Simple Investment Rules

MJG

Hi Guys,

Investing can either be a simple or a very complex matter with a spectrum of intermediate approaches. I favor the most simple approach, but with a cautionary constraint. That cautionary recognition is best summarized by an Albert Einstein quote: "Everything should be made as simple as possible, but no simpler.”.

That's terrific advice that can be immediately transferred to a simple set of investment rules or perhaps more properly guidelines. Many investors have formulated their own guidelines. I have too. Here is my short list.

1. Be a long term investor, not a speculator. Trading is hazardous to wealth so set it and forget it. Stay the course.
2. Hard data beats opinions. Another word for guru is charlatan so ignore them.
3. Diversity rules. Change and fat tails happen randomly and more often than expected.
4. Costs matter greatly so keep control of them. Index when possible.
5. Don't react in haste so make portfolio adjustments incrementally.

Researchers in this field have concluded that most folks can't handle more than 4 to 7 rules. So the actionable rule list should be very limited.

I'm most interested in your actionable investment guideline list. My list is surely not cast in stone and is subject to adjustments so add to those I use or suggest a deletion if you so feel. All your comments are welcomed. Please contribute.

What simple rules do you favor when making investment decisions?

Best Regards

Crash

Zurich Axioms. Because investing should be as simple as possible, but no simpler. The ZA strike me as quite savvy. Not the sort of list that can be followed step-by-step, as if it were a recipe. Maybe, those who are hell-bent to find the best recipe are confounded by it and reject it. But, hey: don't read the NY Times as if it were poetry. Don't read a technical manual for fascinating investigations into The Humanities or the Liberal Arts. Don't pick up sheet music and try to read it as if it were an essay on epistemology. The ZA strike me as doing justice to both aspects of investing: both science AND art. Uncanny, somehow, and the axioms remain true, even though they are rather fluid--- by design.

MJG

Hi Crash,

Nice recall! The Zurich Axioms are indeed an excellent set of investment rules. Your reference Links to the book. Here is another Link that summarizes the 12 rules:

http://www.financialsense.com/contributors/joseph-dancy/2012/01/26/the-twelve-axioms-of-investing

The Zurich set violates the research recommended 4 to 7 limits so immediate recall might prove difficult. The author of the referenced article summarized the 12 Zurich set to a more manageable set of 7. Here they are:

1. Run a concentrated portfolio
2. Keep the odds are in your favor
3. Cut your losses short
4. Let winners run, but sell when they reach fair market value
5. Do your own analysis
6. Beware of excess optimism or pessimism and of expert options
7. Remain flexible and adapt to the investment environment

Note how these rules differ from those that I listed. Simple rules are personal to each individual. You choose those that allow you to sleep well. I just might be doing something right since I sleep very well indeed.. Then again, I might just be innocent or perhaps even lucky

Thanks again.

Best Wishes

Ted

@MFO Members: It's been about 20 years since I first linked Max Gunther's Zurich Axioms to the FundAlarm Discussion Board. One of the major problems I see on the MFO Discuaaion Board is that many members don't take enough risk. Here's what Max Gunther had to say about risk. " Put your money at risk. Don’t be afraid of getting hurt a little. The degree of risk you will usually be dealing with is not hair-raisingly high. By being willing to face it, you give yourself the only realistic chance you have of rising above the great unrich."

BenWP

I like your approach @Ted and I believe you are correct in your assessment of risk-averse MFOers. Your three top fund holdings revealed in a recent thread show that you walk the walk. For my part, I put a slice of my active portfolio into PTIAX for diversity's sake, but you won't see me agonizing over or discussing bond durations or other arcane metrics fixed income investors revel in. According to my age, I should have 25% equity exposure, but it's closer to 75% because I believe I'll be around for 20 more years, a long-term target. I realize what the risk is.

A few years ago my TIAA advisor showed me a graph depicting a line going straight up from 2000 to 2014. It represented the performance of TIAA's fixed income portfolio returning 5% per annum. Stocks came nowhere near that level of performance. I felt kind of dumb until I realized that no one could have told me in 2000 to put everything into bonds and I now doubt many TIAA investors achieved that extraordinary performance. I've done fine in equities despite periods of lagging performance and I've enjoyed the ride. 2008 was a sickening time, but it didn't last forever and it provided a great time to put more money into stocks.

VintageFreak

Ted said:

@MFO Members: It's been about 20 years since I first linked Max Gunther's Zurich Axioms to the FundAlarm Discussion Board. One of the major problems I see on the MFO Discuaaion Board is that many members don't take enough risk. Here's what Max Gunther had to say about risk. " Put your money at risk. Don’t be afraid of getting hurt a little. The degree of risk you will usually be dealing with is not hair-raisingly high. By being willing to face it, you give yourself the only realistic chance you have of rising above the great unrich."

The biggest risk is not taking risk. I agree. The problem is easy to convince someone who started investing in 1990, not 1999. Blaming the investor is the easiest thing to do.

Trading is not always speculation. And it is not "market timing". Ask those who got out of the market the last 2 times it went down 50%. Don't just say they never got back in soon again. They slept well and someone has to produce proof they are worse off today. And until the next 50% correction.

"If you had invested $X in year Y...." is all available in hindsight. In the real world things work differently. When I'm 80 (nah, I don't think I'll live that long, I couldn't afford it, but dream with me a bit...) and I don't have responsibilities, sure I'll go to Vegas.

PS - by the way I've never been to Vegas. I know, I suck.

MJG

Hi Guys,

Congratulations on terrific contributions that expanded the topic in a very positive direction. I never anticipated that your replies would move the discussion in the risk and uncertainty arena. It is a very worthwhile subject matter that gets complex and highly emotional quickly. Here is a quote that I'm sure you all will recognize:

"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."

Yes, Donald Rumsfeld will long be remembered for this quote. It captures the distinction between risk and uncertainty. As investors we like to operate in the risk domain and not in the uncertainty domain. Many folks abstain from entering the investment world because of fear of unknown unknowns. Those of us who do invest have down rated the uncertainty to the risky level by deligent study.

We have significantly reduced knowledge asymmetry by that careful study and have consequently become more comfortable in the risky investment environment. Unfortunitly, that added knowledge, although reducing the uncertainty level, doesn't always make us right. Luck always enters into the outcome equation.

Thanks again for greatly enhancing the meaningfulness of this discussion. Risk and risk assessment discussions are always the most important aspect of any investment decision.

Best Wishes

redwing

A few more to throw in (some attributable to Bernard Baruch):

1. Don't try to buy at the bottom and sell at the top. It can't be done except by liars.
2. I made my money by selling too soon.
3. Every man has a right to be wrong in his opinions. But no man has a right to be wrong about his facts.
4. I never lost money by turning a profit.
5. The main purpose of the stock market is to make fools of as many men as possible.
6. When good news about the market hits the front page of the New York Times, sell.
7. If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.
8. A speculator is a man who observes the future, and acts before it occurs.
9. Don't be afraid of income taxes when deciding whether to turn a profit. (my own)
10. Sooner or later economics always takes over. (my own)

VintageFreak

Two thumbs up for #9. No one went broke paying taxes.

Crash

Good stuff, all.

JoJo26

Buy low, sell high