12 Investment Principles

Here are a dozen guidelines from Doug Kass.

These were developed, according to Doug, regardless of market conditions, as sound investing practices:

1. Err on the side of conservatism.

2. Learn from the best, in classic investing books or through conversations with trustworthy individuals.

3. Avoid advice from those who lack flexibility and are dogmatic.

4. Be more concerned with return of capital than return on capital.

5. Trade/invest with below-average positions in order to take advantage of the market’s volatility and opportunity.

6. Take a base on balls, hit a single, but don’t go for the fences.

7. Buy straw hats in the winter (meaning, but out of favor items).

8. Buy only the best of breed in periods of economic/market uncertainty.

9. Always leg into a position.

10. Be patient.

11. Buy when your hands are shaking; sell when you become overconfident and complacent.

12. Always remember investing is about common sense.

Good stuff. Thanks, Doug.

>

Source:
12 Investment Principles for the Abyss
Doug Kass
RealMoney Silver, 1/17/2008 11:40 AM EST
http://tinyurl.com/3xujp6

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  1. jay commented on Jan 20

    Interesting points- basic points nothing new.

    You know, I read The Street . com every once in a while but I tend to shy away from their “journalists” and economic analysis. Any website that is partly owned by JIM CRAMER can not be too reliable- sure that will upset many of your readers who depend on Mad Money not for entertainment but for elevating their 401ks

  2. John Borchers commented on Jan 20

    “4. Be more concerned with return of capital than return on capital.”

    I’ve been working chart models all morning. So far so good. If the models are correct:

    1) DOW crashes within a few years.
    2) Russel 2000 is extremely under valued.
    3) S&P500 is valued correctly.
    4) Metals, miners etc are extremely overvalued and crash.

    Anyone here is welcome to use my charts in any way they seem fit as long as you give me name credit for doing to footwork.

    Nasdaq Chart Exponential Model (Pre Crash)

    http://i265.photobucket.com/albums/ii204/jmborchers/NasdaqAtPeak.jpg

    Nasdaq Chart Current Model

    http://i265.photobucket.com/albums/ii204/jmborchers/Nasdaq.jpg

    DOW Current Model

    http://i265.photobucket.com/albums/ii204/jmborchers/Dow.jpg

    Russell 2000

    http://i265.photobucket.com/albums/ii204/jmborchers/russell2000.jpg

    Again this model indicates everyone is thinking incorrectly I.E. Big Caps. There are more charts in the album.

  3. Florida commented on Jan 20

    Interesting points- basic points nothing new.

    Yes, but it is important to always return to the basics. It’s about discipline.

  4. whipsaw commented on Jan 20

    @John Borchers:

    If you want to toy with something that has provided generally accurate $SPX guidance for at least 30 years, construct a weekly chart using 13 and 34 week EMAs and look for the points when the 13 crosses the 34. With the exception of 1987 (when every system failed), following the crossovers would have taken you in and out of the market within 10% of actual bottoms and tops with few if any false signals (i.e., you would have exited near the top in 2001 at around 1400, re-entered around 900, and bailed about 3 weeks ago somewhere around 1400).

    I don’t know how well this works for anything but $SPX, but it is a pretty accurate long term trend indicator. Naturally, I failed to follow it recently, but we should get a bounce pretty soon at which point I will take my longs off and sit back and wait for another crossover.

    ==whipsaw==

  5. John Borchers commented on Jan 20

    But moving averages aren’t forward looking?

  6. Dave commented on Jan 20

    Aren’t 7 and 8 somewhat contradictory?

  7. Suge Knight commented on Jan 20

    I disagree with 11:

    11. Buy when your hands are shaking; sell when you become overconfident and complacent.

    Lots of folks were buying when the Dow was at 12,600 (their hands were shaking). Also, I still see plenty on bulls on message boards.

  8. Ross commented on Jan 20

    You can’t drive a car looking in the rear view mirror. True, but if you’re on the Autobahn (where most are killed from the rear) you need a rear view mirror also. Agree with both points.

  9. Chris commented on Jan 20

    Those charts do not contain useful information. For example, just because COMPQ was above the green line exceeding the natural growth curve in 98 doesn’t mean one should have shorted it.

    Perhaps applying the growth curves to a shorter time period would be more useful.

  10. Suge Knight commented on Jan 20

    Hands were shaking when folks were buying Countrywide at $15 and look where is at now. Point 11 makes no sense, should not even be there.

  11. John Borchers commented on Jan 20

    Chris. Look at the R squared value. Notice no matter what index they are relatively the same. Of course no model could perfectly predict the future all the time but what it does tell you is that if suddenly prices increase throughout the entire index, something is probably wrong.

    If you used this model on Nasdaq in 2000 you would have known something was wrong. Now DOW is deviating from the model when none of the other indexes are.

    Of course single stocks may have a growth rate which is high, but if you have enough data over a long historical period including times of good or bad I think that’s at least worth taking a look and considering.

    Interestly enough the exponential model of Nasdaq in 2000 was too bullish.

  12. kuros commented on Jan 20

    okay i sold my house in florida
    i will have around 50,000
    seriously, where should i invest it?

  13. whipsaw commented on Jan 20

    @John Borchers:
    But moving averages aren’t forward looking?

    I don’t think that a single moving average is very predictive, but crossovers are directional and provide inflection points without estimating where anything will ultimately wind up. The 13/34 EMA system that I mentioned can result in some deep drawdowns but generally avoids being on the wrong side of the tape over the long term as well as being jerked around during short term volatility.

    I think that your exponential curves are interesting, but how do they guide you? If I understand it correctly, you expect the Dow to drop in order to kiss or cross the curve at some point, but it appears to me that this has been true since 1996. Where is the point that you either get out or go short or go long? Thanks.

    ==whipsaw==

  14. Marcus Aurelius commented on Jan 20

    The Rules of the Road don’t apply when you’re careening down a rocky hillside at high speed, headed directly for deep water.

    BTW, you’ve got a headlight out.

  15. Suge Knight commented on Jan 20

    kuros,

    Are you serious? Asking for what to do with your money on a blog? (No disrespect to other posters who are very knowledgeable).

  16. kio commented on Jan 20

    13. Remember that only 1% of newcomers win.

  17. John Borchers commented on Jan 20

    Whipsaw,
    It hasn’t guided me in any direction yet. I just discovered it yesterday. I’m currently short EEM via EEV and have been since the inception of the fund.

    The R squared value suggests to me that Asian stocks growth rate is unsustainable. The problem is I can’t build models for them well because of lack of data. So I’ll stick with EEV at least for a while (6 months min).

    If you notice the DOW was also for ten years over the model line during the late 50’s. Then we hit the seventies and it went under the model for 10 years. So even though from 1996 it has been ahead of the model that wouldn’t necessarily indicate it’s correct. The fact that the DOW is clearly deviating from the trend and S&P500, Russell 2000 and Nasdaq aren’t I believe is an indicator.

    I am going to play this model and try it with new money input. I’ll begin shorting DOW and long of Rus 2000. Interestingly enough this is completely opposite of most fund managers.

  18. techy commented on Jan 20

    Kuros…

    i am not an expert…but looking at all the uncertainity and volatility….i would say savings account is better till things become crystal clear where we are headed.

    if you want to be prepared….keep an eye to go short as soon as FED is done with major rate cut and you still dont see good signs in housing or credit markets.

    and then maybe after couple of months if market is still shaky but the world has not come to an end, keep an eye on good stocks which may have become extremely cheap…

  19. D H commented on Jan 20

    If you want to learn more about buying with shaky hands, ask someone who used that strategy during the last bear market — it can be detrimental unless you buy when aversion to stocks is rampant.

    That contrary indicator is rarely as low risk as people believe UNLESS you are buying when you can barely give stocks away. Hence Buffett sitting on the side lines for years at a time during previous bear markets. The real fortunes are made when everyone completely hates stocks and no one wants to talk about them anymore (e.g., 2002). We are not even close. The average Joe still thinks international funds will save them and that agriculture and solar will buck the trend.

    Just look on Seeking Alpha at all the CPA’s and CFP’s who have been touting value in financials and homebuilders. The buy recs on that blog still far outweight the sell recs. Read all the “How to invest in 2008” special edition magazines at B&N. They are all still bullish on the second half, thus encouraging buy and holders to hold.

    If we truly are unwinding excesses in the credit and housing markets that are unprecedented, a couple months of selling does not truly make for shaky hands.

    The quote must be used in context …

  20. bt commented on Jan 20

    I used to value Doug’s advise. During the 2000 – 2002 bear, I had frequent email exchanges (he always responded to emails, even if it was only a one liner). He has experience and is nimble.

    However, he appears to have lost himself lately. On RealMoney he had his thesis well laid out, but as is with most bearish cases, he was early. I think the stress of being wrong for a couple of years got to him (RealMoney reader recall his tequila and fetal positions on cold linoleum posts). Now he is changing his trading position every other hour and based on his posts, no one can track if he is in or out or if he is making money. Too confusing. We already have Jim Cramer to flip-flop every other minute, but sadly Doug Kass appears to be following Cramer’s example.

    Maybe Doug realized, based on Cramer’s media success, that you had to be sensational to be a media success instead of being coherent.

    If you want examples of coherent, steady analysts who recently turned bearish and are sticking to their guns, look at Richard Suttmeir (sp?) of realmoney.com.

  21. Winston Munn commented on Jan 20

    My basic trading concept is based on limiting downside risk – I want to have at least a 3:1 ratio for any trade, and hopefully better.

    At present my view is that the least risk versus possible reward is in silver; it carries now a 50:1 price ratio to gold when historical ratios are 15:1.

  22. bt commented on Jan 20

    Forgot to add. All traders and analysts are wrong at some point. We shouldn’t expect them to be right more than 60% of the time. We expect their advise and their action, however, to be consistent 90% of the time. If you were bearish for 5 years based on your thesis of a crumbling credit cycle, make your case, update it once in a while, and stick to it. That advise helps traders understand the bear case and even if they trade on the long side because that is what is working in the market, when the worm turns, the trader realizes that the worm has turned.

    Such is the case now. The credit bubble has indeed popped and is likely to have huge ramifications for several years. Many bears were pointing this out for the last 5 years, but the markets managed, as they usally do, to humiliate the bears before making them look good.

    Lesson I learned from 1998 – 2002 bull/bear is that it is very painful and unproductive to be a Cassandra. You don’t make money when you are wrong and when you are ultimately proven right, you have to be quiet lest you appear to be saying “I told you so.” Also, having waited for the bubble to pop for several quarters and with the market going against you, you lose confidence in your ability to be an “investor.”

  23. drey commented on Jan 20

    good advice but I would amend #6 to say don’t be afraid to let a winner ride – I’ve left a lot of money on the table over the years by taking a quick profit (AAPL, RIMM, TXN, DE, you name it).

  24. John Borchers commented on Jan 20

    Buckle up. From the articles I see China’s booming housing market is starting to significantly cool.

    What a freggin surprise! Right on time for me.

    Korea is next!

  25. Thomas Pindelski commented on Jan 20

    #11 needs a rewrite and should read:

    11. Buy when there is blood in the streets and sell when your barber tunes the TV to CNBC.

  26. bt commented on Jan 20

    How about this for #11:

    Buy when your broker tunes to Comedy Central during market hours sell when your barber tunes the TV to CNBC.

  27. Ross commented on Jan 20

    Sound advice, bt. QED

  28. Todd commented on Jan 20

    I don’t read Doug Kass on TheStreet or RealMoney, whatever they call themselves. But I always value what he says when I’ve seen him on Kudlow or Fast Money. It seems to me that he got it very right on homebuilders and financials. I have no idea if he’s been very wrong or has changed views too often, but I think he has great insight overall.

    As far as buying when your hands are shaking, I don’t think he’s talking about individual stocks, like someone mentioning those who bought Countrywide at 15. I’m sure Kass is referring to those moments in time when the fear is running very high in the indexes, and the VIX is on a spike. That’s when everyone’s hands are shaking. I doubt the average holder of PG’s hands were shaking when Countrywide was collapsing through 15. But I’ll bet there were a few holders of PG who were getting antsy as the VIX climbed this week.

    I do find it noteworthy that safe havens like PG and ED are down 9% this year while the Naz is down like 12%. I guess there’s some hard hit people who won’t be paying their electric bills or washing their clothes.

  29. Suge Knight commented on Jan 20

    Rumor on the street is that “Good old boy Bernanke is going to FRY bears and shorts with a 75bps cut” at the next meeting. Comments?

  30. Suge Knight commented on Jan 20

    Speaking of Countrywide, visit their Yahoo! message board and you’ll find plenty of bulls there even after the stock has dropped 90% from its all time high. I know a few people who’ve averaging down Countrywide stock since it hit $18 (I’m not joking).

  31. scott brooks commented on Jan 20

    Being open minded is one of the most important items on the list.

    Great list Doug.

  32. cinefoz commented on Jan 20

    Mr Kass said some excellent things. There is nothing to disagree with.

    Some of Cinefoz’s supplemental rules for investing:

    1: Most experts aren’t experts. If technical analysis worked as the books claim, everyone who understood it would be richer than Bill Gates. Graphs may present abstractions of recent human behavior and allow risky short term predictions to be made, but only an idiot or a salesman would claim more. Personally, I like using a MACD to identify a potential bottom. That’s about it.

    2) Most people use uninformed opinion as a substitute for facts and knowledge. Effective communicators frequently turn this into newsletters or seminars. Some become radio investment analysts, such as panicky idiot I just listened to. Many people on tv are just repeating each other. Their investment skill involves making derivative remarks appear original.

    3) Everybody who wants something from you is probably lying. Those who don’t lie don’t tell you everything and allow you to use your imagination to fill in the blanks.

    4) Most people are too lazy to read books or become informed about international business or the Asian juggernaut. These people are to be ignored for important decisions. They are to be profited from when you want to sell at the top or buy at the bottom.

    5) Sell into a dead range at the top.

    6) Don’t be afraid to hold 100% cash if you know why you are doing it. If you don’t really know why, then wait it out.

    7) People make a market. When you make money, you probably took it from someone who made a bad decision. Sometimes this is not true, but mostly it is. Don’t be afraid to acknowledge personal avarice. You don’t have to talk about it though.

  33. badhaikuguy commented on Jan 20

    Blood runs in the street.
    Holy Shit! It’s time to buy!
    Call your broker NOW!

  34. badhaikuguy commented on Jan 20

    Blood runs in the street.
    Holy Shit! It’s time to buy!
    Call your broker NOW!

  35. cinefoz commented on Jan 20

    Another Cinefoz rule:

    If you can’t mentally break down your personal decision making process into a series of binary trees (you can ignore all the limbs you chose not to follow), so that you know how you got where you are and where you are likely to go, then forget about it. Wait for the next opportunity.

    BUT, if you can explain your objective and reasoning in simple terms, maybe it is a good idea.

  36. rickrude commented on Jan 20

    doug told everyone to buy citi,
    I did not, look what happened.

  37. Steve Barry commented on Jan 20

    When I find myself laughing out loud spontaneously about a great trade it is ALWAYS time to get out.

  38. Bob Brandt commented on Jan 20

    Is this the Doug Kass that recently said to buy financials? I would wonder.

  39. Steve Barry commented on Jan 20

    Here’s a neat trick. It makes it easy to insert links into your blog entry!! Adds a link like this one, instead of having to copy and paste to get there, reader can just click.

    Instructions here!!

  40. Bob Brandt commented on Jan 20

    Is this the Doug Kass that recently said to buy financials? I would wonder.

  41. rickrude commented on Jan 20

    Kass said to buy citi last week on street.com

    He is so hot now with predictions, now he is getting into the fine art of trading and
    making up 10 commandmants of investing.

  42. rickrude commented on Jan 20

    actually it is a buy and hold:
    “…Buy Citigroup today, and put the shares away in a drawer for a year or two.”

  43. rachits commented on Jan 20

    John Borchers,

    You have one very fatal flaw with your analysis. Your curve matching on the Russell only starts from 1987 (which was when the index started). Your DOW curve started in 1928.

    1982 – 2000 was the biggest bull market in history, therefore with your data segment the russell curve will be more “bullish” than the longer DOW curve. I would hazard to guess that if you fit the DOW curve only from 1987, you will reach the same conclusion that the Dow is “undervalued”.

    Note that reaching that conclusion is also pretty scary because again, you are using a lot of datapoints from the gigantic bull market. IMO, the DOW graph from 1928 that you have is probably the best indicator of what will happen to the market in the long run.

  44. John Borchers commented on Jan 20

    Richits,

    I tried it. I get an R squared value of 0.9109. That’s more growth than Russell 2000, Nasdaq or S&P500.

    Russell 2000 gives an R squared of 0.9369 (less growth)
    Dow from inception (1928) 0.9233
    S&P500 from inception (1950) 0.9436
    Nasdaq from inception 0.938
    Citibank 0.0932 (almost no growth)

    The best models are built on the most data. If you look at it your way when Dow and Nasdaq deviated going into 2000 you would have changed your model.

    You can see the Nasdaq model on my photobucket before and after the crash. The exponential model was actually too bullish.

    http://i265.photobucket.com/albums/ii204/jmborchers/NasdaqAtPeak.jpg

    http://i265.photobucket.com/albums/ii204/jmborchers/Nasdaq.jpg

    Since all the models indicate growth rate of R squared .923-.944 regardless of time used this indicates the growth model of US is obtained and within this range at least based on all previous data.

  45. Street Creds commented on Jan 20

    Cinefoz, you are so right. When I’m right, I take other peoples money, hence the term OPM ) Whoa, what a great handle too.

  46. Trend Analyzer commented on Jan 20

    Yep, being disciplined is one of the most important things. It’s hard sometimes to be that way, but it works out.

  47. John Borchers commented on Jan 20

    Rachits here’s your chart.

    http://i265.photobucket.com/albums/ii204/jmborchers/RussellVsDowGrowth.jpg

    The russell 2000 growth rate is in green. The Dow growth rate is in orange. These are plotted as a log which is why the graphs aren’t curves but linear slopes.

    So even when you use the data from 1987 although it suggests the Dow is undervalued which I don’t believe because I used only current data it still shows Russell has a better growth rate.

    So if Russell has a better growth rate and is underperforming the slope it’s the better one to buy if you’re bullish.

  48. Steve Barry commented on Jan 20

    John,

    I agree with the poster who said the regression on this chart can’t be the right long term path, as it is strictly data from a raging bull market. In fact it looks to me that by 2020, Nasdaq would hit infinity.

    Nasdaq plot

  49. John Borchers commented on Jan 20

    Steve,

    Yes Nasdaq 2020 projected at almost 13000. But that is actually not much different than historical. Growth is a log mathametical equation.

    S&P started at 16 in 1950. Now over 50 years later it’s 1320. It went up 82.5 times in 58 years.

    So with Nasdaq 2020 that’s 12 years ahead. Look at the dow over the last 12 years.

    I agree we’ve had a major bull run the last many years with no correction. I think we are all trying to say the same thing. I misread the first guys post.

    Also I want to correct. The R square is not the growth rate, the exponent is. The R square is the degree of the slope.

  50. Steve Barry commented on Jan 20

    John,

    Did you do a regression? I thought R squared was the correlation between the two variables. You seem to have just plotted Nasdaq vs. time.

  51. John Borchers commented on Jan 20

    Time is the second variable.

    Jeez Japanese are going to start jumping out the window. Their stock market is just a nightmare.

    With that said I’m sure it’ll turn green.

  52. VennData commented on Jan 20

    I have a dream that one day, this nation of homebuilders, mortgage brokers, real estate agents, and misc. real estate investors will rise up and live out the true meaning of its creed. “We hold these truths self-evident, an SUV in every garage, a 50″ plasma screen on every wall, that all HELOC rates be subsidized by Washington and set zero immediately, and on a going-forward basis.”

    I have a dream that one day in the desert of Riverside county, the swamps of Miami Dade County, the high risers of Manhattan, appreciate together, at above historical trend and beyond affordability.

    I have a dream that buyer’s agents and sellers agents can sit down together and earn a full commission.

    I have a dream, the Las Vegas, a city of sweltering heat in the summer and sweltering property values a few years back, will have a condo hotel for all men regardless of their FICA score.

    I have a dream that mortgage interest and capital gains on sales will forever and always be fully deductible, regardless of the size, the magnitude, or proportions of the US government debt, agency debt, implicit Medicare and Social Security costs, plus all state and municipal bond issuance (including any security commitments we’ve gotten ourselves into – and the infrastructure build out.)

    I have that dream today.

    – Ben Bernanke from the Federal Reserve minutes the day he cut the Fed. Funds rate and the discount rate to zero.

  53. Pat Gorup commented on Jan 20

    This is way off subject so I apologize. But have you noticed an increase in the infomercials for Reverse Mortgages since the beginning of the year when the first official baby boomer became eligible to apply for Social Security? It seems more than coincidental to me but maybe it’s my imagination. I believe this will be the “new wave” of fleecing a couple more trillion from the American landscape. So, if you know of someone considering one of these and they ask you for your opinion, I’d advise against it. I know noone asked for mine but I have alot of prioir work experience in these areas and I know alot of eyeballs veiw this blog. Enjoy MLK day!!

  54. John Borchers commented on Jan 20

    Chinese banks coming out tonight and saying they have significant write downs from bad investments.

    Here we go. The circle of love goes around.

  55. Steve Barry commented on Jan 20

    I think these times call for us to get guidance from the greatest Fed Chairman we had by far…the maestro…Paul Volcker. He predicted in 2004 a 75% chance of a financial crisis. He’s the man. Greenspan, shut up.

  56. NoFate commented on Jan 21

    >> Rumor on the street is that “Good old boy Bernanke is going to FRY bears and shorts with a 75bps cut” at the next meeting. Comments?

    Suge – I hope he does 100bpc! I’m about 1/3 double shorts and half cash. I want a big bounce so I can short more!

  57. Suge Knight commented on Jan 21

    NoFate,

    I expect Bernanke to cut by 100bps. 50bps will not do much, Bernanke has to go for a 100bps cut, he has to.

    Suge

  58. bt commented on Jan 21

    Suge, yes, anything less than 100 bps and the markets think it is half hearted and too little. A lot of worry is being priced into the markets (see Asian markets tonight — Monday in Asia) and the only rational response from Fed is a massive rate cut. Bernanke promised action but so far hasn’t delivered. If he intended not to deliver, he should have shut his trap and told us in no uncertain terms that the Fed’s job is not to worry about markets. Too late for that — he already caved in with surprise discount rate cuts and strong short term lending activity to needy banks. No point in closing the barn door after the proverbial horses have left the barn. The barn door is opening as we speak and the time to act is NOW.

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