A while back the topic of “Investment Rules” came up in an email exchange, 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.”
- No sector investing – I generally don’t have enough sector expertise to have a better opinion than the market.
- 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.
- 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.
- Don’t buy things with high expense ratios – expensive is, of course, relative, but why have headwinds?
- Don’t buy things that are illiquid – I am unconvinced that an illiquidity premium reliably exists. (And Cliff concurs.)
- Don’t buy things where the counter-party can change the rules against you in the middle of the game (many insurance products).
- 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).
- 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 mere psychological exercise – “People seem to like it/have always liked it so it must be worth something.”