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April 1, 2023 by David E. Hultstrom

Investment Rules

The topic of “Investment Rules” came up in an email exchange a while back, and I wrote a quick list of mine. These are just my simple, and perhaps arbitrary, rules. I’m mostly trying, as Charlie Munger said, to not be stupid: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be intelligent.”

  1. No sector investing – I generally don’t have enough sector expertise to have a better opinion than the market.
  2. No zero-sum asset classes (derivatives) – I don’t want to be reliant on someone else losing for me to win. They undoubtedly think they are smarter than me, and there is no obvious reason for me to disagree.
  3. No investments where a negative opinion (shorts) can’t be expressed (IPOs, PE) – When only bullish opinions can be reflected it would be hard for prices to be attractive, or even reasonable.
  4. Don’t buy things with high expense ratios – expensive is, of course, relative, but why have headwinds?
  5. Don’t buy things that are illiquid – I am unconvinced that an illiquidity premium reliably exists. (And Cliff concurs.)
  6. Don’t buy things where the counterparty can change the rules against you in the middle of the game (many insurance products).
  7. Don’t buy things that are expensive (even if it might seem justified) – mean reversion is a real thing (even if folks are confused about what it means).
  8. Don’t buy things that have no possibility of cash flows (i.e. zero dividend stocks are fine, but no NFTs, art, gold, cryptocurrencies, etc.) – there is no way to value such a thing that doesn’t end up being a psychological exercise (“people seem to like it/have always liked it so it must be worth something”).

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