A popular strategy to build an investment portfolio is to pick stocks or shares in individual companies and hope they grow big.

For me, I like to pick stocks that form part of the satellite component of my investment portfolio. This being the 20% or less of investments that don’t make up the ‘core’ or more passive investments that are boring and predictable.

These satellite picks are best describes as speculative buy into companies that could make me some money (could). I treat it as more of a serious hobby instead and even though its not something I do often, I’ve read a number of articles from prominent figures on how to select and own shares in a company.

Below I’ve summarised what the likes of Warren Buffett, James Altucher, The Motley Fool and Phil Town all suggest are good parameters to have in mind when investing in stocks. After the summary I’ve gone further into each of these individuals thoughts as to how they specifically invest.

There are four rules when it comes to picking stocks

I found some similarities in the mantras shared from many of these successful investors and worked a way to package them into four types of rules.

• Invest in companies or funds you know of and understand. These are companies that will be around in 20 years, have a good moat from its competitors and decent management. All of these factors are subjective, but ideally you’d be more comfortable than not of the stock you are buying into.
• Invest in trends and solutions that solve problems for billions. Areas like healthcare, AI, batteries, temp staffing, energy, internet are all in demand and should be valuable to mass population for the long term. It’s much easier to justify investments in areas you see obvious value in.
• Think of the investment as if you were buying the business. Focus on the value, buy into it at below sticker price then stockpile it. When you do own act like the owner — and keep knowledgeable on it.
• Invest with the intention of holding — time horizon is decades. This is a very much a sit and hold type of investment which is a minimum of 5 years. You should sell only due to better opportunities, changes, max valuation, moat breaks — aiming for at least a 20%+ profit gain.

I found four prominent rules to picking stocks, listed above. These are simple but effective suggestions to get going and immediately determine which stocks suit you.

What I found interesting was what I didn’t see or read from these pros. Advice such as:

• Diversify as much as your can
• Buy in a certain country/sector/currency
• Pay attention to the media
• Trade often
• Buy property

Let’s have a look at where I got the above advice from and the investors who can detail it in length, all based off years of experience.

Warren Buffett

Everybody in investing likes to reference Warren to sound more credible and I’m no exception.

• A company will be around 20 years from now.
• At some point, company’s management has demonstrated in some way that they are honest, good people.
• The company’s stock has crashed for some reason (think American Express in early 60s, which he loaded up on. Or Washington Post in the early 70s. Or Coca-Cola in the early 80s).
• The company’s name is a strong brand: American Express, Coke, Disney, etc.
• Buy and hold (the patient investor will ultimately be rewarded if they hold on to their stocks )

James Altucher

A more alternative opinion on long term investing — James has a cheat sheet that he’s made available which is to the point and derived from his own unique experiences.

Some of his advice does contradict with other investors, but is valid to his situations.

• Hold no more than 3% in one stock
• Only hold 30% of your portfolio in stocks
• Invest in trends such as the internet baby boomers retiring — healthcare, senior homes,energy, temp staffing, batteries

The Motley Fool

A service that provides stock picks, model portfolios and tools for the active investor, suggests that we:

• Buy stock in solid businesses. We expect to be rewarded over time through share price appreciation, dividends, or share repurchases.
• Don’t time the market. Certainly don’t speculate when you buy stocks. Speculation is what day traders do.
• Focus on the value of the businesses we invest in. We try not to fixate on the day-to-day movements in stock prices.
• Buy to hold. We buy stocks with the intention of holding them for long haul. (That said, we are willing to sell for reasons we’ll share with you in a few days.)

As part of the Motley Fool’s product suite, Tom Gardner has an Everlasting Portfolio (EP) that he builds based on certain rules:

• All EP stocks must be held for a minimum five years from the time they first enter the EP.
• If a stock has been purchased multiple times for the portfolio, each batch of shares must independently be held for at least five years before that batch can be sold.
• Once a stock has been held for five years, it can be sold on the same quarterly transaction schedule on which buys are made.
• When a stock is sold, the resulting cash will be immediately reinvested on that same quarterly transaction day.

Phil Town

Phil suggests 8 simple steps to create genuine wealth. These steps are based of the best investors and the most wealthiest people in the world have gone through these steps. It really is a great guide to simplifying the process.

• Think of stocks as if you are investing in businesses (treat as if you bought the entire thing)
• Focus on industries that we have some kind of understanding (need to be capable of knowing it)
• Understand the 4 Ms

1. Meaning of the business — know it
2. Moat — barriers for entry
3. Management
4. Margin of safety

• Watch a stock until its under the margin of safety price — be patient like a sloth
• Start acting like the owner of the business
• Start stockpiling it as it gets or stays cheap
• Pay attention to big 5 numbers

1. earnings growth
2. sales growth
3. book value growth
4. cash flow growth
5. ROI capital

• If moat breaks, sell or when the price gets too high (on greed) — 20% or more on sticker price
• Repeat

So should I use this advice and start picking stocks?

Picking stocks is what professionals do. I would say it’s something only keen investing hobbyists do as well. A hobby is not a business and generally won’t provide you a return on what you spend. Go into stock speculation with that mindset and you won’t be disappointed.

If you are a beginner investor, there are so many better options available for you. There index funds, LICs, ETFs and investment app options available that are all setup to provide options for you based on your appetite for risk and effort.

For me, I like the idea of winning big on a stock — but it really is a lottery. You don’t have the faintest idea of what could happen. History is a decent guide, but I’m only willing to bet with what I’m prepared to lose. With everything else I have my core portfolio that focuses on long term growth.

Are you a stock picker? Do you constantly look at the markets or think of possible trades you could make?

Originally published at dadinvestor.com.au on October 18, 2018.

What I've learnt about picking stocks was originally published in Dad Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.

I can’t remember the last time I worried about money.

We are fortunate to be in a position where we don’t have to ever be. People say we are lucky but I tend to disagree.

We have built a great life full of intentional decisions. It wasn’t always that way but a focus on the things that work has got us growing towards where we want to be.

People have occasionally asked us how do we manage to cover costs so easily (or at least it looks that way to them). First and foremost we are consciously aware of where we stand at all times (income and expenses).

I’ve thought over what’s put us in a stronger financial position over the years. I realised there are a few deliberate decisions we make that some families might gloss over. I’ll share them here:

We rent by choice

I love renting. It’s all inclusive. There is one fixed cost per week and that is the most you ever pay.

We’ve done the math and for our current situation and lifestyle needs, it’s the best option. We feel no pressure to change that.Yes we could buy a house if we wanted to but don’t want to take on all the risk of insurance, maintenance, rates and bank interest that comes with it. Renting gives us the flexibility to live where we want in the manner we want.

We only have the one car

Because of the location of our house and proximity to amenities and work, walking is option number one. For longer distances its a car (or even uber/taxi). We don’t value owning cars plural and live a life not reliant on them.

We treat our finances like a business

Every month our aim is to make a profit. I make sure our expenses are below our income so that there is a buffer. WE use that buffer to invest long term with an emergency fund covering the leaner months. Our family runs at a 19% profit margin currently (with one income and two kids). That is — we have 19% of our revenue (income) left over after cost (expenses).

We know what our spending focus is

Freedom and relationships over luxury and convenience

We spend on quality for the things we love and cut back hard on the things we don’t appreciate

This summer we bought a $200 picnic rug. Yes its more expensive than most, but we use it everyday, has an awesome pattern and the kids love using it. It brings us happiness.

On the flip side, my wife uses a three year old iPhone on a $25 a month plan. It does the job, but paying more for that combination doesn’t excite us.

We don’t pay bank fees

Here in Australia, ING don’t charge reimburse you the ATM fees from ANY of the machines you might use.

Our one credit card is $0 a year as long as we pay it off each month.

Our one home loan is free (although we do obviously pay interest on the loan) for the investment property we have.

We save for things before we need them

Every expense that we need to cover over the course of a year is broken into small monthly costs. Rent, insurance, Spotify, PO Box, Petrol etc. This avoids the need to use credit or debt.

We have six months worth of living expenses saved ready to go just in case as well.

We invest for the long term

The money we save by renting goes into shares and funds that set us up over time, providing income and growth.

We experiment with money

Each month we throw $100 on something new just to see if we’d like it or not.

It might be a new exercise program, cooking class, subscription box, essential oils or something a friend is doing that we may or may not like.

The key is that it’s an experiment. If we like it, it becomes a more regular part of our life. If not, at least we now know.

We set caps and stick to them

Each week we have an allowance for groceries and impulse buys (like coffees, drinks, eating out). We don’t let costs for these minor things get out of hand.

We realise we are different

We do things our way, you do things yours. Just because a friend bought a new car doesn’t mean we suddenly need one. We can survive not going to Europe this year.

We keep things simple

We avoid debt (apart from a positively geared house we used to live in)

We don’t bother with rewards programs.

We don’t need discounts for our utilities, just good rates

We live, work and shop local.

We holiday with the family.

We stay modest.

Do you feel that you are getting ahead and have control of your finances? What’s holding you back? Mindset?

Originally published at dadinvestor.com.au on February 6, 2019.

What our family does to ‘get ahead’ was originally published in Dad Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.

What gives me confidence when I think about expenses or pulling out my wallet to buy something?

1. Consciously preparing for that expense ahead of time.
2. Knowing why and for what reason I spend money on a certain good or service.

This isn’t just being conscious of the stuff you need to spend money on, but the cool and exciting things that make us happier when we spend the cash on it.

Once you start collecting information on your spending habits you can determine if they are priorities that should be called a regular expenses list or something you can cut right back on.

So how do we do this? Here are three steps to completely owning your spending needs and habits while aligning them with your lifestyle priorities.

1. Plan out your expenses (including all the fun stuff)

Most budgets I see or hear about only include things that you HAVE to pay for — like rent, mortgage, utilities etc.

Rarely do I ever talk to people that have a list of things they WANT to spend money of included in their budget — like concerts, nights out or gifts. It could be that most of these WANTs are impulsive buys. But if we spend money enough on these impulsive things regularly they can become something we can budget for so as to not feel like we are spending above and beyond our means.

The theme here is to consciously map what your spend your money on. Start to understand what you spend each month — list it out in two columns, the HAVE tos and and WANT tos.

Don’t worry about the exact cost of each. If you can have a guess then write it as it’ll help measure the cost against each other.

Already we now have a good understanding of what we need to spend money on and the fun stuff that chews up the rest of our cash.

2. Understand your spending priorities

A typical personal finance blog or article might suggest that these expenses now need to be cut down as much as possible — get those numbers down to as low as they can for everything on the list.

This is ok advice, to an extent. There’s no need to pay more for things if you can get it at a cheaper rate, like insurance or utilities. But not everything is comparable by cost alone.

Especially when it comes to your more impulsive expenses, things you have the option of spending on each month.

Why would you want to cut down on things that bring you happiness and excitement? It might be your preference to spend more as you know you will get a massive gain in return.

Match your expenses with your lifestyle

Factors like convenience, luxury, family or health might be a higher priority to you and determine why you spend the money the way you do. For example:

• You like the grocery store that is more expensive as its walking distance and has better products.
• You might like go to the more expensive gym as your workouts their put you in better health

It’s fine to value these more than the cost it incurs. I know I do for things. To our family, we enjoy coffee and visiting cafes on the weekend. It might not be something everyone does and is an expense we can avoid but it is something we love doing so have no interest to eliminate it.

Not all your expenses need to be the cheapest. In you columns of HAVE tos, list out why you pay the rate you do. For the WANT tos, have a think about how you would categorise each of the items based off your reason for puchasing. Is it by cost, convenience, luxury, health or another priority?

Some costs may be unavoidable (like rates or car registration) but there is still a reason why you pay them at the rate your do (you might pay a higher rent for a better location or faster internet for convenience).

3. Cut mercilessly on things you don’t value

So now you have a list of HAVE tos and WANT tos that you spend money on every month. You have assigned them a category and can now determine what (especially for those in the WANT tos) is your real priorities.

The aim here is to cut back on the categories you don’t value as much. Have a look at the categories you’ve written and determine what is most important to you. Is it convenience, travel, luxury or generosity for example? What categories do you see that can be highlighted for you to get a better price on.

For instance, you may spend $150 a month on lunches which might be a convenience cost, health cost or experience cost. If it’s a convenience costs (you don’t have to make it yourself) and convenience is a priority to you, then $150 is fine as you know the value in the purchase. If you are spending the money without valuing the convenience (or any other reason) then consider reducing the amount you spend and replace with another habit or process, like making lunches a week in advance.

It’s important to focus on the big wins here.The things that save you a lot with little effort (not the other way around).

• Don’t value spending money on bank interest? Get a better mortgage rate
• Insurance costs pretty high? Review and compare your policies
• Haven’t read a newspaper for 5 years? Cancel the subscription

Highlight a few areas of spending that you do not value. Our families priorities are freedom, relationships and education so we are finding ways to cut down in areas like luxury and convenience so we can continue to spend on the things we are prioritising.

Go ahead and start cutting down on the real things that you don’t see value in so you can align your spending with your lifestyle priorities.

Your spending plan is an evolving one

You should now have a list of what you spend your money on, how each of these costs aligns with your lifestyle and what you like focus on and remove focus on going forward.

It’s not meant to be a budget as it maps out what you spend money on rather than how much. It’s meant to compliment your budget by reviewing your costs rather than collating them.

Thiscan become a great plan and method to gain complete control of your spending routines. Continue to evolve it, know it and when you are spending you’ll begin to see focus on how the expense fits in with you life.

A couple more considerations…

Your spending decisions are your own as are others

It took me a while my adult life to adapt to this thought process, which is don’t let anyone else make you feel guilty about spending money on things you enjoy. If you have made the decision to consciously spend money on something, it is your decision to own. If you like shoes, then it’s no ones business scoffing at the expense. They don’t get it, because they don’t prioritise their lifestyle the way they do.

On the flip side — It’s easy to get to judge others based on their spending habits. Avoid this. Its their money. Just because they spend $250 on concert tickets doesn’t make it a waste of money.

I used to get shocked at how much people would spend on cars, as it’s something I never really valued living in a walkable suburb. I try to switch off that angle when listening to others now though as I shouldn’t have any reason to assess why they spend the way they do based off one decision.

Don’t begrudge people for their passions.

Avoid lifestyle creep

It’s worth taking stock of all your expenses and going through this process often. Say, once a major milestone occurs like new job or family change.

I say milestone over time as lifestyle can suddenly catch up on us. If we don’t consciously understand what we spend money on, we suddenly find ourselves spending on things we enjoy.

This is most common when you start earning more. Because you are making 10, 20,30% more money now you are saving more and also spending more simply because you can.

Just because your income increases doesn’t mean your spending needs to. The shiny new phones, cars, travel, homewares catch our eye and we consider them of more importance now that they are more affordable with a higher income. It’s not to say we can’t spend money on these things, and if you value you thendo. It’s more that we can get lost in that affordability can mean possibility. Because I can afford that car now I should get it, or that house, or that bigger investment.

There is nothing wrong with modesty.

What do you think of these concepts?
Do you currently have spending plan like above?
Would it be helpful to start mapping out all your costs even the non-essential ones?

Originally published at dadinvestor.com.au on December 12, 2018.

How I spend money without fear was originally published in Dad Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.

Expected because I now go into any Tom Cruise movie knowing that there is a more than likely chance the movie will be very good. He’s got his rhythm, knows his methods, works to his abilities and after 30 years can consistently deliver even better than before (number 6 is the best of the series so far in my view).

The quality of this movie got me thinking about his career to date. It wasn’t a fluke this movie was good. It isn’t a fluke that there are barely any other actors around performing at the level he is for this long. He’s been successful for a number of reasons and in thinking about them I started to see similarities in how his techniques can be used support a good investment strategy.

So what can we learn from T Cruise? Let’s list them out.

Disclaimer: This isn’t a promo to go see the movie, or any of Tom Cruises other films. I’m purely an unintentional advocate of his work.

When starting out, you’ll gain valuable experiences that help you long term

In his first 10 years of acting, Tom (as many actors do) didn’t have much predictability the roles he picked up. He started in comedy/dramas, some lower budget, buddy and coming of age stories (Risky Business, Top Gun, Cocktail) . He then moved to serious dramas working alongside already established actors (Rain Man, Born on the Fourth of July, A Few Good Men) and started to pick what he thought might suit his career.

Looking back now, it seems strange to think of some of these roles that Cruise pursued — considering the type of roles he is known for now in high octane action and franchise based movies.

It’s because of trials and efforts in the early days that led Tom to his journey 10–20 years later. He started to understand what was working for him and what wasn’t. He gave it a go and over time slowly tuned his focus to the things that work for him best.

This is why he’s lasted, he’s used his experience to narrow his focus. He can now repeat the patterns that’s given him the most fun and success.

Investment Lesson

Trial and error can be applied to investing. In the early days you might think every kind of investment is a winner — like property, shares, crypto, a mate’s business or currencies. It’s not until you experience the ups and downs of these options that you will you understand what works for you personally, and what might be best in the long run.

You’ll slowly get to a place where you can start finding achievable methods for your success. There is a lot of advice and suggestions out there but if you get started now you’ll be able to understand where you need to go next.

Give yourself a long term view to get the best chance of being above average

If I reviewed Tom’s career after 10 or even 20 years, I’d be talking about a wave of ups and downs in terms of his performances or quality of movies he was in. It hasn’t been until the last 10 years we’ve seen consistently providing us with some great films.

Like a good investment, Tom has committed. Committed to regularly putting himself to work over a long period of time.

Tom’s breakout hit was 1983’s Risky Business — 35 years ago. Since then he has acted or produced in another 19 films that have been ‘certified fresh’ by Rotten Tomatoes (those that are rated at least 80% or above by the public/critics). There have been some duds in between, but every year he turns up and works.

If we look over the last ten years his movies collectively have rated 70% on average. Some higher, some lower. Each time you invest in seeing a movie of his you can bank on seeing a film that will likely be a 7/10. This bloke is proven.

Investment Lesson

It’s easy to get anxious or fidgety with investments that aren’t performing straight away. Give yourself time to diligently save, accrue and collect the rewards of long term investment performance.

It takes a few years for a compounding effect to kick in and be noticed (could be 7–10 years plus).

Find out your strengths or your knowledge set and focus them

If I asked you what Tom Cruise’s favourite things to do in movies are would you be able to tell me? Maybe. Maybe not.

But now when I give you the answer, you’ll probably immediately be able to picture it. He loves to do his own stunts — in particular running really fast and riding motorbikes.

Tom is famous for doing his own stunts and no doubt enjoys this aspect of movie making. He is regularly put in scenes running through streets or hopping on a bike for brilliant effect. It’s what he knows, it’s what he’s good at and it works.

Cruise is also staying close to his favourite genre of film - action blockbusters. He knows they work for him and his fans will appreciate the work. He knows the formula of a good cinema experience.

He’s done with experimenting as he knows his strengths. He’s not trying a period drama for the sake of it. He’s not jumping to make a Netflix special or launch a new TV show. He knows what works and drives it hard, everytime.

Investment Lesson

Early on you might be willing to try and test investing in different formats, through different people or services. But once you find out what you know, like and are good at then start to drive that hard. Invest in what your know and do so often to your advantage.

Don’t feel pressured to chase what others want — push away your FOMO

Tom Cruise spends his energy on the tried and true methods that gave HIM his best results. Personally he’s into a few alternatives ways of living, and doesn’t really seem to care. You don’t hear or see from him much away from premieres these days.

Early on he chased roles that gave him Oscar nominations (he’s received 3), but in the last 15 years his focus has been on a genre that doesn’t necessarily receive many academy accolades. That is, his focus is now on his strengths and what he is comfortable with. While he might have felt pressured to win awards and nominations, he’s passed that and now believes in what is right for him.

Tom Cruise doesn’t care if actors are diversifying into different roles in older ages, if actors are moving to Netflix specials or hopping on the lecture circuits. It doesn’t matter to him that most people his age are pushing for retirement. To him its all about his inner circle and to achieve the goals he sets.

Investment lesson

Personally I know there have been times when I see everyone winning with property and thinking — that should be me. I need to remind myself that I have a good system in place already that is simple and proven. I like shares because I know and understand the process for sustained success. I like the liquidity and the ability to be diversified, plus there are no phantom costs like property.

Don’t be concerned if others are succeeding or chasing success in other investments. Don’t worry if your methods aren’t common or mainstream. If it works for you, then keep doing it. What others are succeeding at doesn’t always translate to everyone.

There will always be distractions

Other have come and gone, but Tom Cruise continues to act at the level he knows.

There are new actors, actresses and the like popping up all the time. New franchises, streaming services and broadcast deals in place to distract us from regular programming. What Tom knows is that people like simplicity. The simplicity of being entertained. If you can do that well then there will be interest.

As much as we want to try new genres, shows or people. We still feel pretty happy watching Top Gun or Jerry MGuire again and again — because it just works.

Investment Lesson

Trust what you know. Focus on what is proven. The shiny allure of new alternatives will always be there. It’s the most boring methods that work best.

There will be dry spells

Ahh, yes. There will be duds. The Mummy and Jack Reacher 2 are a couple of movies in the last 10 years that I’d say have been pretty average to watch. It’s hard to meets high standards all the time. Sometimes the story, the cast, his performance, the timing just doesn’t mix and in the end you can’t easily predict the results. There’s always a chance the next movie could be a dud, there could be a few in a row.

Investment Lesson

Always look at long term averages (5 years plus) when forecasting your investment considerations. There will be bad times, and you’ll never know exactly when it may change. A short term drop doesn’t indicate a pattern so don’t panic.

It’s time to find your trajectory

For Tom Cruise he’ll be off to make his next movie. He’ll take his time, do it his way and produce.

For you it could be a number of things — start investing, focus your investing or double down on your stronger performing assets.

Who knows what Tom will dish up next (heard it’s a new Top Gun), but I do know that he will do something and it’ll most likely worth watching. Wouldn’t it be great to have investments like that - ones that you know will give you better than average returns each time?

Originally published at dadinvestor.com.au on August 10, 2018.

What Tom Cruise has taught me about investing was originally published in Dad Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.