Hi Guys,
Everyone and his uncle offer year end investment forecasts and rules of engagement.
Typically the forecasts are trash and not worth the paper they’re printed on. Sometimes the rules are similarly trash, but occasionally some well integrated rules, that have been thoughtfully assembled from experience, do serve a useful purpose. They can act as a compass to guide your investment ship to a safe harbor.
There are many practical rules that have been cobbled together to make a consequential list. I have several favorites. One such list that is high on my personal hit parade is from Morgan Housel. He recently published that list in a WSJ article.
I failed to note the reference, but I did make a copy of his 16-point guideline. Here it is:
1. All past market crashes are viewed as opportunities, but all future market crashes are viewed as risks.
2. Most bubbles begin with a rational idea that gets taken to an irrational extreme.
3. “I don’t know” are three of the most underused words in investing.
4. Short-term thinking is at the root of most investing problems.
5. Investing is overwhelmingly a game of psychology.
6. Things change quickly—and more drastically than many think.
7. Three of the most important variables to consider are the valuations of stocks when you buy them, the length of time you can stay invested, and the fees you pay to brokers and money managers.
8. There are no points awarded for difficulty.
9. A couple of times per decade, investors forget that recessions happen a couple of times per decade.
10. Don’t check your brokerage account once a day and your blood pressure only once a year.
11. You should pay the most attention to the investor who talks about his or her mistakes.
12. Change your mind when the facts change.
13. Read past stock-market predictions, and you will take current predictions less seriously.
14. There is no such thing as a normal economy, or a normal stock market.
15. It can be difficult to tell the difference between luck and skill in investing.
16. You are only diversified if some of your investments are performing worse than others.
I think rule 7 is especially insightful. What you pay, how long you hold, and how much you keep after fees is the whole ballgame. Rule 8 advocates for simplicity. Rule 11 emphasizes that real learning takes place in what the military calls After Action Reviews that uncover faulty concepts and/or execution.
Note that rule 13 supports my position on forecasting futility. It’s fun each new year to project and to read forecasts. But only a fool acts on these historically and scandalously inept predictions.
I have a little time before our Christmas party moves into high gear, so I’ll research the Housel list. I just located the referenced article. Here is the Link so you can read the entire piece:
http://www.wsj.com/articles/16-rules-for-investors-to-live-by-1417789469Enjoy! Best Wishes for a Happy Holiday season and a prosperous coming year.
Comments
I'd say the less I read and watch the news the smarter I've become.
14. "There is no such thing as a normal economy, or a normal stock market."
Perhaps there is but it is very short lived and if you blink you'll miss it. Ever wonder why Bill Gross termed the phrase "the new normal?"
8. "There are no points awarded for difficulty. Yes, there is. It is called risk."
What do you get for risk? A lump of coal from Charles Jaffe.
15." It can be difficult to tell the difference between luck and skill in investing."
The modest investor will tell you it was luck. The braggadocio will say it was skill. ( my statement is not pertaining to anyone here)
Thanks again @MJG for this thread.
The modest investor will tell you it was luck. The braggadocio will say it was skill. ( my statement is not pertaining to anyone here)
Anyone who develops a Skill (ie good at what he does) is called "Lucky" by his contemporaries (known as envy), but I've never heard a truly Skillful person claim LUCK as his reason for success.....hard work, insite of the future, original thought, unwilling to accept No for an answer ect ect is usually the Real reason for their success
The smarter I work the "luckier" I get....tb
Thanks for sharing, as always.
Thank you all for reading my post during this Holiday season, with a special thanks for you guys who replied. I’m a firm believer in the benefits of measured and respectful interchange and debate.
Upon reflection, several of Housel’s rules are simply reworded long standing, generic axioms.
For example, the rule (No. 6) that things change rapidly has been historically addressed from several directions.
Confucius noted that “Only the wisest and stupidest of men never change”. Machiavelli wrote that “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things”. J. Paul Getty cautioned that “In times of rapid change, experience could be your worst enemy”.
For example, the rule (No. 8) against investing difficulty is just a restatement of Einstein’s famous proclamation. He famously voiced that we should “Make everything as simple as possible, but not simpler”.
For example, the rule (No. 12) emphasizing a mind reset is a remake of John Maynard Keynes advice as follows: “When the facts change, I change my mind. What do you do, Sir?”.
Even with this limited MFO response, a sharp disagreement among members is clearly in evidence.
Dex said: “I'd say the less I read and watch the news the smarter I've become”. In contrast, Tampabay said: “….hard work, insite (insight?) of the future, original thought, unwilling to accept No for an answer ect ect is usually the Real reason for their success “.
The disparity of opinion illustrated here should always be welcomed on MFO. Based on the arguments and our own circumstances, we get to choose.
In this instance, I subscribe to the Tampabay perspective. I’m sure that surprises zero souls among MFO regulars.
But even the hard work ethic has its limitations when investing. I offer that all mutual fund mangers and their staffs are smart, well educated, and hard working folks, yet many fail to generate benchmark rewards.
The failures are not caused by a work or smarts shortfall; it is coupled to the overall market interactive complexity and the uncertain future. Hard work reduces risk when it is somewhat known in terms of frequency and impact; it falls short when uncertainty basically overarches and controls future events. It’s the unknowable future that kills performance, not effort.
Enough philosophizing for this year. Once again, and finally, thanks for participating. Have a wonderful Holiday season.
People wanted to forget any lessons from 2008 early in 2009 and just wanted to reboot things to a few years prior ASAP.
Rather than trying to fix the problems that got us to that point, we quickly embarked on the easiest monetary policy ever, aspects of which are still in place almost several years later.
Here's a rule: People will choose easy solutions that aren't sustainable over difficult decisions that lead to a sustainable recovery.
If faced with the idea of having to learn lessons not to repeat history (economic or otherwise), people are like this:
Sorry for my long delay in reading and responding to your post. During this holiday season my dance-card has been especially full.
Thank you for your line-by-line review and commentary on the Morgan Housel rules of investing engagement list. I do not agree with many of your observations, but I appreciated all of them.
I really believe that we learn much more from opinions that run contrary to our own than from ones that completely coincide with our thinking. Diversity is good in many areas beyond the investment universe.
But I was flabbergasted by your heavy discounting of the value of reading. I seriously doubt you truly meant your closing statement about reading less and getting smarter.
I too almost totally abstain from viewing the TV business networks. They introduce murkiness and anxiety rather than clarity and calm. They encourage imprudent impatience and unwarranted trading action. I pass on them.
I do much reading from a carefully screened and selected group of market expert writers. I certainly concur that all writers are not equal, and some discriminating criteria need to be applied. I do so.
By way of an unfair comparison, I learn much more. with higher trust coefficient. from this cohort than from the MFO discussions. Often the MFO submittals are far too abridged to secure the required trust level, especially given that the contributor qualifications and incentives are unknown.
Currently, I count Charley Munger among my favorite investing writers.
Please note that both Munger and his partner Warren Buffett are dedicated and committed readers.
By not following that pattern you are choosing to ignore the advice and practice of these two giants. I suggest that you consider adopting their regimented approach. A summary of their method was provided in a 2013 article. It is titled “The Buffett Formula – How to Get Smarter”. Here is a Link to that excellent piece:
http://www.farnamstreetblog.com/2013/05/the-buffett-formula-how-to-get-smarter/
Please access this fine presentation of the Buffett-Munger study routine You could not do much better than to at least give their method a try. It works for them, it works for me, and it is likely to work for you if you give it some serious time. Good luck.
Best Wishes for next year.