My Tenets of Investing

Investment Discipline Is Key

• Let your profits run and and press your winners, as knowing when to seize opportunity is one of the basic principles of investing. But, stop your losses, as discipline always should trump conviction. Edwin Lefevre wrote in Reminiscences of a Stock Operator, "I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit." Woody Allen put it even better: "I don't want to achieve immortality through my work. I want to achieve it through not dying."

The Past Is Not Necessarily Prologue to the Future

• History should be a guide, but not a jailer. There is little permanent truth in the financial markets, as change is inevitable and constant. Do not extrapolate the trend in fundamentals in your company analysis nor the trend in stock prices. Be independent of analytical and investment conclusions, greedy when others are fearful and fearful when others are greedy, but always remember that holding on to a variant view has outsized risk as well as outsized reward.

Risk and Reward Should Be Assessed Properly

• In buying a stock, remember that risk/reward is asymmetric. A long can climb to indefinite heights and one can only lose 100% of the value of each investment. (Buy value, but only with a catalyst). When longs have high short-interest ratios, investigate the bear case completely.
• In shorting a stock, remember that risk/reward is asymmetric. A short can only return 100% (a bankruptcy) but can rise to indefinite heights. (Never make conceptual shorts without a catalyst). Avoid shorts when the outstanding short interest exceeds five days of average trading volume.
• Use leverage wisely but rarely, as financial markets are inherently unstable. While the use of leverage can deliver superior investment returns when the wind is at the back of your investments, it can also wipe you out when events fail to conform to your expectations. Only the best of the best consistently time the proper use of leverage.

Knowledge of Accounting Is a Must but Meetings with Management Have Little Value

• There is no substitute for a thorough knowledge of financial accounting. Accounting can be misleading, opaque and unaccountable, but free cash flow rarely lies.
• If you must meet with management, do so to understand a company's core business, but remember that managements infrequently, if ever, view their secular prospects with suspicion. In the late 1980s ,Warren Buffett wrote in a letter to Berkshire Hathaway's shareholders that "corporate managers lie like Ministers of Finance on the eve of devaluation."

Be Open to Others' Ideas but Rely on Your Own Analysis

• Always be self-critical, and once your view is formulated, be open to criticism from others that you respect. Take their criticism and test your thesis (constantly). Avoid what G.K. Chesterton once mused: "I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite." Bullheadedness will get you in trouble in the investment world.

Only Invest/Trade When Distractions Are Limited

• Invest/trade/speculate only if you are not dependent upon the investment profits to maintain your standard of living.
• A stable personal and financial life, outside of investing, is typically a necessary ingredient to investment success.
• Take vacations and smell the roses. When you return you will be rejuvenated and a better investor/trader.
• Be well rested and in good shape physically. "Investing is 90% mental. The other half is physical." -- another Yogi-ism!
• Keep your investment expectations reasonable and expect to make mistakes, as perfection is not attainable. Nevertheless, by all means try to chase perfection, as the byproduct will be investment excellence.

Read and Learn From the Best

• Learn from those investors that have excelled by reading and re-reading the classic books on investing.