Eight Principles Of Profitable Self-Directed Investing

Self-directed investing is simple, if not easy; doable, if not intimidating. Uncomplicated, focused research conducted in a thoughtful, disciplined manner can outperform Mr. Market over an extended holding period, more often than not. Here are eight principles of profitable self-directed investing that when consistently implemented can produce market-beating portfolios over an extended period. How many of the following strategies are you currently applying to your 401(k), IRA, or individual brokerage accounts?

Principle One: Investing is 90% Half of This

Paraphrasing baseball legend, Yogi Berra, investing is ninety percent half common sense. As much as the institutional way of stock picking may attempt to convince you otherwise, this is not rocket science, folks. Warren Buffett, arguably the most successful investor of our time, once said:

Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

How well do you know and understand the company’s products or services of the stocks you own? Could you explain the enterprise’s value proposition to practically anyone?

Never invest in any idea you can’t illustrate with a crayon. – Peter Lynch

Put another way, would you purchase the products or services of the targeted publicly-traded company if you were in the market for them?

Alternatively, imagine a friend was the managing partner of a similar, although privately-held enterprise and invited you to buy-in as a partner. Assuming you had the necessary funds, would you accept his or her offer?

The answers to these hypothetical questions should validate your understanding and confidence in the prospects of the company’s value proposition or competitive advantages toward continued growth and prosperity as reflected in the stock price over time.

Give your portfolio a K.I.S.S., i.e., keep investing super simple. Your portfolio's beneficiaries will thank you. And when the Wall Street fee machine insists that its complex investing paradigms are best, remind yourself that common sense and keeping it simple are the primary tenets of successful, do-it-yourself portfolio management.

Principle Two: Disciplined Investors Rarely Lose Money

They eschew complicated or expensive investment vehicles such as options, futures, arbitrage, currencies (crypto or sovereign), commodities, trend following, short positions, technical analysis, momentum growth, high yield dividend, or any trading schemes in the hopes of fast money gains. He or she happily leaves those speculative ventures to professional traders, market gamblers, and the Ouija Board.

Some market pundits believe they can predict future price movements with abandon. Their proverbial crystal ball — disguised in the sophisticated clothing of technical charts, trends, and assumptions — wreaks havoc on the portfolios of unsuspecting investors.

Disciplined value investors do not pretend to know what any stock’s price will be one, three, or five years from now, never mind next week. Nonetheless, an attractive current stock price is a non-negotiable prerequisite for initiating the productive partial ownership of a quality company.

But how can a self-directed investor protect the principal capital of his or her investment?

One rule virtually guarantees an investor will not lose money on an investment.

          An investor cannot lose money unless he or she sells out the position after it declines below the   cost basis.

The above rule recognizes the ever-present dichotomy of realized and unrealized gains in our portfolios. Dividend payouts notwithstanding, an investor can only lose money on a stock if he or she sells shares for a realized loss as opposed to waiting patiently for a realized gain.

Naturally, the inverse is true, as the capital gains of individually-held stocks are treated as unrealized or paper profits until the investor executes and settles a trade.

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Copyright 2018 by David J. Waldron. All rights reserved, worldwide.

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Susan Miller 1 year ago Member's comment

This was helpful, where can I read more by you? Do you plan to publish additional articles here?

David J. Waldron 1 year ago Author's comment

Thank you, Susan. I am happy that you found the post helpful. This piece originally published on the MSVI blog (see my profile), but I do plan on submitting new material to TalkMarkets from my Finding Value series, in 2019. Happy New Year.

Mike Nolan 2 years ago Member's comment

Gotta love Yogi Berra!

Terrence Howard 2 years ago Member's comment

Solid pointers, thanks.