Boundaries (The Financial Athlete #112)

Everyone knows it takes discipline to be successful in sports and investing. Why then is it so difficult for people to be self-disciplined? Some fear discipline as being too harsh, military like. Others worry that to become disciplined, a free spirit is surrendered. Neither should be true. Simply honor sensible boundaries. These are not walls of a virtual prison. Sensible boundaries free you from distress. Like high walls of an old city, these boundaries offer protection. If an investor lacks discipline, the market gladly takes all her money.

Some boundaries for an investor of individual stocks to consider:

1) Limit an investment in one stock to a maximum of 10% of your portfolio.
2) Scale-in purchases of shares (never all at once).
3) Only invest in profitable and dominant companies.
4) Only invest money you do not need for 5 years (from Jim Cramer).
5) When you are up 50%, take some profit by selling at least 25% of your shares.
6) Prepare a watch list and wait for reasonable valuations before buying.
7) Allocate 2/3 (or more) of your portfolio of stocks in companies that pay dividends.
8) Insist on a strong Balance Sheet and Cash Flow Statement.
9) When your investment thesis fails, sell unless a new and viable one evolves.
10) Hold shares under the condition of on-going and objective due diligence.

“If you’re poor and you do something stupid, you’re nuts. If you’re rich and do something stupid, you’re eccentric.” – Bobby Heenan


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