Josh’s Twenty Common Sense Investing Rules
- Joshua M Brown
- January 23rd, 2012
I get a lot of inquiries about investment help from people that aren’t suitable for what I do or people who simply don’t yet meet our minimums. I hate having to turn folks away, especially loyal readers or people that truly need assistance and can’t find anywhere to get it in an unbiased way.
So with that in mind, I’m laying out my Twenty Common Sense Investing Rules. Please understand that these are not intended to be taken as Iron Law applicable in all situations nor are they meant to be specifically geared toward any one person. This list of rules is simply my accumulated common sense, learned in victory and defeat (lots of defeat) and it can be applied to a plain vanilla portfolio within one day.
The below is for ordinary investors, not professional traders or those aspiring to become professional traders…
1. Buy mid-sized and large stocks that are growing earnings and revenue
2. Buy large and mega-sized stocks that are paying consistent dividends and have low debt-to-equity ratios
3. Read the news on your stocks once a week maximum, once a month minimum
4. The moment a stock disappoints you or makes you wish you hadn’t bought it, sell it. Immediately and regardless of price. Life is too short to hope a bad decision reverses itself
5. Don’t get In or Out of the market, but modulate your exposure up and down as a function of what you think is happening. Your guess based on all the available news and indicators is as good as anyone else’s – and it is more important than anyone else’s for sure because it is your money on the line
6. You should be willing to take a 20% drawdown on every dollar you have in the stock market. Obviously being down 20% is not the goal, but it’s the reality – it can happen at any time. It’s not a permanent loss but you need to invest as though it could be
7. Don’t buy stocks trading over 30 times earnings or under 7 times earnings – something is wrong in both cases. Stay away from anything not trading on a US exchange. Avoid the 52-week low list – a loser is a loser
8. Don’t buy stocks with market caps under $500 million unless you are playing and can afford to lose 100% of that money
9. Sell any stock with a controversial development or red flag no matter what. Let someone else be the hero that swoops in on a mispriced, misunderstood security. You can cheer them on from the safety of the sidelines. Earnings restatements, auditor resignations, massive unexpected earnings misses, filing delays, fraud allegations etc are all automatic sells. Let’s not act like there aren’t 8000 other stocks to choose from in the market
10. Use ETFs to own sectors that are in favor as opposed to individual stocks, when a huge positive trend becomes apparent – you’ll get the upside without the single-stock risk. The aging population and increasing demand for energy are big, fat pitches – it’s hard to swing and miss if you own big swathes of these industries via an ETF, make your life easier
11. Avoid all mutual funds except for asset allocators (balanced funds or go-anywhere can be very useful for investors). Anything based on a discipline (value, growth) or a sector (tech, financial) or a cap size (large, small) is going to underperform its benchmark over the long-term, mean revert versus its peers and cost you more than you need to spend in internal expenses. This is fact not opinion
12. Don’t try to be a trader unless that’s going to be your full-time gig. Trading as a hobby is not the same as being a trader – and it’s less fun than you might think. If you’ve decided to become a trader, find a method and stick with it until you can do it regularly
13. Pay no attention to people who are always pessimistic. The dirty secret is that even when things are terrible, they aren’t that bad. 2008 was the worst sell-off and economic conundrum in 70 years and it only took 18 months for the market to come all the way back. If you fell asleep in 2007 and woke up now five years later, your diversified portfolio including dividend income and unrealized gains/losses looks like nothing ever happened at all
14. Pay no attention to people who are always optimistic. They are selling something. if someone can’t admit that things suck every once in a while, their cheerfulness has an ulterior motive. Or they belong in an insane asylum
15. The financial media wants you to think you are missing out on something and that you need to tune in or click to get up to speed. Pay attention only if you are generally interested and get some entertainment value out of it, most of the time the headlines and segments are dreamed up by editors and producers who need something interesting to talk about each day. And that’s fine, everybody has to earn a living – but don’t think anyone is keeping you informed as a public service
16. Don’t follow gurus. Don’t buy software. Don’t buy DVDs. Don’t listen to “Gut Traders”. Read books by and about people who’ve been successful in the market – but only if you’re interested. They won’t help you become a better investor if you don’t care that much to begin with
17. Remind yourself about the difference between investors and traders: Investors make trades when necessary, traders make trades in the course of doing business – that is what they do for a living and your goals are different than theirs. You don’t get paid out on closed positions or a daily p&l statement.
18. Don’t trade for excitement even though trading can be exciting at times
19. Don’t trade angry or for revenge (this motherf*cking stock owes me!)
20. When you finally do become wealthy, hire other people to do this for you and watch them. Go about enjoying the short time we all have left on earth away from the screen. Kiss your kids and play tennis and read books and get drunk during the day just because and go to Australia for a month and buy that car you drove in high school – fix it up and take your sweetheart for a ride. Don’t spend that time reading about inverse correlations between German bund yields and the gold/oil ratio. Because that’s all masturbation and really, who gives a sh*t?
Look, the market always goes up given enough time. It is very hard to find a decade during which returns were negative even though we’re just coming off one now. Stocks go up three out of four years and declines of twenty percent peak-to-trough are extremely rare (declines of 50% are even rarer still and are always a buying opportunity). So for new or smaller investors the name of the game is to stay in, do smart things while you’re in and avoid blowing up.
It’s that simple.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.blog comments powered by Disqus
The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.