2000 site views and counting!

Marketfox has passed 2000 page views! I would like to sincerely thank my readers for their support and encouragement. To celebrate, I would like to invite my readers to participate in this blog post by answering the following question: What are the investment rules that you live buy?

Please post your investment rules by using the “Leave a Reply” section at the bottom of the page. Don’t be shy.

For inspiration, I’ve included an extract from an article written by Morgan Housel and published in the Wall Street Journal entitled 16 Rules for Investors to Live By.

1. All past market crashes are viewed as opportunities, but all future market crashes are viewed as risks.

If you can recognize the silliness in this, you are on your way to becoming a better long-term investor.

2. Most bubbles begin with a rational idea that gets taken to an irrational extreme. Dot-com companies did change the world, land is limited and precious metals can hedge against inflation. But none of these stories justified paying outlandish prices for stocks, houses or gold. Bubbles are so easy to fall for precisely because, at least in part, they are based on solid logic.

3. “I don’t know” are three of the most underused words in investing.

I don’t know what the market will do next month. I don’t know when interest rates will rise. I don’t know how low oil prices will go. Nobody does. Listening to people who say they do will cost you a lot of money. Alas, you can’t charge a consulting fee for humility.

4. Short-term thinking is at the root of most investing problems.

If you can focus on the next five years while the average investor is focused on the next five months, you have a powerful edge. Markets reward patience more than any other skill.

5. Investing is overwhelmingly a game of psychology.

Success has less to do with your math skills—or your relationships with in-the-know investors—and more to do with your ability to resist the emotional urge to buy high and sell low.

6. Things change quickly—and more drastically than many think.

Fourteen years ago, Enron was on Fortune magazine’s list of the world’s most-admired companies, Apple was a struggling niche company, Greece’s economy was booming, and the Congressional Budget Office predicted the federal government would be effectively debt-free by 2009. There is a tendency to extrapolate the recent past, but 10 years from now the business world will look absolutely nothing like it does today.

7. Three of the most important variables to consider are the valuations of stocks when you buy them, the length of time you can stay invested, and the fees you pay to brokers and money managers.

These three items alone will have a major impact on how you perform as an investor.

8. There are no points awarded for difficulty.

Nobody cares how much effort you put into researching a stock, how detailed your spreadsheet is or how complicated your options strategy is. For many people, a diversified buy-and-hold strategy is the most reasonable way to invest. Some find it boring, but the purpose of investing isn’t to reduce boredom; it is to increase wealth

9. A couple of times per decade, investors forget that recessions happen a couple of times per decade.

When recessions come, stocks tend to plunge. This is an unfortunate, but perfectly normal, part of the process—like a Florida hurricane. You should get used to it. If you are unable to stomach declines, consider another investment.

10. Don’t check your brokerage account once a day and your blood pressure only once a year.

Constant updates make investing more emotional than it needs to be. Check your brokerage account as infrequently as necessary to prevent you from becoming emotional about market moves.

11. You should pay the most attention to the investor who talks about his or her mistakes.

Avoid those investors who don’t—their mistakes are likely to be worse.

12. Change your mind when the facts change.

Admit when you are wrong. Learn from your mistakes. Ignore those who refuse to do the same. This will save you untold investing misery.

13. Read past stock-market predictions, and you will take current predictions less seriously.

Markets are complicated, and human emotions are unpredictable. Unless you have illegal insider information, predicting what stocks will do in the short run is unimaginably difficult.

14. There is no such thing as a normal economy, or a normal stock market.

Investors have a tendency to want to “wait for things to get back to normal,” but markets and economies are almost constantly in some state of absurdity, booming or busting at rates that seem (and are) unsustainable.

15. It can be difficult to tell the difference between luck and skill in investing.

There are millions of investors around the world. Randomness guarantees that some will be wildly successful by pure chance. But you will rarely find an investor who attributes his success to luck. When you combine a market system that generates randomness with a belief that your actions reflect your intelligence, you get some misleading results.

16. You are only diversified if some of your investments are performing worse than others.

Losing money on even a portion of your portfolio is hard for some people to swallow, so they gravitate toward what is performing well at the moment, often at their own expense.

The rules that resonate the most with me are rules 3, 5, 11, 12 and 15.

Which rules do you agree or disagree with and why? Are there any rules missing from the list?

Please feel free to share your opinions by using the “leave a reply” section at the bottom of the page.

Again, thank you for your support. I hope that you continue to visit Marketfox and that you find the content posted here to be entertaining, informative and helpful.

 

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6 comments

  1. Anton Pimstone · December 10, 2014

    Firstly let me say that I took an immediate liking to you when I saw your post in an FT log and followed the links. I fear though that after a very bright start you may be running out of things to say, I read the other day that Jason Zweig had written that he says the same things in different ways numerous times a year. They are worth repeating. I am more one who wants to learn than a seasoned investor. I agree with most of the sentiments expressed above and most of what you write as well. I look for a comparatively small number of large established companies (UK FTSE 100) which have a low PE ratio and about 4% yield. I will have some idea of what each company does. I try not to hold more than 10% in any one company. I view the investments as long term.. A large portion of my portfolio is in Vanguard ETF index companies and quite a bit is not yet invested. My aim is not to lose capital and to receive a reasonable return. I want to be able to carry out the EBITDA etc tests but have not yet worked out how to extract the information from the figures in accounts.

    Like

    • dgrioli · December 10, 2014

      Thanks Anton. I’m not running out of things to say, just running short on time to write them down. Stay tuned as there will be more interesting posts soon.

      For example, my next post will consider how investors should approach uncertainty. This will be followed by the next installment in my series of posts on how to beat the market.

      You raise an interesting point. Repetition is a large part of what investment is all about. Failure to stick to a disciplined process or a mistaken belief that “this time is different” are common ingredients in most investment failures. Humans are fickle and inconsistent, which is why we need constant reminders.

      Your investment approach sounds like a simple and common-sense way to go about things. Like you, I am a value investor at heart. I would like to offer the following suggestions that might help you to evolve your strategy:

      1. Every valuation ratio has its “companion” variable. Valuation on its own doesn’t tell you much without also considering the companion variable. For example, if you go onto http://www.rightmove.co.uk you will probably be able to find a flat in greater London for sale for less than GBP 150,000. But will it be good “value”? Probably not. It is likely to be very far from the CBD (perhaps somewhere in Essex), run down, on a busy street, with poor access to transport, etc.

      I’m exaggerating here to make a point. Just because a company is STATISTICALLY cheap doesn’t mean its a bargain. Value is really about “getting more than you pay for” and not just buying cheap. Often buying cheap means sacrificing future growth. That is companies with poor future growth prospects often trade cheaply. This is where consideration of companion variables might help. The companion variable for P/E is earnings growth, for P/B its RoE and for P/FCF its ROIC.

      Finally, beware of leverage as cheapness can sometimes be a proxy for distress.

      2. When to sell. All value investors struggle with this step.

      3. To double down or not to double down. The natural inclination of a value investor is to buy more of a stock if its fallen in price (i.e. its now cheaper). Sometimes this is the right thing to do, but often it isn’t. There’s always the risk that you’re ignoring what the market is trying to tell you about a company.

      4. Momentum. using price momentum in your investment process can potentially help with points 2 and 3.

      You also raise the topic of how to use accounting data. Accounting data needs to be adjusted before it can be used to develop a true picture about a company. I will write about this in a future philosophy and process post (probably after writing about how to deal with uncertainty.)

      Thanks again for your comment. I hope that my response is helpful. As you can sell there’s still lots left to discuss.

      Like

  2. CD · December 10, 2014

    I’ve been a big follower of your blog since you started and let me congratulate you for your frank and candid approach to some difficult subjects.

    My favourite investment rules from this list are (like you) 3 and 15, but also 8, 10 (and the related 4) and 16:

    8. I like to keep things simple. Investing in stocks and bonds should be boring, but people tend to…

    10. & 4. … be too short-term focused. Checking stock valuations on a minute-by-minute basis is unhelpful and only serves to create hype over sudden movements.

    16. This is probably the hardest for people to grasp as they don’t like to see even a small portion of the portfolio going down. It is only in stressed situations when true diversification will be cheered.

    Some other rules I like to invest by are:

    Every investor must have an objective and then pick investments to achieve this. Whether you are investing for other people or for yourself, losing sight of your objective means you will make bad decisions. A good investment for one person might not suit another with a different objective (hence why US insurance companies are still buying long-duration US bonds).

    Look for the cheapest way to invest (that you’re comfortable with). If you want to beat the market, do so in a way that your outperformance won’t be eaten away by fees. A good long-term fund manager may be able to beat the market by 2% p.a., but if it costs you 1.5% to get it, you have to question who is actually winning here (particularly in the years when the outperformance is less than 1.5%).

    Apply the same rules to picking fund managers as you would to picking stocks. If you buy low, sell high on the stock markets why not apply this same principle to fund managers? Sacking an underperforming manager is easy to do, but often counterintuitive as a manager is just a portfolio of stocks which happen to have underperformed at a point in time.

    Keep up the great posts!

    Like

    • dgrioli · December 10, 2014

      Thanks CD. I appreciate your support. Rule 10 is a tough one for most people (I’m guilty of this). Its such a natural tendency.

      For example my father installed solar panels on his roof. The panels came with access to a website where you can log in and see how much power your panels are generating in real time. When he first got the panels he, was logging in several times a day. If the sun was out, he’d log in to see if the power output went up. If it was cloudy, he would log in to see how much lower the power output was.

      Not only was he behaving compulsively but he was also very proud of showing me his numbers – how much power HE had generated and therefore how much money HE had saved. The irony was that his numbers had ABSOLUTELY NOTHING TO DO WITH ANYTHING THAT HE HAD DONE! it was just the weather.

      The point you make about objectives is a very important one. Investors will do a lot better if they take the time to think carefully about what they’re trying to achieve from their investment portfolio.

      I wholeheartedly agree with your comments about treating fund managers as you would stocks, that is buy low and sell high. Earlier this year I made a similar observation at an industry conference where I received a lukewarm response. I guess there were several fund managers in the audience so they might have been worried that I’d given their clients some ideas.

      Like

  3. Cassandra · December 10, 2014

    These guidelines were very incisive. I live by the rules “‘Buy low, sell high” and “keep it simple”. We live in a world where many try to make investing more complex than it needs to be

    Like

    • dgrioli · December 10, 2014

      Thanks, Cassandra. Do you have any suggestions on how you can simplify things? Or in other words, what sort of information should investors ignore?

      Like

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