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My Investing (Business) Plan

In a comment to Bob Wells' fine article here I was asked about a link to my investing plan and responded that I didn't have it online but would consider posting it to the Instablog. That's the purpose for this post. However, a few comments are in order.

Those whom I've previously sent this plan via email may notice a few slight changes but the basic structure and content should still be the same. Over time I continue to update or modify it. Often it's just changing a word but I'm a strong believer in Mark Twain's adage that "The difference between the right word and the almost right word is the difference between lightning and the lightning bug." So I continue to press on to find the right word(s) for each part of the plan.

I've also used portions of the plan as content for past articles and have included the links to those articles in the relevant portions. This is to help further explain my thoughts in regard to those particular passages. If you have any questions regarding any particular portion or content feel free to ask and I'll try to explain why I have something as it is.

Lastly, please keep in mind while reading this that it is designed specifically for me, my personality, and my situation. My posting it is not a recommendation to use it, but rather is to just simply respond to a request.

Investing Plan

Purpose

My purpose for investing is to create a future income stream for my wife and I that will potentially be useable starting in 2023 that will not require depleting of the capital.

Philosophy

I buy quality businesses and hold them to reap long term income benefits - I use the stock market as the means to do that. I am an investor not a trader. I believe this requires a different mindset than trading.

Investment Principles

Article here

Surround myself with quality companies;

Understand the relationships;

Know when to say No (applies to both buying and selling);

Be prepared when opportunity knocks (and watch for those opportunities);

Seek dependability;

Continually improve knowledge level;

Do the right thing;

Keys To Success

  • The portfolio is a business. Treat it like one.
  • Understand each company and the role it plays in the overall portfolio. If I don't understand it don't invest in it. Period! No matter what the yield, no matter how popular, no matter who recommends it. Don't do it.
  • Give preference to investing in low beta high quality companies;
  • Always practice patience.
  • Devote a minimum of 8 hours/week to continual learning of investing, whether reading, studying, having discussions, writing articles, researching, or analyzing investments.
  • Identify and manage risk on a continuing basis.
  • Utilize compounding of investments by either reinvesting directly in dividend paying companies or using cash dividends to buy additional dividend paying companies.
  • Manage the psychological aspect (Fear/Greed) of investing by managing my emotions (see list of questions to avoid panic*).
  • Think long term, not next day, next week, next month or next year. Note: Time frame for investments may be adjusted if/when distributions begin from the portfolio.
  • Evaluate and consider others' ideas, suggestions or recommendations but always accept responsibility for my own investments. Ultimately choose what is in the best interest of and supports my investment goals.

Goals/Objectives/

My goal is to increase my portfolio size to a level that provides income that is at least half that of my annual pension. This will be accomplished by investing primarily in dividend growth stocks, adding funds each year to the portfolio, and practicing passive management but active monitoring of the portfolio.

Strategy

At least 80% of the portfolio will be in companies/stocks that pay dividends. The portfolio will be segmented as at least 60% core/foundational, ~20% may be non-core for short-term (<5 years) positions for high yield or growth of capital while collecting dividends, and no more than 20% of the portfolio may be used for speculative investments, i.e. stocks for growth of capital only or techniques such as options.

The dividend paying companies should have a history of paying and increasing dividends or exhibit the ability to do so. These may include C corporations, BDC's, REIT's, and MLP's. I may also invest in closed end funds, as well as companies that don't pay dividends, such as growth stocks, but my core or foundational investments will be solid blue chip type companies.

Rules for Managing the Portfolio

  • I will structure the individual positions so that no single position will exceed 15% of the portfolio - for any at 15% I will not add to that position but will add to others or add new positions so as to decrease its portion of the portfolio. Any company exceeding 10% of the portfolio should be rare! The average position size of the portfolio shall not exceed 5%.
  • I will not buy any company without first doing my due diligence to insure their ability to pay the dividend and the stability of the company.
  • I will not buy a company that is losing money or that has no discernible product. I don't do IPO's.
  • To protect against inflation I will look for companies averaging a dividend growth rate of 6% or better.
  • I will not buy any company with a dividend yield of less than 2% unless yield plus DGR is =>12%. My preferred is 3% or higher. This excludes speculation in the 20% portion of the portfolio.
  • I will always evaluate the dividend payout ratio based on cash flow.
  • I will evaluate portfolio performance by measuring the dividend income increase or stream on a quarterly and annual basis,
  • I will not buy a company that is over-valued according to my calculation of intrinsic value.
  • I will practice good risk management of my portfolio by understanding the company/investment, allocating my portfolio on a position size basis, obtaining a margin of safety, seeking recession resistant companies, and maintaining sector/industry diversification.
  • I will be patient and control my emotions regarding my investments. I will review my list of questions* when I feel the urge to sell if a company price is dropping significantly.
  • I will always ask how does this investment align with my purpose and move me closer to my goals.

The Process

Obtain candidates for evaluation from various sources. Sources include the CCC list authored by David Fish, various screens, and/or mailing lists.

For dividend investments in C Corps perform a dividend safety check. Evaluate the dividend payout ratio based on both cash flow and earnings. If the payout on cash flow is above 75%, stop. Check credit rating, if BB+ or lower, stop.

Make sure I understand the company business, how it makes money and the business risks it faces; Check the company website, annual reports and 10-K; Verify is well run company by metrics, management history, and reading CEO/COB letters;

Evaluate fundamental metrics. Sources for metrics include Fast Graphs, Morningstar, Yahoo Finance, FinViz, and company reports such as 10-K. and annual reports.

Evaluate for economic moat.

Check for recession resistance;

Perform valuation to determine intrinsic value and compare valuation to Fast Graphs, Morningstar and others;

Make sure valuation template is complete;

Compare valuation to current pricing for buy/wait signals.

Compare my evaluation to analyst reports, such as S&P Capital, on brokers website;

Write investment summary and identify if the investment is short term or long term; Note - summary (why this company) must be explainable in plain language in two minutes or less.

Reasons To Sell a Position

1 - I was wrong about the company;

2 - The company, criteria, or reason for investing has changed;

3 - I have identified a significantly better investment that will improve the portfolio;

4 - I need to rebalance the position due to growth;

5 - The objectives of the investment have been met or exceeded (note - usually short term buys);

6 - If a company becomes too over-valued that it would be better to take profits and buy back in this may be considered but should be rare, with the exception of bubble events;

*My List of Questions To Avoid Panic

Article here

What is really happening here?

Has anything changed other than the price?

Is this a news driven event?

Did I enter at an over-valued price, i.e. was I wrong or did I miss my entry?

If I didn't own this stock, would I consider buying it here?

What is my timeframe for this investment?

Is the entire market moving down, the sector/industry, or just the company itself?

What are the alternatives?