Lately the interweb has been inundated with Nassim Taleb content no doubt because he has a new book coming out. One review of the book called it a rules for life type of list (I've read so much lately that I'm not sure which article that came from so no link).
While we can get to a life list here some other time a lot of well regarded investors have published their rules for investing as lists and I thought it might be fun to start one here. Please note this likely will not be a a final draft but more of a working paper (this post was written Friday night with the Cotton Bowl on).
1) Define your real time horizon and your real objective
I can tell you that far too many people have this wrong, for example it is rare that a time horizon ends with the first day of retirement. Having this wrong does not have to be a deathblow, that is probably rare, but it can reduce efficiency of more things than just portfolio management.
2) Figure out what you can really tolerate in terms of volatility
As I've said many times, finding out you had too much in equities after a large decline is a bad place to be. It increases the odds of panic selling. A normal bear market doesn't have to result in a permanent impairment of capital but selling near a low increases the odds that it will.
3) Watch your position sizing
A 10% weighting in a sector fund or country fund is not a huge bet but that much in one stock might be (I think it is). A sector or country is not going to go to zero. You may choose poorly and create a drag putting 10% into a utilities ETF and another 10% into a Sweden ETF but they won't get wiped out. If you use broad based funds for your portfolio then 30, 40 or even 50% is not out of line. An asset allocation of 40% domestic large cap, 20% domestic small cap, 25% foreign developed and 15% emerging would not be insane and someone doing something like this just with broad based funds might only have one fund for each segment. Again this will be right or wrong but asset classes don't go to zero. I have about 85 or 90% of my equity exposure in the fund I subadvise.
Putting too much in one stock is a behavior that repeats over and over and it continues to blow people up.
4) No product wrapper can possibly be the best for all markets for all times
It makes no sense to limit yourself to just one product wrapper for your portfolio. I never understand when I read about a firm that only uses ETFs, it seems like an artificial structure. There might be plenty of reasons why owning 30 individual stocks might be difficult but I do believe that many participants have the capacity to own some individual stocks with reasonable position sizing.
5) All bull markets end eventually
But most people fail to see them ending. Remembering that all bull markets end reduces the chances of being caught off guard and panicking.
6) Bear markets start slowly
They rollover slowly over a period of several months giving plenty of time to get out before the full brunt is felt.
7) Fast declines, like crashes, are better to be bought than sold
See 1987, 1997, 1998 as examples of fast declines that people remember. There have been countless others that people don't remember.
8) Stick to your strategy
Chances are that whatever you think is the best way to invest was decided over some period of time and done when there was little to no emotion involved. If you think something is best then you have some reasonable basis to believe it can get the job done for which assumes you've figured rule number one. The middle of an emotionally challenging time, like after a 40% decline, is not the time to change strategies, or asset allocations. You chose your strategy for a reason, stick to it.
9) But remember no strategy can be the best for all times and all markets
No matter what you think is best for you, it cannot conquer all market conditions, it cannot always be the best but it doesn't have to be. The building block here is that just staying close to the market over the long term can get the job done for a lot of people so your strategy should allow you to sleep at night and be such that you aren't going to screw it up.
10) You are going to be wrong
No one is correct 100% of the time, but fortunately you don't have to be. Putting 2% into a stock that goes to zero will not result in a financial plan re-write but 20% in that same stock might. Mitigate the consequences of the times you will be wrong.
11) Saving money is just as important as your portfolio results
Maybe more important.
12) Don't drink soda
Ok one life rules item.
This is a work in progress, I know that as I think about this more I will add many more. What are some rules you invest by?
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8 comments:
Even diet soda? :-)
My first rule comes from my High School football coach, "Offense wins fans, defense wins games."
Regarding individual stocks and options, 1 thing I hear myself telling folks a lot is "No matter how much you study and think you know about a particular stock/option play, you're still making an educated guess, at best.".
I'm glad to see that you "eat your own cooking" by keeping most of your equity assets in RRGR. As an investor in that fund it gives me comfort. Of course, if your equity assets are low relative to your total net worth then that doesn't really say much. You're still a young guy (in your 40s?) so I assume that you have a reasonable percentage of your assets in equities?
First of all Roger, all 12 of your thoughts are just plain EXCELLENT!
Number 3 especially should not be forgotten-chiseled in stone on the front cover of every portfolio.
Number 1, however deserves the most attention by every reader. Most people just do not get that one right. Keep up the good work!
Read "Wheat Belly" by Dr. William Davis and then you will add don't eat wheat or foods with wheat in them to your life list.
1) don't reach for yield
2) stay the course
3) you're not smarter than the market
4) stock picking and market timing are expensive, risky, and ultimately futile excercises
5) by speculating instead of investing, you lower your own odds of building wealth and raise someone else's
6) the knowledge of how little you can know about the future, coupled with the acceptance of your ignorance, is an investor's most powerful weapon
7) the more you trade, the less you keep
8) a great company is not a great investment if you pay too much for the stock
9) the gross return in the stock market, minus intermediation costs, equals the net return earned by investors as a group. If the data do not prove that indexing wins, well, the data is wrong
10) the miracle of compounding returns is overwhelmed by the tyranny of compounding costs
and one life rule
11) don't put your hands anywhere you wouldn't put your p*n*s
Good game, great post, Roger. Thank you.
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