Over the years I have published numerous articles with “investing laws” from some of the great investors in history. These laws, or rules, are born of experience, tested by markets, and survived time.

Here are some of our previous posts:

• Bob Farrell’s 10-Rules
• Desktop Trading Guide- Part I
• Desktop Trading Guide – Part II

Throughout history, individuals have been drawn into the more speculative stages of the financial market under the assumption that “this time is different.” Of course, as we now know with the benefit of hindsight, 1929, 1972, 1999, and 2007 were not different. They were just the peak of speculative investing frenzies.

Most importantly, what separates these individuals from all others was their ability to learn from those mistakes, adapt, and capitalize on that knowledge in the future.

Experience is an expensive commodity to acquire, which is why it is always cheaper to learn from the mistakes of others.

Importantly, you will notice that many of the same lessons are not new. This is because there are only a few basic “truths” of investing that all of the great investors have learned over time.

The next major down market cycle is coming, it is just a question of when? These rules can help you navigate those waters more safely, because “you’re different this time.”

The Rules 1-10

• Common sense is not so common.
• Greed often overcomes common sense.
• Greed kills.
• Fear and greed are stronger than long-term resolve.
• There is no vaccine for being overleveraged.
• When you combine ignorance and leverage – you usually get some pretty scary results.
• Operate only in your area of competence.
• There is always more than one cockroach.
• Stocks have a gravitational pull higher – over long periods of time equities will rise in value.
• Long investing generates wealth.

The Rules 11-20

• Short selling protects wealth.
• Be patient and learn how to sit on your hands.
• Try to get a little smarter every day and read as much as humanly possible – an investment in knowledge pays the best dividends.
• Investors sometimes think too little and calculate too much.
•  Read and reread Security Analysis (1934) by Graham and Dodd – it is the most important book on investing ever published.
• History is a great teacher.
• History rhymes.
• What we have learned from history is that we haven’t learned from history.
• Investment wisdom is always 20/20 when viewed in the rearview mirror.
• Avoid “first-level thinking” and embrace “second-level thinking.”

The Rules 21-30

• Think for yourself – those who can make you believe absurdities can make you commit atrocities.
• In investing, that what is comfortable – especially at the beginning – is most often not exceedingly profitable at the end.
• Avoid the odor of “group stink” – mimicking the herd and the crowd’s folly invite mediocrity.
• The more often a stupidity is repeated, the more it gets the appearance of wisdom.
• Always have more questions than answers.
• To be a successful investor you must have accounting/finance knowledge, you must work hard and you have to be keenly competitive.
• The stock market is filled with individuals who know the price of everything but the value of nothing.
• Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
• Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
• Avoid “the noise.”

Rules 31-40

• Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
• Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
• Avoid “the noise.”
• Reversion to the mean is a strong market influence.
• On markets and individual equities… when you reach “station success,” get off!
• Low stock prices are the ally of the rational buyer – high stock prices are the enemy of the rational buyer.
• Being right or wrong is not as important as how much you make when you are right and how much you lose when you are wrong.
• Too much of a good thing can be wonderful – look for compelling ideas and when you have conviction go ahead and overweight “bigly.”
• New paradigms are a rare occurrence.
• Pride goes before fall.

Rules 41-50

• Consider opposing investment views and cultivate curiosity.
• Maintain a healthy level of skepticism as you never know when the Cossacks might be approaching.
• Though doubt is uncomfortable, certainty is ridiculous and sometimes dangerous.
• When investing and trading, never let your mind dwell on personal problems and always control your emotions.
• ‘Rate of change’ is the most important statistic in investing.
• In evaluating the attractiveness of a company always consider upside reward vs. downside risk and ‘margin of safety.’
• Don’t stray from your investing and trading methodologies and timeframes.
• “Know” what you own.
• Immediately sell a stock on the announcement or discovery of an accounting irregularity.
• Always follow the cash (flow).
• When new ways of earnings are developed – like EBITDA (and before stock-based compensation) – substitute them with the word… “bullshit.”

2-Bonus Rules

• Favor pouring over balance sheets and income statements than spending time on Twitter and r/wallstreetbets.
• Always pay attention to what David Tepper and Stanley Druckenmiller are thinking/doing. (Trade/invest against them, at your own risk). 

The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” – Howard Marks

The biggest driver of long-term investment returns is the minimization of psychological investment mistakes. As Baron Rothschild once stated: “Buy when there is blood in the streets.” This simply means that when investors are “panic selling,” you want to be the one that they are selling to at deeply discounted prices. The opposite is also true. As Howard Marks opined: “The absolute best buying opportunities come when asset holders are forced to sell.”

As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question but how you manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

As I stated at the beginning of this missive, every great investor throughout history has had one core philosophy in common; the management of the inherent risk of investing to conserve and preserve investment capital.

“If you run out of chips, you are out of the game.”