My simple stock selection rules of thumb

A few years ago, along with index investing using ETFs for my RRSPs, I feel like I saw the light and I became a DRIPper of dividend paying stocks.

My first dividend-payer purchase was Enbridge (ENB) and at the time of purchase, I remember how my stomach churned when I made the transaction.  I bought a bunch of shares @ $37 when all the talking heads said to run from equities during the financial crisis.  That was long before their pipeline breaks and tons of bad press.  Today, Enbridge is chugging along, having since recovered from the Marshall, Michigan mishap and others, now lists around $31 after a 2-for-1 stock split earlier this year that saw me double-up my holdings.

One of my investing lessons was bronzed with this transaction – look to be greedy when others are fearful.  I figure if this mantra is good enough for Warren Buffett and applied by a Millionaire Teacher on his way to wealth creation, this principle is good enough for me.

Since that ENB purchase, I’ve bought more stocks.  Not always at rock bottom prices but when I felt comfortable with the entry point.  I’m no market-timer. I simply think being invested is better than not being invested:  I think the power of time is much more important that timing.  With that, over time, my plan is to diversify my stock portfolio to help mitigate Mr. Market risk.   For now, I own a few banks, telecommunications, energy and real estate investment companies.  I’ve got much more work to do but my journey is well underway. I’ve also expanded my stock selection rules of thumb beyond:

1. I buy companies when other investors are fearful.

I’ve got three more to share with you – my simple stock selection rules of thumb.  Here they are in no particular order:

2. I buy companies within my circle of competence.

Firstly, I’m not that bright.   There is absolutely no Nobel Prize in my future.  I don’t pretend to understand all companies let alone their lines of business.  Secondly, even if I was scholarly I don’t have time to research company after company to find the next Google.  Instead of dwelling on what I can’t do, I try to focus on what I can do.  I buy companies I understand.  I buy companies that my nieces and nephews could relate to:  a can of pop (Coca-Cola), a bottle of shampoo (Johnson & Johnson), a bank (CIBC).  It may sound kinda funny but if these children can relate to these products, I certainly have a chance of understanding them for investment purposes.

3. I buy companies that have an established history of paying dividends.

“Established” is a loose term I know but basically what I mean by that is this – if a company hasn’t proven (through history) they can reward their shareholders in bad times, down markets, then I don’t want to own that company.  Everyone loves a winner; money is always easy when the markets are good yet when things go south that’s what separates (in the NHL as they say) the “men from the boys”.

 4. I buy companies that maintain a large market capitalization.

I typically buy companies with a market capitalization of well over $1 billion.  Why?  These are typically mature companies that require minimal attention.  Many of the companies I own have been making money and growing customers for 100 years.  I’ll take my chances they’ll be around for another 50.  Canadian banks, energy and telecommunications companies may be dull and boring (some investors would say) but I like it that way.  I know what to expect from these guys.  I’d rather get paid by dull and boring than ride the investment rollercoaster.

That’s pretty much it.  In all, four simple stock selection rules of thumb.  I could go into P/E ratios, dividend payout ratios, cash flow, earnings, the ability to create and preserve “economic moats” and other details I research when I buy a company but using these four simple rules is always a good start for me.  I can always (and will) get into the weeds of a business after these simple rules.

I know I’m biased, but why do I think some of these simple rules are good rules?

I’ve often heard your short-term memory is meant to hold only about seven items.  I guess that’s why I can usually remember a new phone number someone just told me but very little else including their name or address if I just heard it for the first time.  With only four little things to remember, I should be successful because I have a very simple plan to execute.  There’s another benefit to my rules:  I’ve got capacity to remember a few other items on my “honey do list” around the house today 😉

What do you think?

Are these rules far too simplistic to help me be successful long-term?

How about you?  Any investing rules of thumb you live by?