Posts filed under “Rules”
Interesting set of rules from legendary investor John Templeton:
1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often
Complete explanation after the jump
Back in 2011, I pulled together a full run of Trading Rules & Aphorisms.
It turned out to be a worthwhile exercise, and so I began updating this semi annually. This is a list of my favorite traders, analysts, economists and investors views’ on what to do — and what not to do — when it comes to markets.
This is the latest updated version of my:
Trading & Investing Rules, Aphorisms & Books
• In Defense of the “Old Always” (Montier)
• The golden rules of investing (India)
If you have any suggestions for any good lists of rules I may have missed, please link to them in comments. If they are worthy, they will get added tot he list.
After this run, I plan on updating this list 2x per year . . .
My own trading rules and favorite Trading Books are after the jump
10 inviolable rules for dealing with the sharks on Wall Street Barry Ritholtz August 31, 2012 Back in 2001, a very curious deal was struck between the government of Greece and Goldman Sachs. It was an exotic dollar/yen swap for euros. What possessed Greece to do such an unusual — and expensive —…Read More
David E. Hultstrom of Financial Architects submitted this list in response to our Checklist of Errors, and its a good one. You can grab a PDF of this here. Enjoy . . . ~~~ I am a long-time reader and thought I could contribute usefully to your checklist, but I don’t want to post –…Read More
I only recall meeting Barton Biggs once (via a Green room somewhere), but his legend preceded him. This list of quotes (Thanks J!) should give you a solid basis as to his thought process and investment philosophy: * “Good information, thoughtful analysis, quick but not impulsive reactions, and knowledge of the historic interaction between companies,…Read More
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….Read More
This is post number five in our series, bringing us exactly halfway through our ongoing look at the most common investor errors.
This morning, we are going to briefly look at what may very well be the most common mistake investors make: Being active investors.
Passive vs Active Management
Active fund management – the attempt by an investor or manager to try to outperform their benchmarks through superior stock picking and/or market timing – is exceedingly difficult. It has been shown (repeatedly) that every year, 80% of active managers under-perform their benchmarks.
Those are not particularly attractive odds.
Worse, most active managers typically run higher-fee funds. (all that activity costs money!). That combination — High Fees + Under-performance — are not the ingredients of a winning long-term strategy. This is why for the vast majority of investors, passive index investing is a superior approach.
-Remove the emotional component
-Take advantage of (instead of working against) mean reversion
-Garner the lowest possible fees
-Eliminate all of the friction caused by overtrading
-Keep capital gains taxes as low as possible
-Get good results over the entire long cycle
-Avoids typical cognitive errors
-Stop chasing hot managers and funds
Consider if your portfolio won’t be better served replacing some or all of your active fund managers with passive indices.
This morning we are going to ever so briefly look at mistake number four:
4. Asset Allocation Matters More than Stock Picking: The decisions you make as to your mix of assets has a far greater impact on your investing success than does your stock picking or market timing. This too has proven repeatedly in both academic studies and the real world.
I’ll save you the war story, but when I was on the Sell Side, I was a big Apple fan. When the first iPod came out, the company was trading at $15 (pre-split) with $13 in cash. I recommended Apple, the firm bought a ton at $15, and dumped most of it at $20 for a 33% winner.
Pretty smart, huh?
That was literally the worlds greatest stock — and it hardly mattered at all. The worlds’ greatest stock pickers all got crushed during the 2008 crisis. And a monkey could have thrown a dart at a stock list in 2009 and made a ton of money.
Consider this: If your allocation mix contained too little equities over the past few years, then you probably missed the 100% rally since stocks since March 2009. And a lack of bonds meant that during the 2008-09 crash, you had nothing protecting you as markets fell.
Stock picking is for fun. Asset allocation is for making money over the long haul.
Last week, I mentioned some investor errors investors make, and decided to put together a top 10 list of broad and common mistakes.
So far, we have looked at Excess Fees, and Reaching for Yield. Today we are going to ever so briefly look at mistake number three — behavioral issues in investing. (for far more details, see this collection of posts).
3. You Are Your Own Worst Enemy: Your emotional reactions to market events is yet another detriment to your results. Typically described as Fear & Greed, it is more complex than that. But for starters, Fear & Greed does enough damage.
Do you get excited about hot new companies? Do you love chatting about stocks at cocktail parties? On the other hand, do your holdings keep you up at night? Are there periods where you cannot bear to even open your monthly statements?
These all suggest that you, like most humans, are an emotional investor. This manifests itself in two ways: With heavy buying of equities at the regardless of valuation as excitement builds near the top of the cycle (most public ownership of equities occurs this way); secondly, with panicked selling, typically near major inflection points.
You can take steps to protect yourself from, well, yourself. Predetermine your exits and stick with it. Make decisions while objective, before emotional trouble hits.Set up a Mad Money account with a less than 5% of your capital. This will allow you to indulge “your inner Cramer.” If it works out, that’s great — maybe you are thr next Steve Cohen. If it’s a debacle (and the odds are it will be), it’s a terrific lesson that will serve to remind you that trading in and out of stocks like a deranged hedge fund manager is not your forte. Be thankful it wasn’t most of your retirement assets that you lost.
Your emotions are often the enemy of your financial well-being. Learn how to keep them in check, or to protect yourself from them, to become a better investor.
To start July, we are introducing a series looking at common investor errors. This is the part two of ten. Yesterday, we looked at the impact of excess fees on performance.
In the current low rate environment, many investors make the mistake of reaching for yield. That is our #2 investor error after excess fees.
The first law of economics is there is no free lunch. You would think the mathematics of that would itself be a warning as to the perils of chasing the higher yielding paper, and that it should be self-explanatory. But its not
History shows us there are few investment mistakes more costly then “chasing yield.” Fixed income is supposed to be your safe money, what you have to have back, what will cushion the ups and downs of the equity markets. Hence, you should be first concerned with return of your money, and second, the return on your money.
In other words, safety first for your bonds and preferred.
Don’t take my work for it, just ask the folks who loaded up on sub-prime mortgage-backed securities for the extra yield how that worked out for them. Some people have suggested I cut the RMBS investors some slack, as the paper was rated AAA. I don’t because they willingly violated the Free Lunch edict.
Quick war story: In 2004, I worked at a firm that was occasionally pitched products from other shops. One day, I walked into the conference room to hear Lehman Brothers offer a higher yielding fixed income product. “AAA rated, Safe as Treasuries, yielding 100-300 basis points more. I was subsequently called into my bosses office for saying:
“You guys are either going to win the Nobel prize in economics or go to jail. There is nothing in between.” (Does a firm ending faceplant count as the equivalent of the latter?)
Regardless, we know the outcome of THAT free lunch.
There are three common ways to chase yield: 1) Go out on the duration curve, i.e., buy longer dated bonds; 2) Go down the credit scale, i.e., buy junkier, riskier paper; or 3) use leverage, which amplifies your gains but also amplifies your losses as well.
With the 10 Year Treasury at 1.6%, I see lots of folks trying to capture more income using some combination of the above. Anyone who engages in this sort of ill-advised risky behavior should best understand the risks you are taking, and what that might mean if and when things go awry.
Simple rule of thumb: Never reach for yield.
What are you chasing for Yield?
Top 10 Investor Errors
1. Excess Fees