Micro Blog #19: Know Your Objectives Before Investing In Stocks

One of the things that I have found to be very useful in investing is setting clear objectives. Having clear objectives have helped me stay the course, especially during times when market anxiety is running at all times high.

I consider myself an income investor primarily with growth as a secondary objective. What does this mean?

It means that I foremost pay attention to the cash flow that my investments generate, and as long as an investment meets my cash flow objectives, I would refrain from selling it. My cash flow objectives are income that is: Sustainable, Growing, and Predictable.

Now, just because I am income or cash flow focused, it doesn't mean I don't care about capital gains. Capital gain has always been a secondary objective of mine, but I just don't want to place myself in a position where I am reliant on capital gains for cash. I'm willing to allow capital gains the time they need to develop and grow. At some point, I will harvest those gains to produce even more income.

Having defined income as my primary objective (Plan A) and capital gains as secondary objective (Plan B), I have set the rules by which I would be playing the game of investing:
  • Rule 1: Buy stocks with long history of paying and raising dividends. These are normally the leaders in their industries.
  • Rule 2: Give winners time to grow in size, producing higher capital gains, even if yield gets lower.
  • Rule 3: Keep building number of shares, as more shares equal more income.
  • Rule 4: Focus on building up winners. I want my winners to be positions of size.
  • Rule 5: Adjust tactics as market conditions change: valuations vs. building-up-winners.
Over the years, my objectives have not changed a bit, but what has changed are the tactics of how I achieve my objectives. As the bull market keeps going up and up, I changed my tactics from being a valuation focused investor to a "building-up winners" focused investor. This is why my largest position Boeing is also one of my most profitable ones. If I had stopped adding to Boeing, thinking it is too expensive, I would have missed out on huge capital gains and double digit dividend growth.

I'm going to let my winners like Boeing run as high as they want to go, regardless of valuations. When they start to cool off, I would start trimming them for the gains, and then reinvest those gains into other high quality dividend paying companies. Thus increasing my total share count and total dividends or income.

At the end, everything I do, comes down to meeting my primary objective of building income, no matter what the market conditions.


Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer





Comments

  1. Hi Mr ATM, great to hear your clear criteria when it comes to investing - I agree this is probably the most fundamental aspect to investing. There is no such thing as a one-size-fits-all 'good' investment. Its such a frustrating question when people ask 'is it a good investment', when the first question is - what are your objectives and criteria!

    My criteria are a bit different to yours, but one of the first things I did when setting up my Fund was to explain this as best I can. I think every investor needs to have this written down somewhere.

    ReplyDelete
    Replies
    1. Hi Frankie,

      You are right, there is no such thing as one-size-fits-all good investment, and why everyone should have their own set of objectives that meet their financial needs before investing.

      Thanks for stopping by and commenting.

      Delete
  2. Hi Mr. ATM. Having objectives helps an investor stay the course when the market gets dicey. I think a lot of new investors and old investors who left the market after the last crash are starting to get in. I doubt they have any clearly defined objectives another than fear of being left out. They will also be the first ones to bail when the going gets tough. Why? They have no idea what their objectives are. Tom

    ReplyDelete
    Replies
    1. Hi Tom,

      As a young man, I used to be one of those investors who didn't quite understand what they wanted from their investments. Those investments didn't end well for me.

      Speaking of fear of being left out, I wonder if majority of people investing in bitcoins/cryptocurrencies are doing that due to fear of being left out.

      Delete
  3. $BA has left the runway! Good write up on your strategy. I have a mix of both growth and predictable dividend income spewers. I guess I like to have my cake and eat it too.

    ReplyDelete
    Replies
    1. Oh yes, BA has left the runway quite sometime ago. However, since then it's been cruising higher and higher. I personally believe there is still another 10% - 20% upside left in the stock. That would put it over $400 a share. Will see if it hits that high this year.

      Even if it doesn't get that high, the double digit dividend growth would be enough to hold the shares for a while. Though, I keep reminding myself, BA is a cyclical company and there will be a time when the down cycle will begin and so would be the time to sell/trim.

      Delete
  4. It is so true that you need to follow a set of rules when investing. If you try and go blindly into the stock market, you'll end up getting caught with your pants down. Keep up the great work with the blog, I look forward to reading your next article!

    ReplyDelete
    Replies
    1. Thanks Money Professor, looking forward to hearing from you again.

      Delete
  5. Thanks for sharing, Mr. All Things Money! I agree 100% that it's important to have a perfectly defined plan to not get off course. I'll admit that there are some interesting opportunities out there, but I think consistency and sticking to the plan is the best option. I like your rules, especially the concept of building up winners. I think it's an original idea compared to the averaging down concept. As someone with a small portfolio in the building stage, I appreciate the insight. Take care!

    ReplyDelete
    Replies
    1. Thanks RTC. Yes, having a plan is like having a map that guides us through thick or thin of the market. Without it, we would be lost.

      Building-up winner is not really my idea, it's something I learned from other more experienced investors. The whole premise of the idea is that you want to focus on building the dollars and cents in terms of performance and not merely percentage gains.

      When you build-up your winning positions that are outperforming quarter after quarter based on their earnings, you are maximizing your potential gains.

      When you keep building-up losers, companies that have been under-performing quarter after quarter (e.g. GE), you are digging a hole into a value trap. You can only dollar cost average so low until it's going to get you, and you will sell off that position at a huge loss.

      Another advantage of "building a winner" strategy is that even if you add at higher valuations, you have build-up enough margin of safety, in terms of potential gains, that a correction of 20% or 40% won't put the position in red.

      For example, my BA position is up 184%, would I worry about it taking a 20% correction? Absolutely not, a 20% correction won't even move the needle for me, instead I would buy more if the company continues to outperform.

      Delete

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