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2011 / Opinion Piece
How I Treat My Investing Like A Business
of the biggest mistakes I made when I first started
investing was not treating my investing like a business.
Instead I basically followed the advice of my broker, my
friends, or articles I read in money magazines. I truly
did not have a clue what investing was all about. But as
years passed and I either lost money or made very little
I realized that I had to get serious. I decided to treat
my investing like a business.
how I began to turn the corner on my investing. I learned
that in order to be consistently successful I needed to take
a completely different approach to my investing. The first
thing I did was stopped trading. I didn't sell anything
immediately but I bought nothing more. I did not return
phone calls from my broker. Instead I read a number of books
about various companies and why they were successful;
companies like Wal-mart and Coca Cola. Next I spent 6 months
at a local college taking a course on managing a business. I
learned hundreds of things and over the next year here is
what I implemented.
Running My Business:
There Must Be A Profit
In order for my business to be viable there must be a
profit. That means that I could no longer take losses. It
meant that when my broker told me that everyone was losing
money, it was an excuse - not a reason for being
unprofitable. I realized that while my investing might be
unprofitable, the broker was still being paid.
If my business is not profitable then I cannot afford an
employee. I learned that employees make an income because my
business is growing and they are contributing to my business
growth. That meant my broker was being paid no matter how
much I was losing. I explained to my broker that as my
employee it was important that he be adding to the earnings
of my business. He seemed quite shocked by this and told me
that my attitude was very negative.
I fired my broker. I was just lucky that there was no
severance package required.
found that it was important that I have a salary. I was now
CEO, CFO, and everything in-between. But without a profit I
could not get paid. Everything again came back to profit.
Next I had to decide since I was running a business what
products would I be selling. That's where the stocks and
bonds came in. It is important that I have a profit. This
meant that the stocks and bonds I invested in were the
products of my business. I therefore had to decide what
products was I going to have in my business. As I wanted my
business to be around for a few decades at the very least, I
decided that this eliminated high flying stocks and penny
These type of stocks could make me a lot of money overnight
sometimes, and they could lose everything just as fast. As I
was now running a business I needed products that I could
"sell" long term and rely on for steady income. I began to
look around and found stocks like Johnson and Johnson, Coca
Cola, Royal Bank Of Canada and dozens of others.
A Steady Cash Flow
I learned that a business needs a steady cash flow.
The cash flow is
important because it allows for projection of income. I
learned that business keep a certain amount of cash
available for contingencies and the rest is set aside for
salaries and benefits, bills and then reinvestment back into
the business. I decided to split my capital into cash, bonds
They All Paid A Dividend
Every stock that did not pay a dividend I sold. I didn't
even look at the price. There were some big losses and very
few gains. The stocks I keep all paid a dividend. This meant
that immediately when I invested in my "product (stock)" I
was paid something back - a profit. I never was paid
anything for penny stocks or high flying stocks. Truly it
was such a revelation because with my former employee, he
would recommend something and I would buy it. He never
called and told me when to sell after a nice run up in a
stock. I was just always buying something. I guess his
belief was that someday everything was going to be worth
millions of dollars. Incredibly by my selling out when I did
I missed so many of the companies going bankrupt in the
1970s. More than three quarters of the companies I owned in
the early 1970's were gone by the end of the decade, so
while I had some pretty big losses when I sold out, I still
had some capital, which would not have been the case had I
held on for a few more years.
The Need For Bonds
As my stocks paid
a dividend I could plot out on an annual basis when the
dividend would be paid to my business. I then turned to
bonds. I took 30% of my capital which was $10,000 and spread
it out in 1 to 10 year bonds at $1,000 each. Each bond paid
a different interest rate. This bond ladder was going to be
renewed each year when one would mature and I would then go
out another 10 years. I suddenly had a regular payment back
to my business. Bonds became the staple of my business as I
knew exactly when the interest payment would be paid.
Keeping Up The Inventory Levels
By setting up my bonds to renew each year and
payments spread out through the year I could plan in advance
for when I would have enough income to add to my inventory -
in other words add more stock or bonds. I therefore spent
time looking over various companies and decided in advance
what I would be buying next when there would be enough
capital available to reinvest.
Studying The Inventory
Once I had set up
my consistent income, I then took the time to analyze my
inventory. In a business, inventory can make or break your
business. If I have too much inventory or the wrong
inventory such as the products that no one wants, then my
business will suffer. I needed inventory that could perform.
That meant that I had to look hard at the stocks I was
buying. They had to be paying increasing dividends so that
each year I knew my earnings would increase. For mutual
funds, they had to have very low management fees, which most
did not. I also weeded out those stocks that paid low
dividends, or were not increasing their dividends. I went
from 50 stocks and mutual funds from my former employee's
recommendations down to 12.
The Business Plan - Goals and Objectives
The next important step was setting up a business plan that
had goals and objectives for my business and how I planned
to attain those goals. I created a list. Things like retire
at 60, take the kids to Disney world, have money for new
kids clothing three times a year, pay my bills on time, get
rid of credit card debt, etc. It was then that I realized
that the main goal was to invest 5% of everything I earned
and receive at least 10% a year on all my investments and
compound those returns yearly, as my spreadsheet told me
that over the next 35 years it would mean I could retire by
a) I didn't lose any capital
b) I consistently made 10% annually.
c) I reinvested the earned capital
I remember thinking how in the world was I going to reach
those goals. At this point I had a mortgage on my home, car
loan, student loan, credit card debt and two toddlers to
raise. The goals seemed somewhat out of reach.
Like any business, I needed more input than just my own.
There was no way my business could meet my lofty goals with
the knowledge I alone possessed. In the college course the
professor had discussed consultants. I realized my business
was a bit different but I decided to seek out a consultant.
It was a lot easier than I thought. I found my consultant
through talking to a number of local investing clubs.
The consultant looked over my business plan and told me it
was more than doable. He presented me with his credentials.
He was a former broker who had left his firm and gone into
investing full time using his own capital. He had only
consulted twice before. I was somewhat surprised but he
seemed very sure and told me it would take a couple of years
to learn enough to go it alone. He gave me his consultant
rate, I agreed and the learning began.
The accountant was my next employee. I spent a lot of time
accountants and discussing my needs. We spent quite a bit of
time going over my business plan and he discussed with me
the various tax advantages of things like RRSP (like an IRA
in the US), Margin Account, dividend and bond income, etc.
He showed me how to best handle capital gains and how he
would apply all my capital losses for the next five years.
He then discussed the importance of a lender and how I
should talk to my consultant about margin. He became a very
important part of my business and met with my consultant a
number of times. We all became good friends.
With my business plan in hand I went to 4 different banks.
In Canada there are only a handful of banks to borrow from.
The first bank I went to held my mortgage. They turned me
down flat and offered no advice or support. The second bank
was not much better but the third and fourth were interested
in talking to me. Both told me they were impressed with the
business plan I had developed and told me they had never
seen anything quite like it when it came to investing. Both
offered to pick up my mortgage and restructure it so that
some of the interest would be tax deductible against my
investing "business" earnings. It was the fourth bank though
that offered me prime rate borrowing and offered to set up
the load in such a way that every payment I made to the
mortgage would be increase the amount available for
borrowing for investing. They told me I could pay whatever I
wanted at any time, daily, monthly or whenever. The
accountant and I worked out how I could apply the dividend
payments and the bond interest towards the home mortgage to
wipe it out faster and increase the borrowings for my
At this point the consultant and I, had spent close to a
year working on paper trading. I had learned a lot about
investing and I was ready to begin using actual capital. My
lender was in place, I had a small income from my bonds and
a handful of dividend paying stocks, and two employees; a
consultant to help guide me and an accountant to answer tax
questions and do my taxes.
It was at this point that the consultant and I decided it
was time to get new shareholders into my business. Part of
the reason buy and hold was such a successful strategy was
that while some investors do benefit from it (depending on
what stock they buy), it was fantastic for businesses as
they could raise capital and increase their businesses by
issuing shares that would be picked up in the market place
by eager investors who quickly parted with their money
hoping that those shares would grow in value as the
underlying business grew. Since so many investors were sold
on the "buy and hold" strategy, this meant that companies
that issued stock had underlying support of their stock from
all those buy and hold investors. Many held on despite bear
markets, oil crisis, wild inflation, more bear markets,
credit crisis and natural disasters. Basically "buy and
hold" is very good for companies and the stock markets.
With my little business though, I couldn't issue shares but
I definitely needed other investor's money to help me own
more shares in some great companies. To do this I had to get
"shareholders" interested in parting with their money. To
accomplish this I had to give something in return. That's
where naked puts and covered calls came into play. In simple
terms, by my selling naked puts I was telling investors that
if they gave me their money I would be willing to buy shares
of companies from them at predetermined prices.
The same strategy for the stocks I held. My consultant had
shown me that while I could get the dividend payments by
holding on to the shares, he explained how other investors
would be willing to pay me for the right to take my shares
at a predetermined price and time, should I be willing to do
this. He had explained how with covered calls, it would
force me to sell my shares, capture the gain and then
reassess the stock position and determine its viability for
another repeat performance.
Every chart he held up showed how companies go up and down
in value. Some took months and others took years, but I had
been surprised at how many stocks really didn't appreciate
by much over the long haul. By selling out repeatedly and by
timing the selling to be a couple of months after dividends
payouts, I could guarantee myself some additional income and
the dividend which could be put back into my "business".
The naked put was even better. He showed me how investors
would give me their money in return for a guarantee that if
the stock fell to a predetermined value I would be willing
to buy the shares. Basically they were helping me own
shares. He then explained that nothing was written in stone,
that I could buy back any position, roll any position or
accept the position the way it was. All the while though
other people would be giving me their capital in exchange
for a "possibility" of assignment.
I suddenly had shareholders who were investing in my little
business, every month of the year. With their help my
business grew a lot faster as they provided a ready source
of capital that assisted me in paying for the stocks I
wanted to own.
The Ongoing Business Of Learning
Like any business I can only stay ahead of the "competition"
by educating myself. This means I have to read annual
reports, look at the fundamentals of the business and make
sure I have the right inventory on my shelves. If I find a
stock that is not performing and no longer meets my
criteria, I have to shop and find other products to replace
them with. I also like to keep a few products on my waiting
list and watch them and paper trade them to see if they
could be a good replacement or addition to my inventory of
stocks. To this end I attend conferences, trade shows and
read a lot of materials. The internet has made a big
difference in the amount of material available.
My Business 3 Decades Later
Today more than 35 years later my business has grown
considerably. I pay myself a nice little salary, and I don't
really need to retire. My consultant retired a long time ago
and we shared a lot of strategies over the years. My
accountant retired too, but I use his son who still believes
in my business. My bank is not needed any more but they have
helped out both my children.
Today I have a lot more shareholders than in the past. They
still seem quite happy to invest in my little business and I
am pleased they have come along to help me build my