Posted on 05/05/2021 8:44:08 AM PDT by SeekAndFind
Over the years I have published numerous articles with “investing laws” from some of the great investors in history. These laws, or rules, are born of experience, tested by markets, and survived time.
Here are some of our previous posts:
Throughout history, individuals have been drawn into the more speculative stages of the financial market under the assumption that “this time is different.” Of course, as we now know with the benefit of hindsight, 1929, 1972, 1999, and 2007 were not different. They were just the peak of speculative investing frenzies.
Most importantly, what separates these individuals from all others was their ability to learn from those mistakes, adapt, and capitalize on that knowledge in the future.
Experience is an expensive commodity to acquire, which is why it is always cheaper to learn from the mistakes of others.
Importantly, you will notice that many of the same lessons are not new. This is because there are only a few basic “truths” of investing that all of the great investors have learned over time.
The next major down market cycle is coming, it is just a question of when? These rules can help you navigate those waters more safely, because “you’re different this time.”
Common sense is not so common.
Greed often overcomes common sense.
Greed kills.
Fear and greed are stronger than long-term resolve.
There is no vaccine for being overleveraged.
When you combine ignorance and leverage – you usually get some pretty scary results.
Operate only in your area of competence.
There is always more than one cockroach.
Stocks have a gravitational pull higher – over long periods of time equities will rise in value.
Long investing generates wealth.
Short selling protects wealth.
Be patient and learn how to sit on your hands.
Try to get a little smarter every day and read as much as humanly possible – an investment in knowledge pays the best dividends.
Investors sometimes think too little and calculate too much.
Read and reread Security Analysis (1934) by Graham and Dodd – it is the most important book on investing ever published.
History is a great teacher.
History rhymes.
What we have learned from history is that we haven’t learned from history.
Investment wisdom is always 20/20 when viewed in the rearview mirror.
Avoid “first-level thinking” and embrace “second-level thinking.”
Think for yourself – those who can make you believe absurdities can make you commit atrocities.
In investing, that what is comfortable – especially at the beginning – is most often not exceedingly profitable at the end.
Avoid the odor of “group stink” – mimicking the herd and the crowd’s folly invite mediocrity.
The more often a stupidity is repeated, the more it gets the appearance of wisdom.
Always have more questions than answers.
To be a successful investor you must have accounting/finance knowledge, you must work hard and you have to be keenly competitive.
The stock market is filled with individuals who know the price of everything but the value of nothing.
Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
Avoid “the noise.”
Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
Avoid “the noise.”
Reversion to the mean is a strong market influence.
On markets and individual equities… when you reach “station success,” get off!
Low stock prices are the ally of the rational buyer – high stock prices are the enemy of the rational buyer.
Being right or wrong is not as important as how much you make when you are right and how much you lose when you are wrong.
Too much of a good thing can be wonderful – look for compelling ideas and when you have conviction go ahead and overweight “bigly.”
New paradigms are a rare occurrence.
Pride goes before fall.
Consider opposing investment views and cultivate curiosity.
Maintain a healthy level of skepticism as you never know when the Cossacks might be approaching.
Though doubt is uncomfortable, certainty is ridiculous and sometimes dangerous.
When investing and trading, never let your mind dwell on personal problems and always control your emotions.
‘Rate of change’ is the most important statistic in investing.
In evaluating the attractiveness of a company always consider upside reward vs. downside risk and ‘margin of safety.’
Don’t stray from your investing and trading methodologies and timeframes.
“Know” what you own.
Immediately sell a stock on the announcement or discovery of an accounting irregularity.
Always follow the cash (flow).
When new ways of earnings are developed – like EBITDA (and before stock-based compensation) – substitute them with the word… “bullshit.”
Favor pouring over balance sheets and income statements than spending time on Twitter and r/wallstreetbets.
Always pay attention to what David Tepper and Stanley Druckenmiller are thinking/doing. (Trade/invest against them, at your own risk).
The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” – Howard Marks
The biggest driver of long-term investment returns is the minimization of psychological investment mistakes. As Baron Rothschild once stated: “Buy when there is blood in the streets.” This simply means that when investors are “panic selling,” you want to be the one that they are selling to at deeply discounted prices. The opposite is also true. As Howard Marks opined: “The absolute best buying opportunities come when asset holders are forced to sell.”
As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question but how you manage the inherent risk.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham
As I stated at the beginning of this missive, every great investor throughout history has had one core philosophy in common; the management of the inherent risk of investing to conserve and preserve investment capital.
“If you run out of chips, you are out of the game.”
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Pinging this for later.
PFL...thanks for posting.
Were the rules supposed to repeat? We have duplicates.
Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
Avoid “the noise.”
Rules 31-40
Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
Avoid “the noise.”
“Short Selling Protects Wealth” Not so fast...
Investopedia
Short selling involves amplified risk. When an investor buys a stock (or goes long), they stand to lose only the money that they have invested. Thus, if the investor bought one TSLA share at $625, the maximum they could lose is $625 because the stock cannot drop to less than $0. In other words, the maximum value that any stock can fall to is $0.
However, when an investor short sells, they can theoretically lose an infinite amount of money because a stock’s price can keep rising forever. As in the example above, if an investor had a short position in TSLA (or short sold it), and the price rose to $2,000 before the investor exited, the investor would lose $1,325 per share.
Paraphrased my tagline
Keep that in mind in formulating any trading strategy.
Rule 1: Get rich slowly. Spend less than you make, put 10 percent or more into investments
Rule 2 Dollar cost average into market index funds. The market goes up given enough time; paying fees is a sucker’s game
Rule 3: any time frame less than 20 years is a fool’s game, just go throw your money on the craps table instead. The Market *WILL* be higher in 2041.
Those are all I’ve needed.
All the rest is BS to churn and burn the money of people who think there’s an easier way; people win the lotto, too but that doesn’t mean it’s a viable strategy.
95% or more of the time when I hear “History teaches......” I can rest assured I will hear bad teaching and even worse history.
If someone needs 50 laws of investing to guide you, he's made the process overly complex and is probably just selling a book.
I have no more than 8-10 rules of investing. Some of them are just meticulously detailed rules that relate to my general approach to investing and wouldn't necessarily apply to every investor.
Here's an example of a rule I use that I learned over time. It may not apply to everyone but I did see the wisdom of it after seeing how it applies to my own situation: When investing in mutual funds, don't reinvest the dividends or capital gains.
This might get criticized by financial advisors, but my reasons for this are two-fold:
1. If a mutual fund pays a dividend or capital gain, it's taxable as income (dividends), a short-term capital gain, or a long-term capital gain. If I have to pay taxes on the dividend or capital gain, I want to pay it out of the proceeds of these transactions.
2. I meticulously invest in a set of mutual funds on a scheduled dollar-cost average basis. If I'm investing $100/month in a mutual fund and that fund pays me a dividend of $500 at the end of the year, reinvesting it turns my $100/month schedule into a $600/month asset purchase for just one month. That just complicates things by throwing the schedule and my asset allocation into disarray, which requires a potential adjustment in the monthly schedule after that.
Amen brother. The most important thing is to save money in the first place. 10 to 20 pct of your salary. Nothing beats dollar cost averaging into index funds in an asset allocated portfolio and leaving it alone for decades.
The best path to wealth is also the easiest - it’s called lazy investing and it works.
Short selling is not something a retail investor should ever play around with.
Coach Bobby Finstock’s three rules of life:
1 Never get less than 12 hours of sleep a night
2 Never play cards with anyone who’s first name is a city
3 Never go near a woman with a tattoo of a dagger anywhere on her body
My point was that the rule was repeated as were two others.
I certainly don’t make my stock purchase decisions on what jewelry a CEO or CEO relative is wearing. Sounds cute & edgy but ridiculous.
I look at profitability, use of resources, demand for product now & down the road and behavior of the stock in different economic markets. One thing I look at is how desirable the products are and what market sentiment for the stock is. Momentum plays demand an exit strategy but they can be very profitable. Dynamic Materials BOOM was one of those market darling, quick exit needed but lots of profit retained.
Agreed.
Yes. I figure most of that noise is generated by folks who want to get rich selling books, investment guides, newsletters, or seminars.
Slow & steady wins over flashy in the long term.
I could literally have made enough to retire on the spot when COVID started: I noticed the Baltic Dry Index had cratered, to fractions of a 1% of its pre-COVID values.
Alas, they ceased all trading in it.
For about six months, when it started trading again at $300/share or so, compared to the $1200 pre-COVID.
But I'd given up on it, and never checked back until it had climbed up a lot from there.
Bastards.
...also beware the head fake to shake out small investors with protective stops, who guessed the right direction of a big move. They take it a couple percent in the OTHER direction, then the big movel
anyone interested in investment strategies to hedge against inflation?
A. I’m not going to be a landlord: too much hassle
B. I’ve already got enough precious metals, so don’t need more.
C. I’ve already invested in a ton of RDSB when it was priced at give-away prices March a year ago, so don’t need more petro ...
D. I’ve got plenty of guns and ammo, so don’t need more ...
I’m more interested in ETFs in the following sectors:
A. Agriculture: equipment, fertilizers, chemicals, and big processors like ConAgra and Archer-Daniels-Midlands (price of food is fixing to go through the roof due to massive cost increases in the inputs: who’s going to profit the most?
B. Single-family housing REITs: housing is going to go through the roof because of explosion in cost of materials, resulting in concomitant price increases in existing housing stocks ... not interested in apartment, commercial, or industrial REITs due to economic uncertainty ...
C. Building materials ETFs: producers, wholesalers, retailers, appliance makers, lumber, etc.
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