Sixteen Investing Aphorisms

16 Rules for Investors to Live By

The List (article details):

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.

Comments: Here's my favorite (# 6):

Fourteen years ago, Enron was on Fortune magazine’s list of the world’s most-admired companies, Apple was a struggling niche company, Greece’s economy was booming, and the Congressional Budget Office predicted the federal government would be effectively debt-free by 2009. There is a tendency to extrapolate the recent past, but 10 years from now the business world will look absolutely nothing like it does today.

Comment: I'll add # 17: Don't forget "Mr Market" (Image above)

Then he turns to his usual speech about investing in stocks, giving a shout-out to Ben Graham’s idea of Mr. Market, which he says investors should think of as their partner. The beauty of having Mr. Market as a partner, he says, is that sometimes Mr. Market behaves like “a psychotic drunk.”

Investing in "a twitchy market"

100-Point Dow Swings Are Back

Excerpt:

For the seventh time in the past ten sessions, the Dow Jones Industrial Average (^DJI) is moving at least 100 points, up or down, from the previous close. The cause of the volatility is hard to pin down since it is almost equally split between rallies and sell-offs, as well as domestic and foreign worries or hopes.

Today's early jitters appear to be pegged to the fact that the uber-easy Bank of Japan held pat and did not see the need to be even looser with their devaluation efforts. Fortunately, better-than-expected Small Business Confidence has tempered the disappointment, forcing investors once again to make a buy or sell decision on a twitchy market.

Comment: Image Source. Advice:

• Watch the market daily if one wishes. But do not be overly euphoric on market upswings or overly morose on downswings. This leads to the next point:
• Don't invest emotionally! 
• Schedule investments. Examples: $ 300 on the 2nd Tuesday of the month. Our schedule is weekly.
• Spread buys. For example today we bought 5 shares of Stanley Black & Decker, Inc. Our objective is to acquire 100 shares. This will take multiple weeks. By the time we have acquired 100, we will probably have 10 -15 buys over several months. 
• Buy on fundamentals. Example. We have a high degree of confidence that SWK will pay a 2.5% dividend.
• Follow the value investing principles of Benjamin Graham - The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel
• Hold for a period. I expect that we will have SWK for more than 3 years.
• Remember that Sometimes Mr. Market behaves like 'a psychotic drunk'"

Margin Loans and Mr Market

Borrowing Against Yourself
Excerpts:

With dirt-cheap interest rates, this might seem like an ideal time to borrow from your investment portfolio. It might also be a dangerous time.

.. "Margin loans" allow you to borrow against the value of your brokerage account to buy additional securities, at rates often below those you could get on other debt secured by your own assets, like a home-equity loan. Rates range from roughly 6% to less than 1%. "Margin-interest rates are extraordinarily low right now, and you don't have to get past a committee" to approve your credit-worthiness, says Owen Murray, director of investments at Horizon Advisors in Houston. "If you want to do it, you just do it."

... When you use margin, you merely appear to be borrowing from yourself. Instead, you are borrowing from one of the most unstable and unreliable lenders imaginable: Mr. Market, that personification of investors everywhere, sometimes euphoric, sometimes miserable, never predictable.

... If Mr. Market trashes your investments in a sudden panic, your margin debts may be "called," forcing you to sell some of your assets to sustain the minimum account values you committed to under the terms of the loan. By definition, margin calls are most likely to come just as the prices of the holdings you borrowed against are in free-fall.

Comment: I've been tempted. But I have resisted investing on Margin Loans. If I have money to invest and the investment looks well-priced, I invest. If I don't have money to invest ... I wait. More on Mr Market here and here.