Posts filed under “Rules”
After last week’s Rules frenzy, Cassandra Does Tokyo sent this in. Enjoy:
Trolling the blogosphere, it seems to be the season for sharing one’s so-called Golden Rules of Investing. So here goes…
Cassandra’s 25-3/4 (or so) Tungsten-Filled Golden Rules
#25-3/4. Do as I do – not as I say – but do it without delay! (NB: 13F-HR’s are too late!)
#25-1/2. The trend is your friend….errrr….ummm…..except when its not.
#25-1/4. Whatever kind of metaphorical market animal you are (bull, coq, chicken, weasel, whatever), always remember that Pigs Get Slaughtered.
#25. Buy “The Best of Breed” companies…..unless they are priced at levels preceding the moment when Pigs Get Slaughtered, or when the trend is not your friend, or I am saying the opposite of what I am doing.
#24. NEVER short “Best of Breed” companies…except when Pigs Are Getting Systematically Slaughtered in other “Best of Breed” companies (but don’t get piggy puking out the pigs).
#23. Cut your losses short and let your winners ride – but not when pigs are getting slaughtered
#22. No one ever made a dime by panicking … unless apparently you’re following the previous rule #23 which says you should cut your losses short and let your winners ride.
#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you’re Ed Thorp, or if you’re playing at The Martingale Room.
#20. “Systems” always stop working (Even if they DID actually work at one point). So forget about asking about their “system”: what you really want to know about is their Plans B&C for when it DOES stop working (and why they’re not using them NOW).
#19. Diversify to control risk – except if you are Eddie Lampert
#18. Don’t own too many names – unless you’re Ed Thorp or diversifying to control risk per the above rule
#17. Invest in what you know – unless you don’t know a whole lot about those things.
#16. Buy when others are (almost finished being) fearful.
#15. Buy when there is blood in the streets – but only after it has dried a little bit.
#14. But NEVER buy when the blood in the street is your own. (See rule #23 above)
#13. Never catch a falling knife (unless you know why it’s falling and/or approximately when it’s likely to stop). Catching a rather dull falling knife, however, is OK. (NB: IF you ignore this rule and try to catch the falling knife, and discover it is hazardous, and the street becomes stained with your blood, see rule #23 above).
#12. Leverage is poison! (unless you’re doing risk-parity and then it’s sorta kinda seems theoretically OK, but then again, maybe not just when yields are near zero and everyone else is doing risk-parity or has risk-off asset allocations and…)
#11. Cranking up risk in order to target return when vol is low is like smoking a cigarette out of your butt-hole – it’s just stupid.
#10-1/2. A great coder is worth at least six fraternity brothers.
#10. NEVER allocate money to anyone who feels the need to sum their aggregate number of years experience to some impressively large number.
#9. NEVER invest with anyone with an improbably-inflated CV. If he’s embellished his Starbucks-fetching experience while an intern into something rather more grandiose – imagine what he (and it will be an egotistical ‘He’) is capable of fabricating in regards to his investment strategy and performance!
#8. NEVER invest with an investment manager who buys and then increases positions in less-liquid securities at higher and higher prices (unless those prices are likely to be demonstratively requited by per share growth metrics)
#7. Be entirely skeptical of an investment manager who touts his self-professed superior research skills, proprietary channel checking methods, or interns sent to dumpster-dive to gain an edge. This is almost certainly first-class balderdash.
#6. If your broker says you’re his first call (and you believe him) you’re an idiot.
Always assume you are the LAST one to receive a “tip” or sell-side research. Prop Desks, friends&family of potentially anyone in the research publishing & distribution chain, SAC, MW all will have had the chance to act upon it before you.
#5-1/2. Oh and I forgot one which is the keystone to resolving the logic flaws at the root of the conflicting rules: “One man’s momentum is another man’s reversion….”
#5. If you pay an upfront load for the ‘privilege’ of investing in a fund, you’re an idiot.
#4. If you invest in a hedge fund with anything less than annual incentive-fee crystallization, you’re an idiot.
#3. The moment your Advisor, Letter-Writer, Investment Guru mentions “Hyperinflation” or “Government Conspiracy” – run away in the other direction as fast as you can.
#2-1/2. To catch a gopher, you’ve got to think like a gopher.
#2. NEVER subsidize losers with winners – unless you’re diversifying to control risk – where rule#23 will tell you to sell your losers and let your winners ride – unless the losers are “what you know” and therefore you SHOULD be investing in it – doubly-so if you have material non-public information, and especially if there is Blood In The Streets – unless of course it’s your own blood, in which case you should return to #23 and sell your losers – at least until tomorrow when you wake up and see that there is blood in the Street and you remember to be greedy when the others are fearful…
#1. Never listen to other peoples Golden Rules – particularly those filled with Tungsten.
> My Sunday Washington Post Business Section column is out. This morning, we look at Ritholtz’s rules of investing. The dead tree edition has the headline Think like a contrarian: Ritholtz’s rules of investing. We have 6 rules today, and 6 more rules next week: 1 Cut your losers short and let your winners run…Read More
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.