When it comes to investing, like many things in life, there is more than one way to “skin the cat”. And while everyone has their opinions, I thought I would share my top ten rules for investing.
- Stay humble, stay curious… this is the most important rule of all. Overconfidence and lack of curiosity will damage any investor over the long term.
- Invest for long periods of time… the day-to-day action in the stock market is just noise. Long-term investors have a super power of avoiding the chaos and focusing on what matters most, compounding over time.
- Avoid doing stupid stuff… Charlie Munger said, “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid.” Often this takes the form of doing nothing, but no action is better than stupid action.
- Don’t buy anything you can’t easily sell… for most people, illiquidity doesn’t offer much value. It’s also a good idea to allow yourself an easy way to change your mind.
- Don’t buy individual stocks or sectors… remember rule #1? I’ll readily admit that I don’t have enough insight to outperform the market. I’ll certainly stay curious over time to see if any new evidence pops up, but right now the research strongly indicates that passive/index investing is the way to go for most people.
- Keep costs low… high costs are a headwind for any investor. The main costs to keep an eye on are fund fees, trading fees, and taxes.
- Avoid non-productive assets (e.g. gold, crypto, collectibles)… non-productive assets thrive on fear. Productive assets thrive on innovation, grit, and hard work. Non-productive assets are also next-to-impossible to value.
- Don’t be the sucker at the poker table… If you don’t know who the sucker is when you sit down at the poker table, it’s you. Avoid investing in a way where your counterparty has a significant competitive advantage. Examples of games you don’t want to play include day trading, options, or other complex derivatives.
- Avoid alternative investments… Ties in with rule #8 – private equity and hedge fund managers are sharks. Many alternatives also suffer from artificially suppressed volatility so it’s tough to fully understand the risks. Also see rule #4.
- Don’t mix investing with insurance… most annuities and cash value life insurance products cost a fortune! Nevermind the fact that insurance contracts are quite complex and the insurance company often has the right to change the rules whenever they want. Don’t believe me? Take a look at a structured product or variable annuity prospectus.
