to a good destination.

    The major components of my approach to investing have a Biblical basis. Some of the following concepts are common sense. Some are out of the consensus beliefs. It is my hope that many of the readers of this content provider are fellow Christians or Jewish believers. The idea that there is a Biblical directed way to invest could be a foreign concept to you. This is a topic rarely covered by the residents of the pulpit. I wanted to share with you what I believe so that you would know.

    That basis can be found in the following proverbs:

    Proverbs 10:04 - Poor is he who works with a negligent hand, but the hand of the diligent makes rich.

    Proverbs 13:03 - The one who guards his mouth preserves his life; the one who opens wide his lips comes to ruin.

    Proverbs 13:11 - Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

    Proverbs 14:15 - The naive believes everything, but the sensible man considers his steps.

    Proverbs 19:02 - Also it is not good for a person to be without knowledge, and he who hurries his footsteps errs.

    Proverbs 15:22 - Without consultation, plans are frustrated, but with many counselors they succeed.

    Proverbs 14:23 - In all labor there is profit, but mere talk leads only to poverty.

    Proverbs 27:23 - Know well the face of your flocks; and pay attention to your herds.

    Ecclesiastes 5: 13-15 - The man who speculates is soon back to where he began - with nothing.

    Ecclesiastes 11:02 - Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on earth.

    Here is how I implement that advice. I will show my interpretation one verse at a time.

    Proverbs 27:23 - Know well the face of your flocks; and pay attention to your herds.

    Your investment portfolio is the 21st century equivalent to "flocks". Know those investments well. To me, that means knowing the operating and debt metrics well when you own individual stocks. By nature and by nurture, I am a numbers guy. Some of you will not share that attribute. I cannot imagine doing an analysis of an investment without leaning heavily on the numbers. I totally base my decisions on the numbers. And I do not know what advice to give to those who lack this knack. It is not enough to arrive at a non-quantitative decision that a company is good. I believe that you have to quantify the degree of goodness to ascertain if the correct degree of goodness is priced into the stock.

    I also believe that this instruction "to know" is advising us to put time and effort into observation. How much observation? As much as it takes. It takes time and effort to the see correlation between metric attributes of a given stock, its dividend growth and share price appreciation.

    Proverbs 15:22 - Without consultation, plans are frustrated, but with many counselors they succeed.

    The metrics and the analysts will also play the role of being your "many counselors". I have used metrics in the "many counselors" concept in setting my dividend or distribution CAGR (Compound Annual Growth Rate) projections. My CAGRs are partially based on the projections of the analysts and the price implied CAGR (which is the voice of the market) using its current price. But the projection is also based on earnings growth; the dividend to earnings ratio; and the current inertia (or trend) of dividend growth. I set my RRRs (Required Rates of Return) based on S&P credit ratings, the current yield on debt and the price implied RRR. I also use credit metrics (debt to market cap; debt to EBITDA and the interest coverage ratio). I also use historical earnings projection accuracy and the spreads in the high and low projection for the current year.

    Proverbs 13:11 - Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

    I would like to tie in "gather little by little" into the importance of the dividend to earnings ratio - put I know that is stretching it. On the other hand, I learned of its importance of this metric by observation.

    I am going to take a gamble that I am extending this proverb to areas where it was not intended by saying two things. (1) This proverb applies to the relative "wealth of knowledge" that I believe I have. It has been gained by consistent observation of the little things over a period of just over a decade. I have been blessed with some "ah ha" moments - but I would not have had those discoveries without the data gathering. I now have a lot of data in which to search for correlations. (2) I also believe this proverb could be applied to retirement withdrawal management. Those who withdraw little by little (meaning only living off the dividends only) will increase their wealth little by little.

    Ecclesiastes 11:2 - Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on earth.

    "Divide your portion" is - in the texts I have read - interpreted as "diversify your investments". The instruction to portion by seven takes some simple interpretation. The number "6" has a spiritual meaning - it is the number that means incomplete or lacking. "7" is the number for completion. "8" would be beyond completion. So the warning should not be literally interpreted as "8 investments are enough". I see the correct interpretation as being "be diversified as you prudently can" - and always be working to expand your investment universe of sectors that you know well enough to prudently invest.

    "Divide your portion" is advice coming from someone who already working hard to correctly assess his investments. I believe that this is a warning that things could go wrong - even with some of the components in the best of plans.

    Proverbs 13:3 - The one who guards his mouth preserves his life; the one who opens wide his lips comes to ruin.

    The warning to be "one who guards his mouth" - in the texts I have read - is not a warning about guarding about the things you say or come out of your mouth, but a warning about the things you consume of put into your mouth. I do not believe that this is a simple warning about food - and only about food. It is a warning about things you put in your mind; things you put into your life; and even things you put into your portfolio.

    With both a warning to "divide" and to "guard" - you have potentially conflicting advice. Go to excess on dividing, and you are in danger of dividing into asset types where you lack the knowledge to "guard". Go to excess on "guarding", and you will lack diversification which you are instructed to have. We are not instructed to do one or the other. We are instructed to do both.

    Proverbs 14:15 - The naive believes everything, but the sensible man considers his steps.

    Proverbs 10:04 - Poor is he who works with a negligent hand, but the hand of the diligent makes rich.

    Proverbs 14:23 - In all labor there is profit, but mere talk leads only to poverty.

    For me, 2008 was a transformative year. That was the year of the credit crisis. That was the year that all equity investors lost a ton of money. It was the year I discovered the importance of equity "required rates of return". It was the year I changed what due diligence means to me.

    I do not believe I am exaggerating when I write that for the overwhelming majority of retail investors, due diligence involves listening to the opinions for as many sources as you currently view credible - and then trying to decide which voice to believe. And they do this because they lack the tools to form an opinion on their own. And they lack the time to form an opinion of their own because so much of their due diligence time is spent listening to the opinions of others. It is a vicious circle. 2008 was when I consciously decided to break the circle.

    I have always had the perception that my due diligence was higher than average. Then along came the market crash of 2008. 10-Q's went from being optimal reading that was done by nerds to being required readings in many sectors where I invest. I still do not read the full document. I use the binocular tool or the search for specific text box to find several items of specific information. Metric awareness went from being "a" guide to being "the only" guide. Dividend growth inertia went from being very important to being a redundant indicator that is good to know. And risk metrics went from being a small consideration to being an equal consideration when compared to CAGR related metrics. The quantification of risk went from being a nice idea in theory to a required task.

    We are warned not to invest our time in mere talk. But for the majority, all of their due diligence is the consumption of talk - because they make their investment decisions based on borrowed opinions.

    My mission statement is: "I seek to liberate investors from the chains of borrowed opinions by teaching metric awareness that leads to the formation of your own opinions."

    I could not spend a few hours each day reading the Wall Street Journal and have time to spend investigating individual companies. So I stopped reading the Journal. I stopped reading the business section of the NY Times and USA Today. And I stopped reading the Yahoo Finance message boards.

    CNBC is 5% content and 95% opinion. Watching CNBC is entertainment - it is not due diligence. I still watch CNBC. But I know that my CNBC time is entertainment time.

    So what does one do with due diligence time? I gather data, input data, and update the computer code that generates my spreadsheets. If you own stocks in several sectors, half of the quarter is "earnings release" season. And one fourth of the quarter is spent going back over the earning releases and earning supplements to find missing data or to investigate recurring themes. And that one fourth portion tends to overlap the last one forth - where you pause and listen to the data. And listening to the data leads to time refining the computer code to alter spreadsheet presentations - because I am always finding new ways to organize the data.

    Do not be negligent by slacking with your due diligence. There are more things to investigate than you have time to investigate.

    Do not rush your due diligence. We all want to buy on the dips. Your due diligence is not over just because a dip comes along. Your due diligence is over when your due diligence if over. I have used the buy first and learn about the stock latter approach. That method has not worked well for me. I have a goal of never doing that again.

    A five minute chat about a stock on CNBC is mere talk - to an extreme degree. But there are investors who invest on that small amount of information. What makes me think that? CNBC would not produce programming that is 5% content and 95% opinion if the audience did not want it that way.

    Listening to only one conference call and then making an investment still places you still in the deciding based on mere talk group. You are headed in the right direction. But this relatively informed investor is lucky if he understands over 75% of the content with a listen to the first call he hears from a company. It takes time to acclimate to the lingo, the relevant metrics and the acronyms. In many cases, it takes me a couple of hours to read the data and prep for listening to a conference call.

    The overwhelming amount of investment message board conversations are mere talk. And it is mostly talk coming from the uninformed. There are good message boards out there - but they are hard to find. And there is a Catch 22 thing going on here. You have to already know a lot of stuff before you know if a board is "good" - but if you already know a lot of stuff, you do not need a message board to tell it to you again.

    The headline judgments from the analysts are mere talk, too. If you do not know how they reached their conclusion, you should not trust in that conclusion. I often find faults with how the analysts reach their conclusions. From the polling I have done, most investors fail to read the reports to which they have access. And a large portion of those who take the time to download the files lack the time (or fail to make the time) to read the reports - they skip down to the conclusions. I data mine from the analyst reports. I do not take the time to read their conclusions.

    I should confess that I was doing some of my metric observations before I was making a conscious effort to have a Biblical based investment assessment system. I could easily be guilty of retro-fitting my investment assessment system into a Biblical based system. But it is also true that my behavioral change that started in 2008 was reinforced by Biblical instruction.

    Proverbs 14:23 - In all labor there is profit.

    I process the numbers from scratch and make my own spreadsheets. It would not be realistic to expect others to follow me in that path. But I would encourage others to do something like what I am doing in the sector where they have the heaviest weighting. It is one thing to "know" or "see" a number or metric - it is a very different thing to "feel" the number. Tracking earning metrics (NII, FFO, FAD, EPS, DCF) will in time lead a person to feeling the volatility (or lack of volatility) of those metrics. Tracking the correlation of earning metrics to year to date returns and dividend CAGRs provides more feelings. You see the effect of downgrades in earnings on CAGRs and stock prices over and over again.

    It is one thing to be told a correlation is important. It is another thing to see the effect over and over again - and thus intuitively know the importance. And this has resulted in a change in my purchase behavior. My mind can downgrade a "correlation" to a "trend" that I may not act upon. But once you see the correlation happen time and again, the "correlation" becomes more of a "rule that should never be ignored". So in my case, there has been profit in doing the grunt work of tracking numbers. In this clerical labor, I have found profit.

    Do you personally need to track numbers? No. You can delegate that task. But do not delegate the task of forming opinions. Use the numbers to form and justify an opinion. If you lack the time to do the due diligence to justify an opinion, then index.

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Comments (5)
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  • polecat
    , contributor
    Comments (389) | Send Message
    Mr. F.
    Thank you for this wonderful article! Your calm and systemic approach was insightful and informative. I could go on an on however, more words would just distract from the content.
    God Bless!


    7 Jun 2014, 09:26 AM Reply Like
  • gfmn2000
    , contributor
    Comments (947) | Send Message
    Thank's for putting this together. I am saving it to my favorites.
    7 Jun 2014, 11:50 AM Reply Like
  • jdbunn
    , contributor
    Comments (78) | Send Message
    Thank you for an excellent and wise article. I too will save it for future reference. I commend you for your hard work, which is a central part of the Biblical view of investing, as well as life in general.


    Keep up the excellent work!
    7 Jun 2014, 11:44 PM Reply Like
  • jbmaynard
    , contributor
    Comment (1) | Send Message
    I just came across your MLP articles today and came here based on your reference in the comments on one of those articles. I also really appreciate your sharing this (and all the other great information). I'm a really "new" investor, having contributed heavily to my 401, but never bothering to learn anything about investing. Now I'm 57, thinking about retiring, and trying to figure out how to be a good stewerd of the "flock" that I've been blessed with. "Following" and looking forward to your latest! Blessings to you! <><
    17 Jul 2014, 05:20 PM Reply Like
  • Factoids
    , contributor
    Comments (1266) | Send Message
    Author’s reply » My strongest suggestion - build a network of resources. Share research with a network of friends, family, co-workers, etc. Have access to multiple CAGR projections. Build your CAGR awareness. Other suggestions: Until you start on your RRR awareness, avoid investing in (most) companies with anything less than a BBB- credit rating. Stay conservative in your equity investments. Buy quality. Get and stay diversified.
    17 Jul 2014, 07:05 PM Reply Like
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