One of the great things about investing is that you are in charge.
In your job, you have a boss, who also has a boss. You have colleagues with expectations. To get your paycheck, you have to do things that other people want you to do.
But in investing, you are the boss. Your investing, in fact, is your own little business. The assets that you invest in are like employees, there to work for you.
The goal of your investing business is to make money. The investing legend Benjamin Graham often referred to this as an “investment operation.” Here’s what he said:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
A self-directed dividend growth investor should treat his or her “investment operation” like a business. Give it a name. Have a plan. Create rules, procedures, and even a culture that give your business its particular character and keep it on track.
Keep emotions at bay. Anticipate changes in your business environment and how you will react. Constantly learn: You should be better at your business after five years than when you started.
You are the founder, CEO, and Chief Investment Officer of your business. You want to run it well. Every well-run business has:
- a primary goal;
- strategies designed to achieve that goal; and
- tactics, programs, and activities to execute the strategies.
I urge you to create a document that sets forth at least the first two of those elements. Write down your goal and high-level strategies. They form the core of your business plan.
Throughout this lesson, I am going to use the business plan for my Dividend Growth Portfolio to illustrate how you can construct your own business plan.
Your own plan, of course, will be customized to your goals and circumstances. But the general concepts of having a plan, identifying your goals and strategies, and the like, are universal ideas that can be applied to any business plan.
Why Are You Investing?
Start your business plan with your goals. Why are you investing?
Here’s the Goals section from my own business plan:
As you can see, the goal statements are simple. KISS: Keep It Simple, Stupid.
But that simplicity masks the thought that went into them. The simple words are the distillation of much consideration about what I really want to achieve in my own investing.
The reason is that, upon consideration, I realized that trying always to maximize an income stream might mean taking risks that I am not comfortable with.
High-yield investments (say those yielding 9%+) are often risky ventures.
They have to be watched like a hawk. That’s not the way I want to live.
But different investors might have different views of what they consider the best dividend goal.
For example, you may want to have a few really high yielding stocks, and be willing to tolerate occasional dividend cuts, so long as the portfolio’s overall long-term trend is up. You might reason that you can use the high income from riskier stocks to fund the purchase of more dependable stocks that will become your core portfolio down the road.
I urge you to give your goal(s) considerable thought. But don’t stress out over them. You don’t have to get everything right the first time. This is your business plan. You can change it whenever you want to.
You can adjust your goals as you gain experience, enter different phases of life, and encounter life changes such as marriage, divorce, births, deaths, retirement, and so on. Your primary goal undoubtedly depends on your age, financial situation, stage in life, tolerance for risk, and a host of other factors that are important to you.
As those factors change, feel free to change your goal. Think it out and write it down.
You can have hybrid goals. “Growth and income” is a common approach. Many investors want some of each. As you can see in my own case, I do have a secondary goal of achieving total returns that are competitive with the broad market.
The main reason to give your goals thought and be comfortable with them is that they form the foundation for your investment strategies, tactics, and day-to-day decisions. Reaching your goals is why you are investing. So knowing your goals will determine how you will invest.
One last point about your goals: Stating them clearly can help you guard against mission creep – a gradual shift in objectives and practices that ends up taking you into unplanned territory.
Mission creep can cause an investing operation to spiral out of control. Adhering to your plan helps you put the brakes on when you are considering a “hot tip” or other decision that really does not fit with your long-term goals.
What Are Your Strategies?
After goals come strategies.
Here is a diagram I devised to show how goals, strategies, and tactics relate to each other.
The umbrella at the top is your overarching vision. It could be something like, “I want to retire at 55.”
Beneath that umbrella aspiration, your goals, strategies, and activities depict how you will get there.
Strategies are the general plans that you will use to achieve your goals. Your strategies sum up the business model of your investment operation. They state how you will invest so as to accomplish your goals.
You want your strategies to provide a logical roadmap for how you will achieve your goals. Strategies are pretty general in nature. For example, they don’t tell you what stock to buy. Rather they tell you how to select what stocks to buy.
Strategies don’t change much, unless your goal(s) or circumstances change dramatically. But as you gain experience, you may well add, drop, or refine a strategy as you learn more about investing and absorb new ideas about it.
Your strategies should always be designed to achieve your goal(s). To illustrate, here are the strategic headings from my own investment plan, along with summaries of what is under each heading.
In this section, I describe the methods that I use to select stocks. I have links to articles or examples that show how I do it. I evaluate companies not only for their suitability to my goals, but also for good valuation.
Since I am building an income stream for future use in retirement, the dividend revenue from my enterprise is invested right back into the enterprise. In this section, I describe how I reinvest dividends.
Because I reinvest dividends, I don’t hold cash in efforts to time the market, because cash does not generate dividends, and therefore it does not advance my goals.
In this section, I describe what I see as the ideal portfolio for my goals:
- It has 20-30 stocks.
- It is well-rounded, meaning that it is diversified across economic sectors, industries, yields, and dividend growth rates.
- I expect the portfolio’s income to go up 6-8% per year on average.
- The maximum size of any one position is 10% of the portfolio.
- I don’t rebalance the portfolio on any set schedule.
Here I lay out the reasons why I might sell a stock. Selling is rare, as I consider dividend growth investing to be mainly a strategy of buying, collecting, and holding good stocks for long periods of time. The businesses themselves do the work; I try to stay out of their way.
In my strategies, I don’t go into deep detail about how the strategies will be executed. Strategies are not to-do lists. I would suggest that you guard against getting bogged down in operational details when you are formulating your strategies. Strategies are best stated at a high level and from a long-term perspective.
The business model for any company answers this important question: How does the business make money? In running your investment business, you should demand of yourself that you understand your own business model as an investor: How do you make money?
In my own case, I make money by buying and accumulating stocks in high-quality companies that send me annually increasing dividends, and reinvesting the dividends to buy more of them. That’s my simple business model: I’m a holding company. I hold the stocks of great businesses that pay increasing dividends.
I would suggest that a good business model for an individual dividend growth investor has these characteristics:
- It is realistic for a self-directed investor to implement and maintain.
- It provides sufficient and reliable cash flow from dividends.
- The cash flow grows steadily, at a rate that beats inflation over long periods of time.
- The operation provides peace of mind and psychological relief from market volatility.
How Do You Implement Your Strategies?
Strategies are implemented through tactics, to-do lists, and day-to-day activities.
I don’t include tactics and tasks in my business plan. They are too detail-oriented, would lengthen it by several pages, and by their nature require frequent adjustments.
I prefer my business plan to be a relatively brief document that I can consult for high-level guidance when I forget what I am doing, find myself straying from my principal goal, or get stuck between incompatible choices.
That’s why I have the business plan: To remind me of my goals and strategies, so they can guide me through difficult situations.
Obviously, in your investment operation, you do not help to manage the individual companies in which you own stock. But you fully manage the investment operation. Your business plan helps you to do it.
Most individual investors find that it is fun. It’s fun to run your own business rather than work for others.
Key Takeaways from this Lesson
- Run your investing like a business, because it is. It is designed to make money.
- You are the CEO of your investing operation.
- Write out your business plan. Your business plan states how you will make money. Writing it out “forces” you to organize your thinking, reconcile contradictions, and integrate ideas.
- Start out with the primary goal of your investing operation. Feel free to modify your goal as you gain experience, enter different stages of life, and encounter new circumstances.
- Make your business plan realistic to implement and maintain.
- Keep your business plan at a high level. Don’t clog it up with day-to-day tasks and activities.
- Modify your business plan whenever you want – as you learn how to be a better investor or encounter life changes that impact your goals.
Dave Van Knapp
This lesson was updated 8/27/2018