I do invest in individual stocks and have quite a few high-dividend yield stocks that I’ve acquired over the past few years using the stock-screener my brokerage offers, but being able to read the financial statements led me to rule out quite a number of seemingly attractive stocks whose financial statements revealed looming problems (shrinking profit margins, rising inventories and receivables or current liabilities, cash flow problems, asset values heavily weighted with commercial real estate or intangible assets resulting from poor acquisitions, etc.).

It’s important also to understand at least some of the risks the company and its industry and sector face, such as currency exchange risks, political risks, limited supplier risks, pricing pressures, and many more.

I enjoy studying these things, rarely get caught up in the herd mentality, and proceed very cautiously with considerable diversification and still make huge mistakes (remember WAMU, anyone? At least I bailed well before the end) or suffer bad luck (NW Airlines purchased right before 9/11).

If studying this stuff is not fun for you, or you can’t take a wipe-out occasionally and still sleep at night, it’s really best not to get into it. With college economics, accounting and tax law classes, years of experience professionally analyzing business reports and financial statements, and 25 years of investing, I’m still not sure I should be doing it.

@#10 Jason – Frugal Dad.
I’m glad you’ve taken some of my ideas and started using them! Great discussion we had on your site about this topic. Best of luck!

My only answer to that is to diversify. Get various kinds of stocks. Bonds. Pay off your house. Stock up on canned goods. Learn skills that save you money (cooking, hair cutting, whatever sounds fun). Learn skills that earn you money. I wish I had more ideas.

Make sure you understand anything you’re investing in and that it intuitively makes sense to you (think of the dotcom boom and companies selling heavy and cheap dog food with free shipping and no profit margins – did this ever make sense?).

I also strongly suggest that with individual securities people implement an automatic “market sell” order at a designated price right when they buy. This keeps you from holding and buying more and more and more shares in an effort to lower your average purchase price. Sometimes this works out if the stock bounces back, but when it doesn’t* it can devastate your returns. You can also buy a whole new position if you’ve sold but want the stock again.

*Worldcom, Enron, AIG and Citigroup are great examples of “good” companies that lost most or all of their value.

Re ethics. I would be pretty unhappy to have stocks in an arms company. Do you really think that has no ethical ramifications?

Hypothetical what if. What if EVERYONE was financially savvy, or even 50% of everyone. Would there be enough shares to go around for everyone to live well in retirement? What if you have more investment money chasing around fewer investment opportunities. According to some essays I’ve read this was a contributory factory to the crisis and is part of the cause of bubbles, and will make bubbles more and more common, driving up prices of real life things (like commodities and houses) for the rest of us.

Of course I’m not saying people shouldn’t buy shares, but I’m thinking people should have more discussions about what investments could look like in the future.

And some people would be irked if Trent felt the need to be very politically correct and write “businessmen and businesswomen” when it’s not necessary to his point. Honestly, the nitpicking in the comments on this site is astounding. If you don’t like the way the absolutely free information here is presented, then find another site! There is no possible way Trent can please everyone all the time, nor should he try.

I agree with “Rob”. “The Intelligent Investor” is an extremely good book. If you don’t like researching stocks, stick with low expense index funds.

Investing in individual stocks is an extremely time intensive endeavor if you are interested in doing it correctly (i.e. minimizing risks and maximizing gains) and should not be undertaken frivolously. Even then, it’s still difficult. Keep in mind that a money manager that can beat the market five years out of ten is considered a superstar. And that’s their full time job complete with research assistants. Folks like Bogle and Buffett are extreme outliers. If you’re not willing to treat it at least as a part-time job, stick with index funds.

As far as investing and ethics go, there are mutual funds and etfs that cater to ethical investing. Their returns are crappy, but they exist. Another alternative, as my rich aunt told me once, is to make as much money as you can and then donate to the causes you believe in.

I’ve had two dividend paying stocks–one quit paying any dividend at all (no, not BP) and the other cut theirs in half during the recession and is only now slowly increasing it again. But I’ve heard that many companies go decades without ever cutting their dividends, and as their stocks go up in value, they pay out more dividends per stock to keep the same payout ratio, so yea!

I researched some high-yield index funds; they don’t seem to pay as much in dividends as the S&P 500. I get even higher dividends from my European index fund.

We’re in crazy times with interest rates so low that the dividends alone from dividend-paying stocks start to look good compared to treasuries and CDs. So, again I say, why not play with a few dividend stocks with some of your extra money?

Oh, and about believing in the company. One thing about investing in evil companies is that you win either way. Either they keep making loads of money–and you get some–or you lose money, but it’s because the evil company is going down! Unless you’re buying stocks in the original sale (by the company), you’re not helping them much. Usually you’re buying from other stockholders, some of whom might be company bigwigs with stock purchase plans, but most of whom are not.

But regardless of that there are other issues.

For example, in about every post you write, you discuss how most people should just invest in index funds (I agree). Well, those index funds comprise the entire market… the companies that you would consider “good” and those that are “bad.”

So if you’re using ethics to pick stocks, you shouldn’t really invest in index funds at all.

Secondly, because most of the stocks sold by these companies are sold to index funds and other large investors, you’re small purchase won’t phase their corporate strategy. It’s not like they’re gonna invite you to the board meetings…

I think a better strategy is just to maximize your gains and then spend those gains in ways that promote causes you believe in.

So, for example, you could invest in Exxon if you think they are a fantastically profitable company, but then use the gains to buy a Hybrid car or install solar panels to promote green energy.

How you spend your money will have more effect than how you invest your money.