On May 23rd, 2016 I bought my first individual stock a single share of GE at 29.49. Armed with the knowledge I had from reading a couple of blog posts from Dividend Mantra and some a couple basic articles about Dividend growth investing, I decided to get my feet wet. I had no clue where it would take me. I think it's safe to say the extent of my knowledge was:
1. Look for a stock with a decent yield but not so high that that it signal volatility.
2. Invest in a blue chip company that you are confident will be around a while.
I essentially knew nothing and knew it, but was eager to learn and was excited that the Robinhood App gave me the opportunity to do this without losing my shirt. I budgeted $30-40 per month to invest and I figured I would see what happens. Less than a year later my portfolio is nearly 4k.
What have I learned?
I've learned a little bit about different sectors, how companies make money, and some of the financial metrics to look for. For instance stocks in some sectors may carry higher debt than others, so that it is important to understand that when looking at the financial reports.
In general I have improved my screening process.
1. I've learned about the importance of Dividend Growth versus just have a good dividend. I now target stocks that have had a minimum of 5 years of dividend growth. But I really prefer better growth.
2. Value is important. I typically look for stocks that are undervalued and have P/E ratios of under 20. I learned that P/E ratios are useless for REITs and that FFOs are the way to go there. Just like shopping it's better to buy low and not overpay for a stock no matter how strong it is. Forward P/E ratios and price targets can also be nice indicators of where a stock is moving. I also try and look at 1 year and 5 year ranges to get an idea of how the stock has performed over time.
3. Payout Ratios tell an important story. A low payout ratio below 60 is a good signal that the company can continue to payout it's dividend going forward.
4. Plan on holding the stock. With sales come taxes. Lots of transactions especially for a novice like me increase the likelihood of impulsive behavior and mistakes. Times to sell are if there if you suspect the company is in trouble long term, they cut their dividend, or you believe they are greatly overvalued. But as a general rule if you get in at a good price and the dividend continues to grow it makes sense to hold.
5. Morning Star and Google Finance are valuable tools to get information. I also look at my blogroll frequently as well as Seeking Alpha. I think when looking at Blogs and other articles to not just take the information as gospel. Second guess everything you read and do your own research. Especially if you are reading this blog. Often times when people talk about a recent purchase, they don't mention the negatives. I've seen high respected bloggers and even professional publications talk very positively about a purchase, that turned out terrible. But for a novice like me it helps to understand why people made the investments they did and what information they used. I often look at these decisions as the initial ideas
6. It's okay to follow a stock for a while, don't be in a hurry to pull the trigger. Do your homework and try to get the best value. I read somewhere that the stock market transfer's money from the patient to the impatient.
7. Don't fall for the yield trap. Luckily this mistake was only for a little bit of money. But I totally drank the Frontier Communications Kool Aid. At $5 per share it was cheap. Some experts (I believe Prudential) set Price Targets as high as $9 a share. Jim Cramer wasn't crazy about it, but said it was alright kind of like a bond. I figured wow if I can grab an 8 percent yield with a chance to nearly double in a year, I can make a small investment and boost my short term yield, and am only taking a moderate risk for a potential reward. Well fast forward a few months and the stock is around $2 a share and there is talk the yield is in trouble. In general I try to target stocks with yields between 2.5-4 percent. I will go a little lower in yield if the company is stable, there is room for growth, and they are growing their dividend and the payout ratios are low.
8. Write down your goals. A goal unwritten will never be achieved. It helps to have a mission. Once I started writing down goals the money poured into my Robinhood account. I set certain ground rules. I wouldn't compromise my Roth IRA, daycare, mortgage, savings, or credit. But every other dollar I could spare would go to this. This meant any cost savings I could come up with (switching car insurance, buy cheaper groceries, going out less, extra projects at work, unexpected money from family went straight to the Robinhood account.
How I got here:
I started out 11 years ago as a blind sheep. New teacher taken in by an insurance agent for a 403b plan. I went with the nice salesmen that my entire school was using. I fell for it all. The 3 percent guaranteed interest within the plan. The high fee, average performing funds. The $30 per year fee for my account being under 25k. The ridiculous surrender fee/tax policy that insures my money will be with them until I change jobs or turn 59.5. I used to be bitter, but in retrospect better putting my money here than nowhere.
A couple years ago I made the smart choice to stop funding my 403b and opened a Roth IRA through Betterment. I knew enough to know I wasn't an investor. I didn't have enough money to buy multiple Vanguard Funds on my all. I am still paying advisor fees, but I know I'm not getting ripped off, and I'm far more diversified than I could have been on my own. I also have another joint fund with my wife through Betterment for our house savings. I believe that index funds will always be a significant part of my portfolio. There may come a time when I leave Betterment and balance my index funds myself, but I'm not there yet.
A year and a half ago I discovered Lending Club and began investing there. I didn't want to start an IRA with them, because I believed it was a major commitment to essentially lend strangers money over the internet. I have managed a decent return with them. However, the taxes come through as earnings and not investments. I also don't like that unlike stocks you can't really pullout your money and invest in something else.
So when I learned about the Robinhood App, I stopped investing in Lending Club and have been transferring money from Lending Club to Robinhood once a month as I receive my payments. The Robinhood App has been incredible for me. I remember being 7-8 years old and father watching the stock ticker. He was heavily invested in Merck at the time. It was the 80s and it seemed everyone was making money. I remember him explaining to me about brokerage costs and how you needed at least 25k to invest in individual stocks if you wanted to make money. With a house savings, a 529 plan for my girls, daycare costs for two, and student loans, I am not going to have 25k to invest any time soon. Even though my wife and I have an upper middle class income. But DGI has been a blessing so far. The biggest benefit is that is the only investment, that has caused me to look for more money within my own income. I invest money I would have otherwise spent. Even if Betterment invests my money better than I do myself, I'm better off continuing to DGI. The reason is simple. 11 months ago I found 30-40 per month I could invest. Had I put it in Betterment best case scenario I would have invested $440 to this point. Instead I've invested over $3,500. Which is why I will continue to make both investments going forward.
What I have to learn.
Plenty. There are still plenty of basic financial metrics and terminology that I don't fully understand. I've only held individual stocks in a bull market. I know I put a lot of emphasis on getting good value when I buy. I do believe that is important. But I also know that there are times to buy without getting the greatest value. I also would like to gain a better understanding of when to sell. I would like to learn more about evaluating REITs. I think this summer I'm going to read at least two investing books to just increase my understanding of the markets in general.
I'm excited, a lot to look forward to down the road. I'm on a path to make more money. Daycare and student loans will be coming off the expenses starting in about a year. All of which means more money to invest. I'm also excited to continue to learn and grow as an investor.
Sunday, April 16, 2017
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