Emotionless Investing: Creating Your Own Investment Rules

The biggest challenge for long-term investors is to control their emotions from making an unsound investment decision. Along the way, there would be a lot of temptations to sell the stock either too early due to fear, or too late to sell when a stock's valuation is clearly overextended. I would argue that the best solution to this is to create your own simple to follow investing rules. By developing your own investing rules, you can basically throw emotions out the window and solely focus on dividend-growth investing.

Here is to give you an example, these are simple rules that I have created and been following ever since.

STEP 1:
Sell 25% of my position in a stock when I have gained +30% (dividend accounted) in less than 2 years. The reason why I choose +30%, not less, is because this will restrict myself to only look for stocks that I will be holding for a long period of time and prevent a high turnover rate in my portfolio.

STEP 2:
a) If I feel confident in the stock that I sold still has good long-term growth prospects, I should be looking to buy it back at 10~15% cheaper.
b) If that stock continues to go higher without giving me any opportunity to buy back at a lower price, continue trimming down the stock position. Sell another 25% of the position if it goes up another +33.3% in less than 2 years, repeat and rinse, this is accounting for the dividends as well. Meanwhile, use the proceed to buy other companies that have more reasonable valuations, or buy fixed income assets in waiting for another economic crisis to occur.

Note to self, there is no real urgency to chase winning stocks, there must be plenty of "cheap" stocks out there. As well, the economy is a cycle of boom and bust. There will always be a better time to buy stocks during the next economic crisis. Following these rules will not only help to take the emotion out of investing and help you sleep better at night, but is also a great tool for capital preservation.

Stock Screening Process: The 'Top-Down' Approach

Using the latest FT Global 500 rankings, I will demonstrate the screening process that I normally use to reduce the number of companies from 500 companies to 100 companies.

Step 1: First off, figure out different sectors that you believe will perform poorly in the next 3 to 5 years. In current economic times, I am bearish on the following industries:
i) Financials (these incl. Banks, financial & investment services, insurance providers, real estate investment & services)
ii) Retailers
iii) Media
iv) Tobacco
v) Gold miners
vi) Chemicals (I also eliminated this sector only because I do not have sufficient knowledge of the sector)
Step 2: Further exclude those companies that have a big chunk of their operations or customer base in countries that you are bearish of. Be careful, some companies may be based in a country, BUT that doesn't always mean that most of their businesses are also from the same country. Meanwhile, I am bearish on the following countries:
i) Japan - I believe that Japanese companies are becoming less and less competitive, and most of them also suffer from inconsistent earning numbers.
ii) USA - Many of the American companies have very well diversified business portfolio around the globe. Most of the companies that rely too heavily on domestic economy, however, are the oil & gas, utility, telecom, and homeland defense stocks.
Step 3: Reorganize these companies to be more useful by categorizing them into general categories. I like to reorganize them into 7 categories.
1)  Financials (incl. Banks, financial & investment services, insurance, real estate investment & services)
2) Consumers (3 types):
i) Non-cyclical products - beverages, food & drug retailers, food producers, general retailers, household goods & home construction, tobacco
ii) Luxury goods and services - automobiles & parts, leisure personal goods, travel & leisure
iii) Entertainment - media
3) Health care (incl. health care equipment & services, pharmaceuticals & biotechnology)
4) Industrials (4 types): i) Aerospace & homeland defense, ii) Industrial transportation, iii) General industrial and engineering, iv) Chemicals
5) Utilities (2 types): i) Electricity, gas, water & multiutilities, ii) Telecommunications
6) Energy (2 types): i) Metals & mining, ii) Oil & gas
7) Technology (incl. electronic & electrical equipment, software & computer services, support services, technology hardware & equipment)
Step 4: Only select companies that are consistently able to: i) raising their dividends over the past 5-10 years, and/or ii) increasing their revenues year-over-year

RESULTS
A) Consumer - Non-cyclical Products
1. Nestle (Switzerland)
2. Procter & Gamble (US)
3. Coca-Cola (US)
4. Anheuser-Busch InBev (Belgium)
5. PepsiCo (US)
6. McDonald's (US)
7. Unilever (Netherlands)
8. Kraft Foods (US)
9. SabMiller (UK)
10. Diageo (UK)
11. Nike (US)
12. Colgate-Palmolive (US)
13. Danone (France)
14. Monsanto (US)
15. Reckitt Benckiser (UK)
16. Yum! Brands (US)
17. Kweichow Moutai (China)
18. Kimberly-Clark (US)
19. General Mills (US)
20. Archer Daniels Midland (US)
21. Kellogg (US)
B) Consumer - Luxury Goods & Services
1. LVMH (France)
2. Volkswagen (Germany)
3. L'Oreal (France)
4. BMW (Germany)
5. Hyundai Motor (South Korea)
6. Starbucks (US)
7. Astra International (Indonesia)
8. Christian Dior (France)
9. Coach (US)
10. Johnson Controls (US)
11. MTR (Hong Kong)
12. Compass Group (UK)
C) Energy - Metals & Mining
1. BHP Billiton (Australia/UK)
2. China Shenhua Energy (China)
3. Freeport-McMoran Copper & Gold (US)
D) Energy - Oil & Gas
1. PetroChina (China)
2. Royal Dutch Shell (UK)
3. CNOOC (China)
4. Statoil (Norway)
5. BG Group (UK)
6. Suncor Energy (Canada)
7. Imperial Oil (Canada)
8. Canadian Natural Resources (Canada)
9. Enbridge (Canada)
10. Transcanada (Canada)
11. Cenovus Energy (Canada)
12. Tullow Oil (UK)
E) Healthcare
1. Johnson & Johnson (US)
2. Novartis (Switzerland)
3. GlaxoSmithKline (UK)
4. Sanofi (France)
5. Abbott Laboratories (US)
6. Novo Nordisk (Denmark)
7. Bristol Myers Squibb (US)
8. AstraZeneca (UK)
9. Eli Lily (US)
10. Teya Pharmaceuticals (Israel)
11. Medtronic (US)
12. Baxter International (US)
13. Stryker (France)
14. Essilor International (France)
15. Shire (UK)
F) Industrials - Aerospace & Homeland Defense
1. United Technologies (US)
2. Boeing (US)
3. EADS (France)
4. Lockheed Martin (US)
5. Rolls-Royce (UK)
G) Industrials - General Industrial & Engineering
1. Caterpillar (US)
2. 3M (US)
3. ABB (Switzerland)
4. Honeywell International (US)
5. Danaher (US)
6. Emerson Electric (US)
7. Deere (US)
H) Industrials - Transportation
1. United Parcel Service (US)
2. Union Pacific (US)
3. Canadian National Raiway (Canada)
4. Fedex (US)
5. Norfolk Southern (US)
6. CSX (US)
I) Technology
1. Microsoft (US)
2. IBM (US)
3. Intel (US)
4. Qualcomm (US)
5. Hewlett-Packard (US)
6. Texas Instruments (US)
7. Infosys Technologies (India)
8. Corning (US)
J) Utilities - Electricity, Gas, Water & Multiutilities
1. National Grid (UK)
2. Centrica (UK)
3. CLP Holdings (Hong Kong)
4. Hong Kong and China Gas (Hong Kong)
K) Utilities - Telecommunications
1. China Mobile (Hong Kong)
2. Vodafone Group (UK)
3. Telefonica (Spain)
4. Telstra (Australia)
5. BCE (Canada)
6. Rogers Communications (Canada)
7. Telus (Canada)

(Disclosure: I am long China Mobile, HSBC, and PepsiCo)

The 3 Steps of Becoming Wealthy

STEP 1: Earn as much money as you possibly can, and save more!

This might sound like common sense, but the key to get richer is you really have to spend less than what you earn. So, do your best to find a well-paying job and work hard to earn as much money possible. You have to also learn to live frugally in order to be able to save the most out of your earnings.

STEP 2: Invest your savings into either stocks or bonds to make it grow

While the amount of money you have is still fairly small, the only viable investment options would be to invest in either stocks or bonds. These investments don't require a lot of money to start. Doing your due diligence in finding the right companies to invest in will provide the most optimal return on your investments.

STEP 3: Use leverage to speed up the growth of your wealth  

Once you have accumulated enough money, you shall move on to the next level, which is using leverage to magnify the growth of your money. I do not mean using leverage to buy stocks, you're basically gambling if you decide to do so. The type of investment opportunities that I recommend include purchasing residential and/or commercial properties, buying franchise businesses, etc. Your timing, type of investments, cost of borrowing, and luck are all extremely crucial. Lastly, the use of leverage should be done with great caution and careful analysis as there are certainly significant amount of risks involved.

7 Dividend-Growth Stocks Checklist

These are the 7 criteria that I have always been using to decide whether a stock is a good buy or not.


1. The company has a competitive advantage over its competitors
a. The company is the leader in the industry
b. The company has a brand monopoly
c. The company's market capitalization > 25B
d. The Net Profit Margin is higher than the industry's average

2. The stock pays sustainable growing dividends
a. Dividend yield > 2.5% or average dividend growth > 10%
b. The stock has always been consistently increasing its dividends every year in the past 10 years
c. Dividend payout ratio < 65% in the past 10 years

3. The business is extremely profitable
a. ROE > 12% and ROA > 7% (ROA doesn't apply for bank stocks)
b. 10-year revenue growth rate > 7%
c. 10-year net income/EPS growth rate > 7%
d. Net margin % > 20%

4. The company's management team has a clear strategy for future growth drivers

5. The company is financially healthy
a. Current ratio > 1
b. Debt/equity < 1 (doesn't apply for bank stocks)

6. The company has low capital expenditures (Free Cash Flow > 5% Sales Revenue)

7. The stock is currently undervalued
a. FP/E < 15
b. The stock has dropped at least 20% from the 52-week high (if this is caused by a bad news, it shouldn't affect the company's long-term profitability)
c. The stock should at least be trading at least 10% lower from Standard & Poor's 1-year price target
d. The stock should at least be trading at 'fair value' according the Standard & Poor's