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How to Become Financially Independent: The Do It Yourself Approach

I suppose I was born with an active Do It Yourself (DIY) gene. Somehow the urge to innovate and do things for myself has always been a significant motivator for me. Being thus motivated, my habitual approach to things has been to decide if I am up to the task. Do I have the competencies and/or tools required? What would the net cost (time, money) be to accomplish the task in DIY mode? What is the likelihood of a satisfactory result? Is DIY the best alternative for how I will spend my time and money? Is it reasonable for me, given the constraints of the situation, to proceed in DIY mode? I have found that, indeed, it is sometimes more cost effective (both in time and expense) to hire expert help to get the desired result, but … often enough I have observed that in the end I would have been better off doing the thing myself. Experience teaches one the art of weighing the alternatives. Experience has also taught me that DIY confidence, when soberly considered, is a valuable asset.

As a young man, I began with no advantages in training about financial stuff. Upon graduation from high school, since I didn’t have any money anyway, I had no sense of missing anything important. My ‘sophistication level’ with respect to money was as close to zero as it could be. I had hardly any job experience. Managing my finances meant making sure I had enough pocket money for gas and a hamburger. “High finance” to me was a bank account (savings or checking). You can picture the movie Grease (the original one); Maybe I wasn’t quite the punk that Danny (the Travolta character) was in that movie, but aside from the fact that I was a bit more of an academic, I had no edge on him financially. I mention the movie, Grease, because it actually portrays the time and place of my recollection exactly, late 1950’s and Venice High School (from which I actually graduated). For the record, Venice High was used as the setting for the school scenes in the movie. If the movie had actually been made at the time it portrayed, Grandma and I might well have been hired as extras.

During the early years, which included getting married and getting an education, earning a living and starting a family demanded the full attention of me and my little bride. This is a picture of us in those early years:

  • ‘Financial planning’ meant having a budget and living within our means.
  • ‘Financial planning’ primarily meant to focus on qualifying for and on finding a better job.
  • ‘Investing’ meant perhaps buying a house and hoping it could eventually be sold at a profit.
  • There was no one watching over our shoulder and suggesting things we might want to look into with regard to our long-term financial plan.
  • The stock market was largely regarded with ivory-tower awe, and self-directed investment was regarded to be as foolish as, say, performing an appendectomy on yourself.
  • The resources of the internet that we now take for granted were not even a speculation for the future. Heck, I still used a slide rule for engineering calculations (Google ‘slide rule’ if this leaves you confused).
  • There was no such thing as discount brokerages.

OK … I won’t bore you further with the ‘when I was young’ scenario. No, I didn’t need to walk 10 miles, barefoot, in the snow to school every day. I did, however, have a second-class ticket to ride as the world of financial opportunity evolved and I eventually got plugged into the game (even if the experience lacked efficiency).

This brings me to the subject of DIY and investing.

First two confessions:

1.     I confess that I see myself in this discussion as something like a Jr. High coach. I don’t have any illusions of professional competence. I have just accumulated certain amount of what I consider to be useful knowledge/experience that is better shared than closeted.

2.     What I have to share is decidedly biased in favor of the preferred investment style I have grown committed to over time. I will call it ‘value dividend growth investment’ (VDGI) and describe its guidelines as follows:

a.  Dividend and interest income

b.  Dividend growth

c.  Dividend reinvestment

d.  Value focused. Buy only stuff that is ‘on sale’ with respect to fair value (ie., stuff that represents a good margin of safety).

Having cleared up those points, we’ll proceed. One of the things life teaches is that life is nothing, if not a marketplace. Early on it became apparent to me that the financial industry was profit motivated. That is its primary motivator was to make money (not for you, but from you). Making a profit is an extremely useful mechanism of the trade, (if you doubt that, may I suggest this thoughtful article) and exactly why we seek to invest wisely, however one should never write anyone a blind check, and assume that a provider of a service has your best interest in mind. Unfortunately, much of what one could learn years ago about investing was designed to guide you into the fleecing pen and put your money to work … for them (the ‘professionals’). As long as you understand that this has not really changed and approach the game accordingly, I am sure you can do just fine. Let us now work our way through some important topics:

Focus 1: Some foundational points (not original thinking on my part, by the way)

  • It is highly unlikely that you will ever find anyone as committed to your financial well being as you, yourself, are. I consider it poor practice to buy ‘professional’ help to do what you could easily do yourself, with greater attention to detail.
  • You must be prepared to thoughtfully watch over your investments. Whether you invest in DIY mode or employ professional help, in the end your results reflect your commitment to monitoring things.
  • Investing success is not ‘rocket science’. Reasonable mental competence, accompanied by common sense and discipline, serves very well.
  • Practicing proven basics habitually for extended time makes all the difference. ‘Time’ is the key factor here.
  • Not infrequently I have encountered the opinion that portfolio management is more important than stock picking skill in the long run. I keep this in mind as I apply myself to the task of investing.
  • Modest income managed well often trumps privileged income managed poorly.

Focus 2: Defining your investment goal(s)

Focus 3: Pitfalls

  •  Strive to disconnect your investment practices from your emotions. If your holdings are justified by careful business-valuation practice, you should be able to tune out the manic-depressive swings Mr. Market will try to trip you up with. Resolve to be non-reactive to panic (the market takes a plunge), or to buck fever (something looks too good to miss but you haven’t done your homework).

Focus 4: Determining your style

  • As you know by now, I’ve gravitated into the style of “value driven dividend-growth” (VDGI) investing. I’m comfortable with this style because it suits my lifestyle, personality, stage of life and objectives.
  • I’ve grown into the VDGI style after some less than satisfactory experience with other ways of putting my money to work. I have learned along the way.
  • Per the above, I am not hesitant to recommend VDGI as the way to go. It may not be thrilling, but more than a hundred years of market history and the experience of a lot of very insightful/successful investors have established the credibility of the VDGI approach.
  • In the long run, however, part of the fun of the investment game is finding outwhat suits you.

Focus 5: Lifetime learning.

  • Much of what I’ve learned that has persuaded me in favor of the VDGI style has come from sifting through the inevitable mountains of marketing and hype the market spawns. There seems to be a huckster around every corner trying to sell you on his special/secret formula for instant wealth. It’s not long before you learn to be a good judge of what is being served up to you and to internalize the old caution, “if it sounds too good to be true it probably is”.
  • It appears that the really successful investors have mastered the art of learning and change, as they continue to practice and evolve a winning game.
  • Since investing is, by definition, a growth experience, the learning process is as important for planning ahead as it is for deciding what to do in the present.
  • Fortunately, there is a reservoir of useful, credible, knowledge out there, too, that is not hard to find after you develop a good sense of how to look for it. For the most part, this information can be accessed for little or no expense. Mostly it just takes time to learn the stuff. The analogy of drinking from a fire hose comes to mind. You need to develop the skill of ‘sipping the right stuff to keep hydrated’.
  • Repetition is also a key to progress here. Repeated exposure to important concepts is profitable in that it helps internalize the subject matter. One-time exposure to a good idea just doesn’t insure that it will be applied in real life when the time comes. I have noticed that good newsletters make a practice of repeating basic principles frequently. You use the tools and concepts you’re comfortably familiar with.

Focus 6: Resources (books, newsletters, other). A starter set that has worked for me.

  • The Little Book That Beats the Market, by Joel Greenblatt. This small book is simple, entertaining and enlightening. The principles it presents are sound, if not necessarily readily applied in real life for me as a DGIV investor. The principle caveat for a young investor would be the relatively high transaction costs to get Greenblatt’s system started.
  • The Intelligent Investor, by Benjamin Graham. This book is widely cited as a must read for serious investors. However, it is a heavy read. All good stuff, but requires some serious digging. Probably the key takeaways: (1) the concept of margin of safety, (2) the concept of Mr. Market. You’ll need to read it to understand what I’m talking about.
  • F Wall Street: Joe Ponzio’s No-Nonsense Approach to Value Investing For the Rest of Us ,by Frank Ponzio. This book is a reasonably thorough presentation of the concepts of value investing. Not an especially polished presentation but worth internalizing. Key takeaways: (1) the importance of free cash flow, (2) the folly of investing in mutual funds.
  • Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, by Jeremy Siegel. This book is a classic. It presents a compelling case for investing in equities (stocks) that is the result of significant academic and practical research. Key takeaway: buy into excellent companies and hang on for the long run (years).
  • Active Value Investing, by Vitaliy Katsenelson. Very readable presentation of the essentials of value investing. Particular focus on investing in a ‘range-bound’ market (as opposed to bull or bear market). Takeaways: a complete set of ideas for beginning or improving a program of active value investing.
  • The 12% Letter Over the years I have subscribed to a variety of investment newsletters. Most of these have been trial subscriptions or have ended up being ‘short term’. I have found most of them to be useful in some way for helping me gravitate to the investing style that seems to suit me best. However, consideration of the cost vs. benefit has effectively constrained my use of newsletters. An important consideration for me has also been that any one of these letters require significant time to digest and there seems to be a lot of redundant content. I have gradually pared down to one service that works for me, Stansberry and Associates. This service publishes a variety of letters that target a wide variety of investing interests (many of them are out of my price range). Of these the one I have used for several years is ‘The 12% Letter’. One of the benefits of this subscription has been a couple of useful daily bonus blurbs that accompany my Stansberry newsletter subscription. Stansberry does send out a load of solicitation that could consume your every waking hour, but I routinely delete that stuff.
  • Valueline This is an investment letter/service that has been a great resource for investors for decades. I use it routinely. I can access it online through my library (for no more than the cost of my library card). The cost of a private subscription, several hundred dollars per year, would be prohibitive for me but being able to access it through the library is a wonderful deal. Of course I can also always just go to the library if I wish to look through the hard-copy of this publication.
  • I maintain a subscription to this site and find it to be an essential tool for my investment research.
  • This site, nonsubscription, presents online articles from a wide variety of very knowledgeable contributors. In a way, you might think of this site as a forum for peer-group review of the best thinking of these contributors. I probably get as much out of following these articles as I would from a newsletter subscription. After time, I have found that some of these contributors carry more weight with me than others, so I am selective with how I spend my time with them. Many times the reader comments to specific articles are highly knowledgeable and instructive in their own right.
  • Another useful site that serves up a lot of good info free (although a rather pricey subscription alternative is offered as well).

Focus 7: The vocabulary.

  • One of the challenges of the subject of investing is that it uses a vocabulary that sounds good, but it turns out to be not quite standardized. Many times terminology can be used that sounds self evident at first, but upon closer consideration obviously requires more careful thought.
  • The word ‘fair’ might be used as example. In context of investing, a ‘fair’ value for a stock represents a best estimate of value (‘intrinsic value’), as opposed to the cultural concept of fairness (a whole different thing).
  • As is usually the case with any area of specialization, there is an ‘expert speak’ that at first seems obscure to the neophyte, but continued exposure and commitment to learning just naturally begins to sort things out. Don’t let this issue be a ‘put off’. Like we’ve said before ‘it’s not rocket science’.
  • If you are like me, it is likely you may find your self mired, from time to time, in a topic because of inadequately defined terms. Terms that seem to make perfect sense until you start to dig into the details and find that you’re not quite sure of what they are trying to say.
  • I have come to the conclusion that learning to think in investment vocabulary is not much different than learning to think in a new language. A new language that appears to be much like English, but that is somewhat challenging because of cultural differences, subtle differences in synonym definitions, and habitual misusages.
  • Reference aid: Useful, but you can find yourself on a ‘rabbit trail’ as often as not.
  • Reference aid: Useful, but you can find yourself on a ‘rabbit trail’ as often as not.
  • I have found that an internet search on a given term usually resolves my issue. I consider time spent on trying to nail down vocabulary is just paying my dues in the learning process.
  • Fortunately, financial vocabulary presents far fewer ‘land mines’ than cultural vocabulary, but it still takes effort to become fluent (as is effort required to become affluent).

Focus 8: Variety of investment choices. Let’s reserve this subject for another installment.

Focus 9: Portfolio management. A very important subject to be covered in a subsequent post.

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