A little help from my friends

If you're my age or older, you should know the lyrics;

I get by with a little help from my friends,
I get high with a little help from my friends,
Gonna try with a little help from my friends...

I like reading the dividends and income section of Seeking Alpha. I've been reading it for some years now. I haven't written much, but I comment enough; several hundred comments, in fact.
Mostly I try to add some insight, ask a question or lend my perspective on a topic.

Like others, I scan the comments for folks whose opinions I trust. I have a top-20. Some of them have paid-services that they offer elsewhere. I don't mind that; one can choose to sample the paid stuff or not.

I've been thinking about who I like, what I have learned from them, how I have borrowed concepts and fit them into my personal investing philosophy;

Lets see if I can create a list of some of those;

1) Capital gains don't compound.

That was a comment to an article a ways back.  I like that concept. In order to benefit from compounding, you need to get paid, then reinvest.  Some folks say that retained earnings compound internally. That's true sometimes. Sometimes retained earnings are used to buy new businesses that aren't as profitable as the original business. Sometimes they are used to buy back stock at a sizable premium to intrinsic value. Sometimes those repurchased stocks are re-issued to the corporate management as incentive pay. I'd prefer to collect the cash and choose how I wish to reinvest.

2) Never Sell;  that's just one guy's opinion, but I like the concept. What it demands is that you pay particular attention to the decision of what and when to buy. If you want to "rebalance", you need to do so by adding new money. You can add new money from your wages or you can collect dividends and selectively reinvest. 

3) Let your fast horses run. That's paraphrasing a rule from another guy I respect; don't sell your winners. He throws out the re-balancing idea, although he may be quietly buying more of his slower horses...

4) Reinvest.  Again, capital gains don't compound. If you collect 3% in dividends and reinvest them, next year's dividends will be 3% higher, even if the company does NOTHING to raise the dividend per share. I mostly buy companies that raise their dividends, so it's usually more than that. The share count goes up by a percentage, the dividend goes up by a percentage, the dividend per share goes up by a percentage and the cumulative effect is significant rates of compounding in the position; both value and cash flow.

5) Valuation Matters.  Where it matters is at the point of purchase. Buying high may not have a huge effect over a long holding period if the trajectory is steadily up, but there is never a time that it's mandatory to buy a given stock. There are almost always individual bargains to be had.  If you combine valuation discipline at the point of purchase, a forever holding period and reinvestment, you have a cash producing engine that gains momentum steadily over time. You set it in motion and years later it will support you in your old age!

6) Monitor.  How can you spot a company that is experiencing fundamental deterioration in it's business model, execution or some other fatal flaw;  It starts with declining rate of earnings growth. It may be signaled by rising debt. The dividend payout ratio may be climbing.  If the dividend growth rate is declining, one should start paying more attention. Some authors call it "the bench".

7)  Have a plan. Write it down. Stick to it. That came from a retired law inforcement officer; He migrated to self management of individual equities a short couple of years ago. He has incredible discipline, way more than I do.  But, as a result of his work, I do have a plan in my head, and I check my holdings pretty frequently against some of the parameters outlined by him and others.

Now, a few of my own contributions to the mix;

8) Take advantage of the DRIP.  I'm making a portfolio bet rather than an individual stock bet. I want every position to compound. I don't know which one is going to race forward the most in the next interval, so I don't spend that much time trying to choose between them. I reserve the most effort in establishing my watch list, figuring out buy points, allocating new money when it arrives, learning to know the details of the companies I already own and what they are doing to grow their businesses.

9) Shovel as much money at the retirement plan as possible. First, that requires financial discipline. It means maximizing contributions to the company qualified plan. It means hit a savings target of total income; I use 20% of gross. I wish I had chosen a higher number before I let other obligations take a higher priority.

10) Insure against all the big risks;  that means life, disability, house and property, casualty. Buy the disability riders so the protection stays in place if the income goes away.

11) Refocus on growth in cash flow (That means dividends and distributions). I work hard to keep that in focus, since it's easiest to see account balances and they go up and down all the time. It takes a bit more effort to see the increase in cash flow into the portfolio, but it almost always takes away the desire to sell a position whose stock price may be languishing a bit.

12)  Eliminate debt.  Damn, that's hard. Debt is poison when times get hard. Leverage can take you to insolvency if you don't keep it under control. Best to eliminate it altogether if possible.

13) Invest in stuff that people need in good times and bad.  That means utilities, energy, consumer staples, real estate.  That doesn't mean I don't own other sectors; it means I have a definite defensive bent to the mix however. In those sectors that don't represent the necessities of life, I still demand that my companies pay me now (that means distributions/dividends).  I have the foundation pretty much built, but I keep scanning for additional holdings within those defensive sectors that might improve the quality or insulate against the risk of an individual company melt-down.

14) Diversify. The magic number is 50. I can track 50 holdings, more or less. That means a complete meltdown only costs me 2%. I have seen only seen a couple of 100% meltdowns in the 20 years I have been investing.

15) No earnings, no dividends, no investment.  One exception; WB, the Oracle himself. BRK has tons of earnings, but all dividends go to the chairman and he decides how to spend them.

16) Keep the Peter Lynch rule in mind. It's also one of WB's rules.  

17) I need to fold this one into the plan;  credit quality;  I need to start looking at the credit rating of my companies and trying to improve the credit quality of the portfolio. 

There may be a few more; I'll think about it, but that's a decent summation of the result of a few thousand hours of reading, study, thinking, learning about being the manager of my own retirement portfolio.