Randy's Rules for Successful Investing

​Investing is unlike other activities in that you can achieve above average success by being right about 60% of the time.  I have followed and studied the great investors for years and one of my observations is that the great investors always focus on how much they can lose when considering an investment.  Beginners tend to focus on how much they can make.

Successful investing is often the “win by not losing” approach.  It makes sense when you consider the math behind recovering from a loss.  If you lose 25% on an investment, you need to earn 33% to break even.  If you lose 50%, you need a 100% return to be back to even.

When looking at the historical returns of the greatest investors, I expected to see several years with huge returns.  In reality, the key to their success was not huge returns, but rather the limited number of years where they lost money.  Again, the “win by not losing” approach.

To quote Warren Buffett; “The two most important rules of investing are #1) Don’t lose money and #2) Don’t forget rule #1.

So, in the spirit of “win by not losing”, you will notice many of my investing rules fall under the category of what to avoid.

1.      Make selections based on valuation, not popularity
2.      Look for lack of change in a business, not dramatic change
3.      Focus on what is knowable and important
4.      Avoid commodity businesses.  It is very difficult to be smarter than your dumbest competitor in a commodity business
5.      Be aware of the shooting star approach to new themes like restaurants or specialty retailers – initially, they have high growth with a new format, prices increases, then the growth stops, the stock tanks and the company often approaches bankruptcy
6.      Avoid companies that recently made a major acquisition – only 17% add value.
7.      Pay no attention to macroeconomic trends, forecasts, or predictions about the future course of stock prices
8.      Be patient….The big money is not made in the buying or selling, but in the waiting.
9.      Be greedy when others are fearful and fearful when others are greedy
10. Focus on your process, not the outcome
11. Avoid IPOs…by design, they are priced for perfection.  Warren Buffett has never invested in an IPO and he is doing just fine
12. Avoid small cap Chinese companies…many are frauds
13. Avoid highly leveraged companies…they have a much higher risk of bankruptcy
14. If there is nothing to do, do nothing and hold cash
15. Avoid leveraged and inverse ETFs…according to a WSJ study, 55% of leveraged and 88% of inverse ETFs were flipped.  Not only did they have tracking error, they moved in the opposite direction!
16. Always use limit orders when trading micro caps
17. Avoid the financial sector….they are too complicated…unless you enjoy reading 200 page SEC filings and figuring out derivative exposures.
18. Check stock prices as infrequently as possible.  Studies show, the more often you check your portfolio, the lower your returns.
19. Hold a losing stock for at least a year before giving up on it
20. Never trade early or late in the trading day when bid/ask spreads are at their widest.


Good Luck and Happy Investing!
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