9 basic rules for investors
Over the years I have been asked many times for my approach to investing. My standard mantras of only investing in companies with 10 or more years of increasing dividends, do your research, not panicking at any or every market downturn, etc., are well known.
What about my basic market philosophy? Do I have one and if so, how would I elucidate it? Yes, I do. So, here are my basic nine rules of investing.
• Discipline. You need to have the fortitude to ignore daily, weekly or even monthly market swings. Once you have made an investment decision, stick with it for at least a year, maybe two. Trying to rebalance your portfolio every time you have a small gain or loss in a stock is deadly to overall returns. I have said many times that my biggest responsibility is protecting investors from themselves.
• “Aversity” to Risk. This can best be summarized with the statement that risk and return are directly proportional. Never fall victim to the idea that somehow you have learned of an investment that is paying greater than the commensurate or market return for that class of investment yet has less than average risk. It just does not happen.
• Money Management. If you are investing in equities, you should be prepared not to need the funds for at least a year, despite their being readily available with three days’ notice. Money needed for an expense that will occur in let’s say six months should be in shortterm Treasury securities.
• Objectivity. Be realistic. Too often investors become over enamored with one or more companies. They see what they want to see and not what is happening. One good indicator that you are not objective is if you tell yourself that a persistent price decline will eventually reverse and you will sell when you break-even.
• Ignore the Crowd. You do not want to join the others as they go over the cliff. Do your own research, the crowd is often wrong, and you could be coming in a day late and dollar short.
• Be Flexible. Do not beat yourself up if you missed a so-called opportunity. The time to invest is any time after you have completed the necessary research.
• Don't Fight the Fed. You may not agree with Fed policy, but it is what it is. Accept it as a given parameter and make it work for you.
• Don't Fight the Tape. Today’s markets provide an excellent example. Ignore the purveyors of doom. Ride along and enjoy the ride. There will be ample time to decide when to step aside.
• Use History as a Guide. The best example I can give you is to look at a 10-year chart of the S&P 500 index. Notice the overall upward trend. However, keep in mind that you are not buying the market, you are investing in individual stocks. Find a similar chart of that company’s earnings over the past 10 years. It should mimic the trend of the S&P 500.
Here is another approach along the same lines of thought. For decades investing legend Bob Farrell was a top Wall Street strategist known for predicting changes in overall stock market direction.
Farrell’s 10 trusty rules are still passed around on Wall Street:
• Markets tend to return to the mean over time.
• Excesses in one direction will lead to an opposite excess in the other direction.
• There are no new eras — excesses are never permanent.
• Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
• The public buys the most at the top and the least at the bottom.
• Fear and greed are stronger than long-term resolve.
• Markets are strongest when they are broad and weakest when they narrow to a handful of bluechip names. (Does this remind you of today?)
• Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend.
• When all the experts and forecasts agree — something else is going to happen.
• Bull markets are more fun than bear markets. Lauren Rudd is president of Rudd International, an asset management firm. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at 941-706-3449. For back columns, go to heraldtribune.com/business/ columns. Lauren Rudd offers commentary Thursdays on SNN News 6 during the 5:30 p.m. live newscast.