When investing in the real world, textbooks and theory aren’t much help. So says Michael Comeau, in Four Real-World Investing Rules That Should Be Taught in Schools.

His short list of  rules are:

1. What You Know, Everyone Else Probably Knows, Too.
2. Timing Is Everything.
3. You May Be Suffering From Confirmation Bias.
4. In Isolation, Valuation Ratios Are Useless.

You should read the entire piece is smart and insightful. He places the these rules into some context, and procides some real world examples.

 

 

Source:
Four Real-World Investing Rules That Should Be Taught in Schools
Michael Comeau
Minyanville, JUN 20, 2012
http://www.minyanville.com/business-news/editors-pick/articles/AMZN-AAPL-FB-NFLX-investing-lessions/6/20/2012/id/41862

Category: Investing, Rules

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5 Responses to “4 Real-World Investing Rules”

  1. constantnormal says:

    1. What You Know, Everyone Else Probably Knows, Too.

    If you’re not going to do the work to know more than the markets do in an ares, this IS the case — in fact, everyone probably knows MORE than you … and if you read some nugget of investable news anywhere, the markets already know it, and have acted upon it.

    2. Timing Is Everything.

    Always true. Luck is Everything also.

    3. You May Be Suffering From Confirmation Bias.

    True regardless of everything else, unless you relentlessly question yourself. In which case, you’re likely to be a basket case of indecision. Confirmation bias is an unavoidable consequence of thinking. Computers running algorithms are prey to the flaws in those algorithms. The key takeaway to this? Learn to recognize mistakes early.

    4. In Isolation, Valuation Ratios Are Useless.

    Obviously true. Always. Everything is relative.

  2. constantnormal says:

    It might appear from my earlier response that I do not understand what confirmation bias is. I do, it’s one of a number of errors in thinking, and should be treated as such. Errors in a thought process produce wrong results. No thought process is perfect.

    Does this mean that one should not try and avoid confirmation bias? No, but some degree of it is unavoidable. There are other errors that occur in our thought processes as well.

    The treatment for erroneous thinking is, of course to try not to fall prey to those patterns, but the suspenders in a belt-and-suspenders philosophy is to learn to recognize errors early and act to correct them.

  3. marquis says:

    3&4 most investors agree with.
    1&2 are partial truths. You can’t predict anything much less the future.
    But you can observe what’s going on now and what will make you lose your investment.
    Agree that information is dissemnating quickly nowadays. But not every information that’s worth is disseminated.
    Media is always intrested in the latest fad stories. It’s alwyas joins the bandwagon at least halfway after it has started.
    How many people or investors are interested in cloud computing in 2005&2006.
    As for timing that’s where execution is important. a professor of mine (economics prof in california) has noticed housing bubble in 2002.
    He did the research to understand that most of them will be impacted by interest rates ( when they are rising).
    He also understood to go the subprime route for shorting which he did through a hedgefund as he does not want to start one and do all the work.
    You have to know where your advantage is. He also shorted enron and netflix.
    He built his position slowly in a rising market as you cannot build a big postion ( short position) at the top, as he know his pain threshold.
    This is something akin to partially agreeing that timing is important.
    We can give anecdotal evidence for anything.
    ( to support our point of view which many magazines like businessweek, bloomberg cite sources who corborrate their stories)

  4. VennData says:

    He needs a few more years if he thinks he can do anything about 2} timing. No one can consistently time the market, if you think you can, see 3}.