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The DIY Journey:

There are a lot of investors looking to get into the DIY (do-it-yourself) game of late and that’s likely for a number of important factors.

Many investors that I’ve talked to in recent weeks are tired of over-paying for under-performance and watching their hard earned money decline in the market despite trusting a professional to manage their money. When they share concerns about moving funds, utilizing a different strategy or expressing themselves with the need for more involvement in their investment decisions they are discouraged to do so and stick it out. Financial advisors can’t take all the blame as each individual investor now realizes that their risk tolerance was likely much lower, but clearly there is a need to put people first when it comes to managing their money.

The financial services industry is dominated by massive firms selling financial products that’s sole benefit is not to increase returns for investors but rather charge increasing fees for the management that is provided. They make more money when you, as an investor, do well but that’s not their sole motivation or core value principle. This is no secret to individuals in the profession and very few stand out against the goliaths by carving out their own distinct niche of business that focuses on client needs rather than advisor needs. Advisors need to be paid; that’s how they earn their money. But even with the growth of index funds and exchange-traded funds that offer low-cost investment vehicles to DIY investors active management continues to dominate the focus of the industry.

I’ve said this many times and I continue to believe it to be true: No one will ever manage your money like you can.

While you might trust your advisor, have a good relationship and a mutual understanding of your expectations an advisor will never take the same type of diligent care that you would with your own money. Any DIY investor realizes this the very first time they consider pressing the “buy” order through their discount brokerage. You start to second guess yourself or wonder if you can get the stock cheaper. You realize immediately that you are the sole individual responsible for the investment decision and it is both a very powerful and humbling experience.

I understand the difficulty in this journey because I myself, only four short years ago, took the important step of buying my first stock. I understand the barriers to education that exist, the abundant bias of advice and difficulty in determining how you approach stock analysis & conducting due diligence. It’s insanely frustrating and in the beginning you find very little help to guide you on your way. Through all of my frustrations of making mistakes and losing money I learnt how to adapt my investing approach to better recognize risk as my primary focus. I’ve adopted an approach that doesn’t focus on numbers entirely but instead on making sense of the difference between a good business and great investment.

A wise investor told me recently, “The subject of dividend based investing is heavily covered these days so what I have to add is minimal. I do believe that most dividend investors & blogs focus way too much on the data and way too little on understanding the business & the business model.

He’s right.

While I respect my peers there is a clear absence in the frequent analysis that we conduct on value, dividend or alternative investments. If there is anything we can learn from the unravelling of the markets these past few years it is that numbers never quite give you the complete picture and that one of the most important factors of a sustainable business is how it is structured. The business models of many great investments have deteriorated incredibly by losing focus on what makes a business successful. Whether its leverage, over-diversification or management losing focus the business model has suffered and shareholders are now paying the price.

Growth in dividends, earnings and revenues mean little moving forward if the business isn’t sustainable. If there’s no demand for a product or service and a company can’t be competitive, proactive and innovative than they’re going to fall by the way side and we’re seeing that now in a number of industries. The world moves fast and to be competitive you have to know not only where you want to go but how to get there.

Those are all elements of what I talk with small business owners about when I’m consulting, but these also apply directly to investors. As a shareholder you are part owner in the business and need to learn to evaluate the business with that mentality. You need to critically examine what the company does, how it does it and what changes it is making to maintain its market share and become more competitive.

My Value Rules aren’t just about identifying good investments; they’re about identifying good businesses. They are fundamental rules that I believe a business should strive to achieve or apply that lead to a great investment. An investor might lose money over the short-term but investing is partly about learning how to lose in order to gain at another time. We all lose money and that is inevitable. The goal as an investor is to minimize your losses while maximizing your gains. How you decide to do that is dependent on each individual.

I’ve grown a lot as an investor over the last eight years and recognize the uphill battle that many new investors face when attempting to follow in the footsteps of those of us who have endured the journey to where we are today. I’ve never forgotten those struggles and frustrations and this site carries the focus of giving back to those who want to learn but don’t know where or how to start.

My focus has always been on quality rather than quantity and I encourage readers to engage me in what they want to learn, read and need guidance with. Whether you participate publicly in the comments section of my posts with questions or privately via email I want to know what you’re having difficulty with and what information you’re seeking to learn about. They can be suggestions for a stock analysis, what my analyses are lacking, how my situational analysis can be broken down on a more basic level or more focus on a specific fundamental.

I won’t have all the answers, but I’ll try my best to point you in the right direction.

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{ 5 comments… add one }
  • Jae Jun November 10, 2008, 2:13 pm

    It’s true. I started on my own because my financial advisor was selling me funds with a commision of around 10%!

    After fees, I was getting 1% returns on the best of best days. Market was at around 8% at that time I believe.

    Boy that got my blood boiling.

  • Nurseb911 November 10, 2008, 3:37 pm

    10% Jae?!!!
    That’s not financial advice that’s robbery! BTW…can you buy stock in the company that sold you those products?

  • Becky November 10, 2008, 5:42 pm

    That would make my blood boil too- wow! I think the best business model that I have heard about in a long time is Darwin Gillett’s, which he lists in his book, “Noble Enterprise.”

  • Ethan Bloch November 10, 2008, 7:17 pm

    Well said…

    However there is one thing that is scary to me… the average retail investor engaging in enterprising investing… a very scary thought indeed.

    Granted brokers usually are worthless, however taking control of your investments and pursuing an active investing approach is not a great choice either.

    The main point being many of us have full time jobs and or families that lie outside the field of finance. Meaning we are handicapped to learn and teach ourselves the various mental models needed to intelligent analyze a business.

    If some of us do find this time, more power to us… but most will not and therefore most should pursue a life of passive investment, i.e. indexing.

    I think it is wonderful you are sharing your approaches, ideas and pains with pursuing an enterprising investment approach, but remember: most people that stumble onto your blog, should prob. not be pursuing this path.

    I have the same problems to face with my video show; everyone is able to make their own choices but I think it is fair we give them enough information and transparency to know just how much the deck is stacked against them.

    Finally, amen to the fact that stocks are REAL ownership stakes in a REAL living, breathing business. Understand the business 1st, buy the stock 2nd.

    Cheers.

    Ethan

  • Nurseb911 November 10, 2008, 7:31 pm

    Ethan – Really appreciating your contributions to the comments recently on my site!

    I think any investor who takes a DIY approach needs to be honest in their capacities to invest. The active vs. passive debate is something that I think is an individual choice but the investing approach and fundamentals really don't need to change all that much (if at all).

    I choose to not index the majority of my portfolios because I don't have a desire to gain exposure to both good & bad companies – I would much rather own just the ones that fit my style or offer value. Yet asset allocation, global diversification and dollar-cost-averaging are still vital components of any strategy (active or passive).

    Most of the time I advocate that an investor begins with a passive approach (index funds & ETFs) and then if/when they have the time branching out into individual equity investments.

    I have posts that I'm working on that go indepth into an index approach, but my obvious forte is individual stock analysis.

    Often in private conversations with readers I'm very active in promoting a passive style as a starting base as I feel a new DIY investor is able to practice many of the important portfolio management skills they need to invest in equities in the future.

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