All the Financial Advice You Need Fits On An Index Card

[GravitySucks]

http://youtu.be/JdUKhgW1gOo

A Chicago U professor finds that all he needs to know about money fits on an index card.

So easy to understand, so hard to implement.

 

[powerplay]

I liked the example provided by the two cakes.

 

[Al18]

I would change rule 4 to don't buy or sell individual stock unless you are prepared to research them for at least an hour. Base your research on unbiased sources that don't profit from the buying or selling of that specific stock.

 

[travelover]

I would change rule 4 to don't buy or sell individual stock unless you are prepared to research them for at least an hour. Base your research on unbiased sources that don't profit from the buying or selling of that specific stock.

People that get paid to do this all day long don't out perform index funds over the long term, so I don't see how an index card investor can hope to do it with an hour's study.

 

[Totoro]

+1 on that.

If you haven't read and understood at least the latest annual report fully (including the footnotes!) and several years of financials + summaries going back, stay out of individual companies as an investment.

That takes a good part of your day, probably a few days.

 

[Gone4Good]

You need to know a shiteload more than what can fit on an index card to make proper use of corporate disclosures and SEC filings.

But you don't need to know much of anything at all to buy a total market index fund and just go fishing.

Say "no" to individual stocks unless you know what you're doing. And even then, mostly say no to individual stocks.

 

[akck]

While I have done well with individual stocks and thought I'd continue to buy and sell individual stocks well into retirement, a few years before retirement I realized doing so was too much like work. So I started to convert to index funds over the years. I still have some individual stocks in retirement, but I'm slowly converting them to index funds. Much less work to manage.


Sent from my iPad using Early Retirement Forum

 

[Gone4Good]

While I have done well with individual stocks and thought I'd continue to buy and sell individual stocks well into retirement, a few years before retirement I realized doing so was too much like work.

Too much work, for sure.

Here's a brief overview of the bare minimum I'd do before investing in individual stocks (TL; DR version: It doesn't fit on an index card):

Learn the company
1) Read the last couple of 10-K reports, the most recent 10-Q report, and all investor material on the website
2) Listen to the the last couple investor calls
3) Put together a spreadsheet of quarterly financial data and ratios going back at least three years
4) Learn the company's products and their key markets

Learn the industry
1) Read competitor company reports and investor presentations
2) Seek out sector specific analysis and / or trade publications to understand primary sector drivers
3) Try to understand what happened to the market and it's company's during the last period of cyclical stress
4) Build a spreadsheet that calculates key financial ratios for the major players in the company's sector to use as a benchmark

Build a fair value pricing model
1) Either using a discounted cash flow projection or some form of relative value framework I'd want to have a way of calculating a price target or valuation metric that would generate buy / sell or rich / cheap signals

Monitor all of this forever
1) Update all of the above
2) Continue listening to quarterly conference calls and periodic investor presentations for both the company and it's key competitors.
3) Read 10-Ks and Qs as they become available

Build a diversified portfolio
1) Do all of the above for 19 or more additional companies.

 

[akck]

Build a diversified portfolio
1) Do all of the above for 19 or more additional companies.

My sweet spot was 23-27 companies. Now, I have 5 kept for the dividend income. They'll eventually be sold to add to my index funds or used for living expenses. I may keep 2 as forever stocks, but likely in smaller amounts.


Sent from my iPad using Early Retirement Forum

 

[GravitySucks]

I never did well with individual stocks. Now I just like to buy markets and hold till I need the cash.

 

[Midpack]

It is a good summary for about 95% of the population, who don't have the ability and/or interest in investing - nothing wrong with that. There is so much bad advice out there, parading as good advice, it's no wonder many are there own worst enemies when it comes to investing. And many smart passive investors had to learn the hard way (self included somewhat) with early mistakes before realizing the index cards were all they needed to begin with.

Thanks for sharing it. Too bad that many of the people who could most benefit from the advice, have to learn the hard way first...

 

[Rustic23]

In 1980 I bought three stocks. Lost on one, broke even on another, and the third got bought out. Since then I have been a funds investor. I decided to get rich slowly and not hit the home run. For us, it has worked out well.

I agree with all ten items.

 

[DrRoy]

You need to know a shiteload more than what can fit on an index card to make proper use of corporate disclosures and SEC filings.

But you don't need to know much of anything at all to buy a total market index fund and just go fishing.

Say "no" to individual stocks unless you know what you're doing. And even then, mostly say no to individual stocks.

I never did well with individual stocks. Now I just like to buy markets and hold till I need the cash.

+1 I thought the rules were great as written. There might be a few things that are not covered, but they are a great start.

 

[Mulligan]

Too much work, for sure.

Here's a brief overview of the bare minimum I'd do before investing in individual stocks (TL; DR version: It doesn't fit on an index card):

Learn the company
1) Read the last couple of 10-K reports, the most recent 10-Q report, and all investor material on the website
2) Listen to the the last couple investor calls
3) Put together a spreadsheet of quarterly financial data and ratios going back at least three years
4) Learn the company's products and their key markets

Learn the industry
1) Read competitor company reports and investor presentations
2) Seek out sector specific analysis and / or trade publications to understand primary sector drivers
3) Try to understand what happened to the market and it's company's during the last period of cyclical stress
4) Build a spreadsheet that calculates key financial ratios for the major players in the company's sector to use as a benchmark

Build a fair value pricing model
1) Either using a discounted cash flow projection or some form of relative value framework I'd want to have a way of calculating a price target or valuation metric that would generate buy / sell or rich / cheap signals

Monitor all of this forever
1) Update all of the above
2) Continue listening to quarterly conference calls and periodic investor presentations for both the company and it's key competitors.
3) Read 10-Ks and Qs as they become available

Build a diversified portfolio
1) Do all of the above for 19 or more additional companies.

I thought I wasnt smart enough to buy individual stocks, now I know I am not. But I do own quite a few preferred stocks. A lot easier to invest in... Monopoly? Check... Essential service? Check... After tax income coverage ratio of preferred dividends by 50 times? Check...Over 6%? Check... Time to hit the buy button!

 

[scrinch]

Too much work, for sure.

Here's a brief overview of the bare minimum I'd do before investing in individual stocks (TL; DR version: It doesn't fit on an index card):

Learn the company
1) Read the last couple of 10-K reports, the most recent 10-Q report, and all investor material on the website
2) Listen to the the last couple investor calls
3) Put together a spreadsheet of quarterly financial data and ratios going back at least three years
4) Learn the company's products and their key markets

Learn the industry
1) Read competitor company reports and investor presentations
2) Seek out sector specific analysis and / or trade publications to understand primary sector drivers
3) Try to understand what happened to the market and it's company's during the last period of cyclical stress
4) Build a spreadsheet that calculates key financial ratios for the major players in the company's sector to use as a benchmark

Build a fair value pricing model
1) Either using a discounted cash flow projection or some form of relative value framework I'd want to have a way of calculating a price target or valuation metric that would generate buy / sell or rich / cheap signals

Monitor all of this forever
1) Update all of the above
2) Continue listening to quarterly conference calls and periodic investor presentations for both the company and it's key competitors.
3) Read 10-Ks and Qs as they become available

Build a diversified portfolio
1) Do all of the above for 19 or more additional companies.

Hmmmm... this, or Vanguard+fishing? Tough choice, but I think I've made up my mind now.

 

[ERD50]

(shortened quote)

Too much work, for sure.

Here's a brief overview of the bare minimum I'd do before investing in individual stocks (TL; DR version: It doesn't fit on an index card):

Learn the company ...
Learn the industry ...
Build a fair value pricing model ...
Monitor all of this forever ...
Build a diversified portfolio ...
1) Do all of the above for 19 or more additional companies.

Good list, but even after you do all that, you need to realize that others are doing it too. And they are driving up the price of any 'bargains' to the point they no longer can be expected to provide above-market performance.

I've come to the conclusion that stock or sector picking isn't about analysis because if it is definable analysis others can and will do it too, and then you are just competing with them. It's about predicting the future, and AFAIK, that is not a learn-able skill set.

-ERD50

 

[scrinch]

...I've come to the conclusion that stock or sector picking isn't about analysis because if it is definable analysis others can and will do it too, and then you are just competing with them. It's about predicting the future, and AFAIK, that is not a learn-able skill set.

-ERD50

Maybe or maybe not...
How to Be Less Terrible at Predicting the Future - Freakonomics Freakonomics

 

[Gone4Good]

(shortened quote)

Good list, but even after you do all that, you need to realize that others are doing it too. And they are driving up the price of any 'bargains' to the point they no longer can be expected to provide above-market performance.

I've come to the conclusion that stock or sector picking isn't about analysis because if it is definable analysis others can and will do it too, and then you are just competing with them. It's about predicting the future, and AFAIK, that is not a learn-able skill set.

-ERD50

Yes to all that. And also this . . .

There are people who do this and only this 80 hours per week. They cover an individual sector and have a team of 2 or 3 people to help them cover that single sector. So in total, they might have 240 hours per week devoted to researching one sector. Each sector has similar assets dedicated to it.

Then, those people also have access to senior management who helps them build their models and also gives them insight that is difficult to obtain from other sources.

Then, those people have access to other institutional investors who frequently share the best information and trading strategies between them.

Then they have access to institutional trading desks who are plugged into market technicals in a way that someone with a Fidelity account simply can't be.

Against all of this is a guy in a home office dedicating just a couple of hours per week to researching the entire market and somehow still thinking that his efforts are adding alpha.

 

[Markola]

+1 to the sentiments above. In my early investor years, I fell for the Dogs of the Dow strategy. In those heady days of the 90s boom one could hardly make a bad decision, so I didn't hurt myself. However, owning individual stocks just felt like gambling. At some point, I read Jack Bogle and became a firm devote of indexing.

Why spend your time playing poker in a dark, smoky room when you can own the casino and get paid even more over time while being out and enjoying the day?

I am transfixed with the idea that, through my core Vanguard LifeStrategy funds I can own the entire publicly traded economy of planet Earth, with hundreds of millions of people working hard 24/7 just to make my slivers of their thousands of companies grow and grow. To me, that is a far more powerful idea than reading boring reports just to bet on Chipotle stock or whatever - and probably lose.

 

[samclem]

It is a good summary for about 95% of the population, who don't have the ability and/or interest in investing - nothing wrong with that. There is so much bad advice out there, parading as good advice, it's no wonder many are there own worst enemies when it comes to investing. And many smart passive investors had to learn the hard way (self included somewhat) with early mistakes before realizing the index cards were all they needed to begin with.

Thanks for sharing it. Too bad that many of the people who could most benefit from the advice, have to learn the hard way first...

All true. Pretty much all you need to >do< will fit on that index card (I'd say we really need to use the back side, too, to get the big, important parts of maximizing tax efficiency for investing and withdrawals).
But, while all the things one needs to >do< will fit on an index card, that person will be vulnerable to the next web site/late might infomercial/commissioned broker/Wade Cook-style huckster with a completely different set of index card rules (for writing covered calls/gold futures/market timing/"technical analysis" schemes, etc). So, to be safe and stay the course, an investor needs to understand and accept the rationale for the simple rules on the index card given in the OP. Without that, they are ripe for the picking.
The index card contains the most important things you need to >do<, but it doesn't come close to listing the things you need to >know< and accept.

 

[Texas Proud]

I might take issue with the max out 401(k) one... (or did they say retirement?)


Unless you have an option for a ROTH contribution, it might not make sense to do so.... IOW, say you are in the 0% or 15% bracket, maxing out with before tax money might not pay in the long run....

I say max out to get any match and then determine what is your next best investment....

 

[Exterous]

(shortened quote)

Good list, but even after you do all that, you need to realize that others are doing it too. And they are driving up the price of any 'bargains' to the point they no longer can be expected to provide above-market performance.

I've come to the conclusion that stock or sector picking isn't about analysis because if it is definable analysis others can and will do it too, and then you are just competing with them. It's about predicting the future, and AFAIK, that is not a learn-able skill set.

-ERD50

One thing that always resonated with me about these arguments is that their goals, requirements and timelines are not the same as mine. So while we may be looking at the same company our actions will not mirror eachother due to these different situations.

The market also seems to have a herd mentality when reacting to news. Over longer timeframes those smooth out into an 'efficient market' but there seem to be many short term irrational dips to me.

My method isn't sexy but it seems to work as I'm up 2.5% on the DJIA over the last 15 years. (Although I'm tied with the DJIA YTD thanks to Netflix's 'slight' downward trend today) Some years I'll only have a couple of trades but I setup orders at prices that seem like steep discounts. The price is pretty low so many never fill but when they do they do well. Some recent examples: LOW at $64.4, APPL at $93.7, WMT at $58.9 (that one has been around for maybe 2 years before filling), HOT at $61.7 with Starwood being about the riskiest stock I've invested in in a while. I also have a strong preference for companies with a long history of increasing dividend payments

I still have index funds as I am still in my accumulation phase and things I consider 'good deals' have never lined up with my paychecks. When an order fills the money comes out of a moderate yield, tax exempt bond fund and I reallocate incoming new money into the bond fund to replace the debit. Occasionally things will fill quickly (like they did at the start of this year) so I will re-balance and\or pause\cancel the orders.

No guarantees in life though so I won't really know if what I am doing is the right move for a few more decades

 

[Gone4Good]

My method isn't sexy but it seems to work as I'm up 2.5% on the DJIA over the last 15 years. (Although I'm tied with the DJIA YTD thanks to Netflix's 'slight' downward trend today)

How does your VOL compare to the DJIA?

 

[Exterous]

How does your VOL compare to the DJIA?

Std Dev is 10.77 from August 2008 to July 2015

 

[ERD50]

One thing that always resonated with me about these arguments is that their goals, requirements and timelines are not the same as mine. So while we may be looking at the same company our actions will not mirror each other due to these different situations.

The market also seems to have a herd mentality when reacting to news. Over longer timeframes those smooth out into an 'efficient market' but there seem to be many short term irrational dips to me.

My method isn't sexy but it seems to work ...

I agree with you that some form of contrarian (going against the herd) approach should seem to work. Implementing it gets a little sketchy though, I'm not sure how to do it objectively, but some might find a way.

Fidelity has a 'contra' fund, but I think it got too big to really do the contrarian thing (FCNTX) - chart shows that it is basically tracking SPY since 2008, but it did a nice combo of not dipping so low in 2002-2003, and recovering faster as well, so that was a great period for it.

-ERD50