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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“Rule 1: Get rich slowly. Spend less than you make, put 10 percent or more into investments”
I put 15% of my earnings into diversified investments for 35 years. I’m enjoying retirement now, earning more on my investments than I spend every year.
Even at only 5%, every dollar you put away on a regular basis will yield almost $100 in 35 years. If you can invest wisely and earn 10% annually, that will yield about 300 times your regular amount.
I taught financial accounting during that time. I had two required spreadsheets for all accounting students:
1. A future value of a regular group of payments model that included 45 years of payments. (the retirement investment model for 20 year old students)
2. A 30 year real estate loan showing cumulative interest until the principal is paid off versus a 15 year version of the same.
Smart students got the message and I get thank you notes from graduates from time to time.
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Been investing at least 10% of my income since 1987. Which is the definition of spending less than you make. I stick with market index funds tied to S&P 500.
I use the "buy and hold" strategy over the long term.
34 years later, I'm sitting pretty well as I approach retirement. Yes, I've had some awful years (the late 2000s come to mind) but never panicked for a minute. In fact, I upped my percentage of investing in stocks so I could buy in at lower rates.
I'm expecting another "crash" like we saw in 2008 but I'm sitting tight and riding it out.
Stock market crash:
The only time people run OUT of the store when there’s a sale on.
Good one!
1. Never amortize a mortgage for 15 years, even if you want to pay it off in 15 years. Instead, get yourself a 30-year mortgage.
2. Figure out the difference between the monthly payment on a 30-year mortgage and the monthly payment on a 15-year mortgage.
3. Make the minimum payment on your 30-year mortgage. Every month, take an amount equal to the difference between the 30-year mortgage and the difference between a 15-year mortgage and invest it in a diversified group of low-cost index funds. In effect, you've disciplined yourself to pay off the mortgage in 15 years but instead invested in YOURSELF every month.
4. Under almost any reasonable investment scenario over 15 years you'll end Year 15 with far more money in your investment account than you still owe on the 30-year mortgage. You can then pay off the balance of the 30-year mortgage at that point in time and still have a six-figure balance in your investment account.
The rationale here is simple: Over a long term, a diversified investment portfolio will get you a far better average return than the interest rate you can get on a conventional residential mortgage.
Why would you ever prepay a loan with a 3% to 4% interest rate when your extra money can be more productive elsewhere?
When the market goes down a lot (>30%), that is a “Buy Low” signal. Start. Continue monthly until it’s down only 20%, then slow down. Continue slowly until down only 10%.
After that, dollar cost average in very slowly only as necessary.
When the market goes up 50% in short order (2020), stop buying. Let cash pile up. You’re going to want it when the next Buy Low opportunity arrives.
I just dollar cost average every paycheck, no matter what the market is doing. Same amount (as a percentage of gross), regardless of what is happening. Been doing it since 1986. I couldn’t care less about a 35% correction or a 50% surge.
Rule 1: Buy stock that is going up.
Rule 2: Sell stock after making profit and the stock is going down.
Or buy low, sell high
To answer your question:
Because debt is bad. Always, under any circumstance. To owe anyone anything is to be no better than a slave.
Never, not for any reason, not for any potential gain. Yes, I had a mortgage; paying it off ASAP was the best thing I ever did for my sanity.
Debt=bad, like Cancer, like Socialism, like child molestation, completely bad; the only action is to get out of it ASAP at any cost.
Maybe other people are not wired that way; I know people who like gambling, too; utterly repugnant to me but it’s a free country.
You are of the same mindset as Ramsey in your philosophical approach to debt.
I'm probably closer to Edelman in this one key respect: I see debt as nothing more than a tool, and therefore ascribe no value judgement to it.
It doesn't mean I think you're wrong. In fact, I think you're right in most respects. HOWEVER, I have another financial rule that has served me well over the years: Never borrow more money than you can afford to repay in 48 hours.
When you look at it that way, it turns out that debt isn't really DEBT at all when you manage it correctly ... it's a financial tool that helps you spread your risk and give you a high degree of flexibility with your finances.
In some cases, NOT borrowing money is a bad financial move -- especially if it is done prudently and is always done with this other rule in mind: When borrowing money to pay for a major asset, never let the loan term exceed the functional life of an asset. It's OK to sign a three-year car loan for a vehicle you intend to own for ten years, for example -- even if you can afford to pay cash for it (for the reasons I laid out above).
Here's an example of a case where NOT borrowing money for an asset is almost always a bad idea: MAJOR INFRASTRUCTURE.
If you are a state government and you have a major highway/bridge project in the works that's going to cost $300 million, should you (A) finance it out of your current revenues, or (B) issue bonds to pay for it over 25-30 years?
I work in this area for a living, and I can tell you with absolute certainty that (A) is a terrible idea. And here's why:
1. You are forcing existing taxpayer to cover the full cost of an asset that may be in place long after they are gone.
2. The person who moves into the state the day after the highway/bridge corridor is constructed gets to use it for 30+ years without ever paying a penny for its construction.
Note Item #2 above. I would make the case that this is a terrible approach to governance that actually encourages taxpayers to abuse the system and treat public assets irresponsibly.
I think you have more balls than I have :-)
bump for later
I actually don't have ANY.
Seriously -- I work as a civil engineer, and we are extremely cautious by nature. But our analytical side can also make us look at financial matters a little more objectively than most.
Good example ...
Suppose you are looking at buying a $30,000 car and you have a choice between paying cash and financing it over five years at a 4% interest rate (that comes to a monthly payment of about $550 if you put $0 down). If you are debt-averse by nature it makes all the sense in the world to pay cash. But even if you are NOT comfortable with the idea of going into debt, think of what a car loan could do for you:
1. If you can afford the $550 monthly payment, you can borrow the $30,000 and hold onto your cash.
2. If you are disciplined enough to invest the cash wisely you can pay the loan off while the $30,000 cash grows in value.
3. Don't think of the debt as the primary motivating factor in this consideration. Think of how much flexibility you have by holding onto the cash.
4. If you run into a financial hardship in two years you can either pay the car loan off with part of your $30,000 investment account which will likely be worth a lot more than what you owe on the car even if you invest it safely.
5. If you pay off the car over five years, you get to the end of year five with BOTH a fully-paid car AND an investment account that would be worth at least $32,000 even if you invested it in very low-risk investments.
Yes, you are completely right.
For me, it comes down to time-value of money vs psychological security of being debt-free. And the value of being debt-free wins by several orders of magnitude. After all, I use money to acquire things that bring me happiness; nothing makes me happier than owing nobody anything.
bfl
Let’s assume you buy a 300K house at 4%
Your monthly interest at the beginning is $1000
The difference in payments would be 786.82
If you made 7% annually on the 786.82 you would earn $4.59 per month.
Technically, over 30 years you might make out, but you taking a risk for small money. 2009 could happen again any time.
Law #0 “Never fight the FED.” is similar to your #1 but comes befoe it. I went massively long in March 2009 the minute ALL THE WORLDS CENTRAL BANKS STEPPED INTO THE VOID. The rest is history.
“They take it a couple percent in the OTHER direction, then the big move”.
Common tactic in the futures market by the big players. They get the small players and mindless trading systems going in the opposite direction to give them better entry prices.
Agree on 110% re debt. Its like a very sharp knife that can do wonders in the hands of the skilled but in the hands of fools or the simple will just wind up getting them bloodied.
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