Last week, Dan Mac from Dividend Growth Stock Investing sent me an email to participate in a “group post” where he compiles answers from many bloggers. He asked us a couple of questions (what is your best dividend stock? and what is your best investment advice?). I gladly participated and shared my answers. When both posts are live, I’ll link to them. In the meantime, I wanted to go deeper into the answer I gave him with regards to the #1 investment advice. He actually asked for advice for beginner investors but I think mine would apply to all investors. But before I share my advice with you, let’s rewind several years ago when I started investing.
How I Started Investing
I started investing 10 years ago… man time flies! I was 23 at that time. I just finished my bachelor degree in finance-marketing and got a job in a bank. I still remember the face of my banker when I ask her for a line of credit. It was right after getting my job; I didn’t have a pay stub to give her as I was too eager to start trading. Yup… I asked for 20K line of credit to leverage everything and invest in the stock market. I actually told my banker it was to get married, but that’s another story ;-).
At the beginning, I didn’t plan on using the full 20K. My goal was to borrow 3K and buy shares of Power Corporation (TSE:POW), the biggest Canadian conglomerate. It was like buying shares of a small (very teeny weeny small) Berkshire Hathaway. My girlfriend, who became my wife a couple years later (see, I didn’t completely lie to my banker!), wasn’t too excited about borrowing $3,000, which was about a month’s worth of salary, to “spend it” in the market. She didn’t use the word “invest”, she used the word “spend”. As if buying shares was like buying clothes, as it had no value since it was very risky.
How I Bought my First House
So I opened an online brokerage account, withdrew $3,000 from my line of credit and bought shares of POW. The investing plan was simple: the dividend paid by POW was more than the interest charged to my line of credit – it was a risk-free investment. Then, after a few weeks, I thought that buying one stock and looking at it going up and down each day was kind of boring. My investment return was tied to a single stock where I had no control over it. I wanted to trade more but didn’t have any money.
This is why I withdrew another $5,000 to buy shares of two other companies. My three investments were up over a short period of time. This is where I realized that I could make lots of money on the stock market. Within the same month, I withdrew the remaining of my line of credit and had $19,500 invested in my brokerage account.
Things went well… in fact very well. Within three years of trading (from the end of 2003 to 2006), I had over 50K to put down as cash for my house. All profits from trading. I was featured in the Globe & Mail for my awesome returns. I thought I was a wiz buying low, selling high and always looking for the next trade.
Then I Learned I Wasn’t Investing
What I was doing at that time wasn’t called investing. I thought it was but it was more like gambling than anything else. But I realized that only the moment when I lost money with a trade. I guess it’s the only way to understand something; when it hurts!
We are now in 2007, I’m taking more and more risk with my investments since I make more and more money. I flip stocks within months, sometimes within weeks. I’m halfway through my year and I’m +71%… as I said before, I’m a real investment wiz. This was until I decided to put almost all my money at that time (remaining 10K after I bought my house) in a single stock going for the homerun. Instead of skyrocketing, the stock (a junior mine) plummetted by 50% upon bad results. I still remember when I noticed the drop. I just had a good lunch with a few colleagues and looked at my computer to start the afternoon. At first, I thought it was a split… but why in hell would a penny stock split?
It took me a few minutes to read more news about the company and realized that I had lost a real $5,000 in this transaction. Needless to say that I had hard time breathing! The stock market doesn’t always go up. Sometimes it tanks!
What Was My Biggest Mistake During the Whole Time?
This whole story leads to my #1 investing advice for any investor. Young investors make the same mistake as I did but I believe that many more experienced investors miss the same point as I did. After all, it took me 4 years to realize that I wasn’t investing properly. I even bought a house with my trading profits; this is far from being an investment horror story. Nonetheless, I would have avoided losing money on a penny stock if I didn’t make this mistake. I didn’t take the time to follow an investing strategy.
My biggest mistake was to go from one trade to another, to buy and sell stocks upon rising profits without ever really thinking of where I was going with my money. The goal was simple; buy stocks, sell them when they are high and pick another later on. I had absolutely no investing strategy to back my trades or explain my portfolio.
It Took Me Three Years to Build a Solid Investing Strategy
After being burned by a lack of methodology in stock picking, I didn’t trade much. We had two kids (2005 and 2007) and I started my MBA. I just didn’t have time to take care of my portfolio at that time. I had a few funds during that period as I just couldn’t find the time to manage my portfolio. On top of that, I was quite frustrated by how my trading experience was going.
In 2010, I bought this blog as I was interested in dividend investing. I started my learning process in how to identify and select strong dividend payers and built my portfolio according to this premise. I’ve tried a few trades and kept reading about the topic. I am now, more than ever, convinced that a dividend stock portfolio has better chance to beat the market. But it took me three years to clean up my portfolio and establish a solid investing strategy.
I had to play around with stock filters, look at the ratios I want to use, the dynamic between stocks within my holdings and how it performs on the market. Since 2010, all my new dividend picks were good trades. I stuck with dividend investing up to a point where I now own 100% dividend stocks in my portfolio… and I’m doing well again on the market.
My #1 Investment Advice
So my #1 investment advice is quite simple but very powerful: take the time to establish your investing strategy. Put it in writing and understand why you buy, hold or sell a stock. Don’t trade because you read something in the newspaper or because you panic. Sell because the stock doesn’t fit your investment strategy anymore.
The benefit of having an investment strategy is often to design the limit of your risk within your portfolio. With such limits, I would have never gambled all my money in one trade based on the hope that exploration mining results would be awesome. Sure, this trade could have multiplied my portfolio by 20, but I lost 50% instead.
With the portfolio I’m currently building, such an event will never happen. I don’t invest based on hope anymore, I invest based on solid financial ground with companies paying strong and increasing dividends year after year. This is how I can make money from the stock market without having to spend 4 hours per day reading the news!
I’d like to know how much time you have put into your investment strategy. Did you even put it in writing?
Actually IMO your first mistake was using the credit line to buy into the market, if you don’t have the capital to invest I wouldn’t be using leverage to buy into the markets. Think if your timing hadn’t been so fortunate and say you started this same scenario in 2007ish? You got lucky, lots don’t.
Hello Grant,
I was able to take the payment of a 20K loan at that time so I didn’t mind leveraging. My budget allowed me to had over $800 per month of free cash flow back then, I could have paid off my line of credit within 2 years or so.
I agree with you that I had a perfect timing though 🙂
I’m still working on my investment strategy. It’s a long term process. I agree that it’s imperative to work on an investment strategy, but my #1 advice for new investors is to just start investing and keep adding to it. If you didn’t start investing, you’d never learn all your mistakes and build a strategy. Anyway, good stuff.
Hey Joe,
I tend to disagree with you. I’ve started investing without knowing what I was doing and I ended-up losing several thousand dollars because of that. If you don’t make your research first, you are better off leaving your money in a savings account and earn 1% on it. at least, you are not losing money to learn.
@$5,000 it was a cost effective lesson you had. Could have been a lot worse.
5 years ago I did not really have an investing plan … and I took the time to figure out a strategy. As I was reading The Lazy Investor, it started to fall into place. Within a couple of years, I had a pretty solid investing strategy with dividends in place along with the ability to invest small amounts regularly.
I ended up with my investing rules and I stick to those. Only companies matching my rules end up on my watch list.
The challenge is the timeline. Over time, the strategy needs to be adjusted. For example, I have 2 strategies around dividend investing since RESP and RRSP have different timeline so I am testing my retirement strategy with the RESP …
Nice story, I like hearing about how people get their start in business or investing.
Hello Rudy,
Yeah, I guess that if I would lose 50% of my 50K portfolio today, I would be crying for several days!
@ Passive Income Earner,
you bring a very important point. I’m currently reviewing my investment strategy to consider the past 5 years of bullish market. It’s easier to find a stock with a positive 5yr revenue growth than it was 3 years ago… It doesn’t mean the past 5 years will happen during the next five years!
This is great advice DivGuy and similar to what I always preach. One of the first things any new investor should do is craft a simple but complete investment strategy/plan. Come up with your goals, figure out what strategy will be effective in helping you reach those goals, craft the rules that you will follow to help limit risk and mistakes, and then execute that plan. Over the long term this should lead to success! And definitely, understand your strategy. I also started out by trading looking for quick profits without giving much thought as to why I expected this or that stock I was purchasing to go up in market value. Now, I follow a strategy of examining the financial fundamentals of a company and I develop reasonable expectations of what I expect the company’s financial performance to do going forward which should in turn increase the stock market value.
By the way, I’m going to be publishing the article with all the responses from different bloggers regarding their favorite stocks tomorrow. I hope to have the article compiling everyone’s advice together for next week or a couple weeks.
Could you share with us an example of a written down investment strategy? I am curious as to how you define your goals, parameters, etc. Thanks
Thank you for sharing. I am very new to investing. I have just opened RBC Direct Investing RSP account but it took a month to open due to there was some glitch but I did not get why delayed or whatsoever. So I thought I cancel the whole idea of transferring to RBC but to TD Waterhouse since my wife uses it and my mortgage and two RRSP are there. I was very upset about it but now it is opened but do not know simple thing about how to sell my old rrsp from HSBC. (I will figure out eventually but before too late =))
I am still considering to transferring to TD Waterhouse because of delay. Anyway, I can always transfer to TD anytime. I will try a year at RBC and decide.
Sorry, I got into my frustration.
So back to your new post about advise for beginner investor.
I am excited read about your article and it is certainly good guideline for me to plan my investment.
I have some sort of idea about what I want to invest in but don’t know always works my idea.
For now I want to invest in Mining ETF, Japan ETF, Pharmaceutical and Biotech ETF, Marijuana stocks, and ASEAN ETF. And Dividend is needed
Wish my luck.
Agree completely with a strategy and follow it. I have a few simple criteria. 1. Understand the business. 2. Track record of dividend growth. 3. Reasonable payout ratio. 4. Yield below 6.5% 5. DRIP every dividend. 6. Minimize fees therefore pick good stocks and not mutual funds.
So many lessons and many more to learn. In no particular order..
No “penny stocks”! Build a solid foundation with sound dividend payers. Auto reinvest those divs.
Don’t chase skyrockets. Sure you will miss a few big gainers but you will miss all those big fallers too. Diversify to a certain point – a nice utility, oil company, conglomerate, personal care, tech giant. Don’t count out foreign companies. Use reputable websites for garnering information. Stay away from Yahoo message boards, lol. Now…. what’s going to be the best “safe” stock for the next 5-7 years? I need to retire soon!
Hello Dan Mac,
you had a great idea, I’m looking forward to read other blogger’s advices!
Hello Gary,
thx for the idea, I’ll come up with an example next week!
Hey Dai,
thx for the feedback about RBC… not good publicity for them, but hey! they just have to be better 🙂
Your portfolio seems very risky, I hope you are in for the best or the worst.
@Dan,
a simple investment strategy is the best investment strategy. Many investors complicate their investment plan with 50+ metrics to follow. Good job on making something efficient!
@Daddio,
those are all sound invesmtent advices, thx for sharing!
This really hit home because the same thing happened to me. I lost $4000.00 and regrouped my outlook and now invest only in trusts with growing dividend rates and a proven track record. I have gotten back my loose(which you really don’t)and more than doubled my start up investment. So I know that you are bang on.Good investing to all!
I got started by a co-worker letting me in on a “secret stock”. I didn’t act on the advice for three weeks while I read as much as I could. I checked the charts and found a perfect sine wave. It was oscillating form 3-4 over the year 3-4 times. I got in at 3 and sold at 12.75 as the stock was also ready to release drill results, which were extremely positive. (AUR resources) I continue to invest today but have stopped using just options or subscribing to investment news letters. I do technical research on my own and only invest in dividend paying stocks now. I am also older and wiser.
Just going to hit you up regarding one sentence in your post:
“With the portfolio I’m currently building, such an event will never happen”.
Be very wary of making statements like this. You talk about losing 50% of your portfolio betting on a junior explorer (something I’m very familiar with). You’re right in that investing in highly speculative stocks is nothing more than educated gambling.
But I’m also sure you’re aware if the market tanks and we see another GFC type event or even worse, it’s likely that even your good dividend paying stocks are going to tank at least 30% to 50%. Just look at the DOW which went from over 14000 to 6600 in 6 months. This will happen again in the future. Markets have experienced boom and bust periods for as long as they have been in existence.
Just something to think about. Love the blog and keep up the good work.
Sam,
Thx for stopping by!
market crashes will happen in the future, but 2008 was the event of the last century on the stock market. It is statistically impossible to go through another event like this one in the upcoming years. The market went down faster than ever, it was even worst than 1929. I know my portfolio will never drop by 50% in a single year anymore. But -20% is very possible 🙂