The Dividend Investing Resource Center

Letting Dividends Do Their Work

Why Did I Buy That?

George L Smyth

It's that time of year when I start to collect those 1099-DIV forms and look at last year's stock transactions so that I can do my income taxes. This year won't be nearly as bad as last year, if only because I'll be able to answer some questions.

A year ago, as I looked over some of my stock purchases, I took note that I had made some rather strange decisions. An example involved the purchase of CMGI (Nasdaq: CMGI) in mid-1998, then the sale of it at a slight loss a little over a week later. I'm sure that I must have had a good reason for doing this, but to this day I haven't a clue. Honestly, I flat can't remember.

One possibility that I would like to discount is that impulses got the best of me and I made the trades on a whim. Compare the price of CMGI now to its value about a year and a half ago and you'll understand why I don't want to think too deeply about this.

To protect myself against potential stupidity (i.e., fear and greed), I decided to start keeping a diary of my purchases. To that end, I obtained a few composition notebooks -- the kind with the black cover and paper held together by string so that it can't be removed without tearing it out. This notebook has become an important part of the process I follow while building my portfolio. Let me explain.

When making the decision to purchase a large chunk of stock, or to make the commitment to start a Drip, we all perform the due diligence of proper research. Contrary to the commercial of a certain discount broker where a novice looks at research for less than five seconds before declaring a stock suitable for purchase, true research takes quite a bit more time.

I'll admit that I'm a bit slower than most, as it will take me months to make a purchase or select a Drip company. However, we all spend a lot of time to make sure that we make the right decision. So why not take an additional 15 minutes to write down some of the points that led us to our judgments?

When I make an outright purchase or sale, I write an explanation in the book. The fact that I can't remove the pages means that I'd better have a pretty good set of reasons for my actions. I don't write an explanation of each Drip purchase. But if I decide to start or end a Drip, then that explanation will be laid out in the book.

Additionally, on a yearly basis, I reevaluate each of my Drip holdings. My suggestion all along has been to hold no more Drips than an investor can 1) make regular purchases into (to ensure the strength of risk reduction via dollar cost averaging), and 2) keep track of by reading the annual report and at least scanning the quarterlies (10-Q) for relevant information. Since I always read these reports, I know the direction of each company, and in my yearly Drip report to myself I can explain whether a company is following my expectations.

By writing this information down in a format that will not be easily removed, I have ensured that the proper thought process will be used when I make any investment decision. Even though I am the only one who will be reading the book, I still don't want to embarrass myself with lame or impulsive thinking.

I don't believe that my system will completely prevent me from making mistakes, but at least I'll know why I sold a 20-bagger at a loss.

This website is maintained by George L Smyth