Monthly Archives: October 2011

Goodson’s 10 Rules for Investing

Because the world needs more “10” lists…

1)     Never Eat Anything Larger Than Your Head.  OK, it’s not really a rule exactly applicable to investing, but I think it’s a pretty good rule for staying healthy.  The healthier you are, the longer you can enjoy the magic of compounding…

2)     Know the Difference Between a “Trade” and an “Investment.” A “Trade” is a short-term “bet” (for the lack of a more elegant term) that something will happen and the result of that something will be good for the stock you bought.  A reasonable trade always has a trigger event and a deadline.  Buying a stock because you think it will report better-than-expected earnings is a classic example.  An “Investment” is something you tend to hold for a longer time.

3)     Don’t Let “Trades” Become “Investments.” So what do you do when the earnings results are disappointing, and the stock you just bought for a trade goes down?  The temptation is to hold on and try to recoup your losses, but the rule #2 dictates that you sell it.  You were wrong.  Move on.

4)     Limit Your Sources of Information.  This may seem a bit counter intuitive, but I think it works.  Listening to too many outside sources can often lead to confusion.  This is especially true of the more popular media outlets dedicated to capital markets commentary.   In my work, I follow closely two or three equity strategists, a like number of economists, one bond market “guru” and a handful of sell-side analysts.  I note in passing a large number of other sources, but usually pay them no mind.  Some popular sources I actually consider potentially dangerous to one’s portfolio.

5)     Always Know Why You Own Something. At whatever point you are not sure why you own a stock, you should get rid of it.  By the way, merely thinking a stock might go up is not really a sufficiently strong reason to hold something.

6)     Never Get Involved in a Land War in Asia.  Again, not exactly a key principle for investing, but it underscores that fact that much wisdom about life in general can be gleaned by simply watching “The Princess Bride…”

7)     Never Buy a Stock on Another Person’s Recommendation. Actually, that’s a bit strong.  The actual rule is don’t do this unless you have considered how that recommended stock fits into your way of investing or into your portfolio.  Understanding the appropriateness of any investment is critical to portfolio balance and risk management.  Buying a stock just because some famous person on television (or your cousin Ned) recommends it is a recipe for randomness.

8)     Never Buy a Stock on “Gut” Feeling. Intuition may serve us well in many endeavors, but in the investment world, it only helps after we have done all the hard work to truly understand the asset we are considering.  Seasoned Wall Street pros will often talk about the importance of gut feeling in their investment making process, but if you press them, they will admit it’s only about 5% (or less) of the total work required to find, analyze and select a successful investment.

9)     It’s Better to be Disciplined Than Smart. The most successful investors I know have lots of rules that they have crafted over many years of experience.  They also follow them more or less religiously.  Sometimes your particular investment approach will not be rewarded by the markets.  That is no reason to abandon it.  Successful rules will more often lead to outperformance than trying to guess what approach will work next.

10)     Sometimes the “Right” Thing do to is to do Nothing. Many people fall into the trap of feeling they must react to events affecting their stocks or portfolios.  More often than not, simply taking a deep breath and re-evaluating the merits of the investment is a much smarter approach than simply selling (or even buying more).  Understanding whether you are using your emotions or your cognitive abilities when approaching a key investment decision is a critical key to success.

A Treatise for Taylor

Last week my granddaughter, Taylor, was born.  As I reflected on the miracle of birth, I began musing about what kind of life Taylor might expect to have.

Despite all the negative talk about the United States, I suspect that Taylor will be grateful to live in this country.  The U.S. economy is still the world’s largest by a large margin, and per capita GDP is still envied by most of the world. She will likely live in a home most of her life that is warm in the winter and cool in the summer.  Her father sells insurance, a product that will likely be in demand for the entirety of her lifetime.  Her mother has chosen to stay at home and focus her efforts on the rearing of her children.  I suspect that Taylor will benefit from both of her parents’ career choices.

The Greek crisis, which seems to be the key driver for the U.S. stock market these days, will probably be little more than a footnote in some history book Taylor reads in a class someday.   Even the “Great Recession” may become a near non-event in the trajectory of Taylor’s life.   She will likely attend public schools and, if she works hard and gets good grades, may attend a university.  It is likely that her careers choices will include jobs in industries that don’t even exist yet.

If she follows the example of her parents, she will likely fall in love, get married and start her own family, experiencing all the joy, pain and promise that family life can bring.  She will likely cry when her grandfather dies, but will have numerous occasions to remember him fondly, his corny jokes, his dry wit, his unshakable belief in value investing…

During her lifetime, the expansion in innovation and technological gains is hard to imagine.  Consider that when I was born, the world had no knowledge of color television, cable television, 24-hour news programs, MTV, manned space flight, personal computers, CDs, heart transplants, GPS, reality TV shows, Bill Gates, Steve Jobs, moon landings, the Beatles, etc.  Taylor will be able to compile a similar list in her 50s that will likely seem like science fiction to us now.

In spite of the notion of diminished expectations we hear constantly now, I suspect Taylor’s life will be full, rich and fulfilling.  The big picture issues we fret and fuss about now will likely have little impact on her ability to find happiness and contentment.

Taking a longer-term view allows one to see things as they really are, apart from the sometimes myopic view we see through the prism of the present.  Sentiment and the markets will swing around as they will, but truth and true principles (either of investing or other areas of importance) will persist and resist all our attempts to invalidate them.