By: David Hale
From the Ground Up
“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”
–Ray Dalio, Chairman, Bridgewater Associates
This is a slightly updated version of my very first blog post. I wrote it in December 2013. At the time, it was my best effort at something timeless. Something that might be useful to people in the years ahead. This quickly became the spirit behind everything I write. Quality over quantity. It also came at a time of fairly intense personal change. My wife and I had both lost our fathers suddenly and unexpectedly that year. Our daughter was born earlier that year and our young family was growing rapidly. The winds of change were gusting. What follows are some lessons I drew from over a decade advising individual investors. I hope you enjoy it.
The holidays are a good time for reflection. What went right his year? What’s working? What went wrong? What’s not working? What could I have done better or differently to create a different result? These are good questions to ask ourselves right now. Often, there may not be one definitive answer. There may just be several possibilities. Regardless, this is a great time to hold the mirror up to our personal and professional lives with the goal of improving our circumstances in the year ahead.
Every year-end, forecasters try and explain why the past year’s stock market performance was so obvious and then they forecast what it will do next year. Most will be wrong about one or both.
Maybe I’m just getting older, but it seems that every year’s summation headline could read:
“Stock Market Turns in Unexpected Performance. Investors Surprised.”
My constant dialogue with clients was, as always, a privilege and a pleasure. Despite the ability to communicate more easily via email, text, IM, and social media, nothing is better than hearing someone’s voice on the phone or seeing them face to face. I am looking forward to the new year in a big way.
With this in mind, I attempted to create something more valuable than a year-end forecast. Below is my humble creation of 10 investment rules. Things you can use regardless of market conditions. I hope you read them with interest and that you will not hesitate to praise or criticize accordingly. :
- Keep your “nut” low – our economy can be highly cyclical and a key to investing successfully is making sure your standard of living can make it through an economic downturn. You must not be forced to sell your long-term financial assets in order to put food on the table or pay your mortgage because your business has slowed or shut down. If this is you, stop reading now and lower your overhead before the nightfall.
- Listen to, and invest with, people who have lots of skin in the game and a vested interest in your long-term financial success. If you don’t, you may leave yourself open to conflicts of interest.
- Don’t overcomplicate your financial planning. Keep your financial decisions boiled down to: “I have a future goal or need. What is the most prudent way to fund it?” The more you deviate from this line of thinking, the more likely you are to overcomplicate things.
- Don’t fight the Fed! If this isn’t intuitive by now, I can’t help you. The Fed is the single most powerful force in the global economy. Ignore them at your peril. Read their statements and forecasts directly, not regurgitated by the press. If you don’t have time for that, make sure a trusted resource is.
- You can’t call the top or the bottom consistently – always remember that bull markets climb a wall of worry and bear markets descend a slope of hope. Instead of timing the market, it is better to keep your portfolio robust enough so that you don’t have to worry as much about adverse market fluctuation. This way, you can process volatility as an opportunity when it eventually happens. Before investing, go through this thought exercise – ask yourself “where are we now on the market-cycle of emotions*?” You don’t have to have a definitive answer, because there isn’t one. But at the very least it keeps you aware of the mass psychology that can play a big role in your outcome.
- Don’t fight the tape! Bull and bear trends persist for longer than anyone thinks they will and herding and fund flows are one of the major drivers of market direction1. Pay attention to and respect the herd. If you’re surprised the market did so well this year, get in line.
- Risk tolerance can change with the times – the number of people willing and able to “be greedy when others are fearful” is surprisingly low. The number of people wanting to liquidate shares at the bottom or get more aggressive around all-time highs is surprisingly high.
- Be skeptical of Wall Street – Massive Government bailouts ensured their survival through the 2008 credit crisis. Studies have shown that their strategist recommendations can be a contrary indicator2 and their equity research can have conflicts3. At the very least, get a second opinion before acting on their advice.
- Know your place and stay humble – the market reflects the views and emotions of millions of individual participants, many of them significantly better capitalized, informed, and connected than anyone reading (or writing J) this post. No matter how well-researched your thesis, someone else out there knows the subject better than you and has more money to put to work. This pool has no shallow end.
- Never underestimate the influence of technology. Technologies we take for granted today were almost inconceivable a decade ago. It will always be this way. Disruption will continue to be the norm. If your business or industry is in the cross-hairs of the next disruption, plan early and accordingly!
- Dong Lou, A Flow-Based Explanation for Return Predictability, London School of Economics, July 2012
- Richard Bernstein; Climbing the Wall of Worry; Richard Bernstein Advisors; December 2012
- Ben Lourie, The Revolving Door of Sell-Side Analysts: A Threat to Analysts’ Independence?; Department of Accounting; UCLA Anderson Business School; November 13, 2014