Tuesday, 23 June 2015 - 20:00

 

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Seed Weekly - Investment Rules

All of the successful investors attribute at least part of their success to a set of investment rules. There is no “one size fits all” when it comes to a set of investment rules, but at a minimum, successful investors try as far as possible not to deviate from a set of rules or their investment process.
Warren Buffett reportedly has 2 rules for investing: Rule no 1 – don’t lose money. Rule no 2 – don’t forget rule no 1. This is often cited more tongue in cheek, but over the years he has freely expressed his investment views in his annual Berkshire Hathaway shareholder letter.
Some of his more important investment rules include things like:
• A stock is a business not a piece of paper;
• Invest with a view not to have to sell;
• Macro opinions and market predictions are a waste of time;
• Focus on the income earning capacity of an investment and not on its prospective price changes.

Dr. Steve Sjuggerud, from investmentu.com lists 12 classic rules that all investors should look at and adopt. These are:
1. An attempt at making a quick buck often leads to losing much of that buck;
2. Don't let a small loss become large;
3. Cut your losers; let your winners ride.
4. A rising tide raises all ships, and vice versa. So assess the tide, not the ships;
5. When a stock hits a new high, it's not time to sell something that is going right;
6. Buy and hold doesn't ALWAYS work;
7. Bear markets begin in good times. Bull markets begin in bad times;
8. If you don't understand the investment, don't buy it;
9. Buy value, and sell hysteria;
10. Investing in what's popular never ends up making you any money;
11. When it's time to act, don't hesitate;
12. Expert investors care about risk; novice investors shop for returns.
The chart below is a depiction of the investment psychology of a typical investor without a set of predefined investment rules. All too often a typical investor is overcome by the emotion of fear and greed. It is in order to limit the effect of these emotions that successful investors define a set of investment rules.

Chart 1: Investment psychology of an investor without a set of defined investment rules

Risk management

Investing is often more about managing risk that trying to overreach for investment returns. There are many definitions of investment risk – e.g. price volatility, liquidity risk to the risk of capital losses that cannot be recovered.
Most top fund managers adopt investment rules with a focus on risk management. Examples include:
• Top hedge fund manager Seth Klarman from the Baupost Group
“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”
• Jeremy Grantham, chief investment strategist at US fund manager GMO
“You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.”
• Howard Marks – co founder of Oaktree Capital Management
“Rule No. 1: Most things will prove to be cyclical. – Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”

• James Montier, from firm GMO
"There is a simple, although not easy alternative [to forecasting]... Buy when an asset is cheap, and sell when an asset gets expensive.... Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance."
• George Soros, founder of Soros Fund Management
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

At Seed Investments we have a defined investment philosophy and investment process. This does not guarantee success but it’s an important step in aiming for it.

Kind regards

Ian de Lange

Tel 0219144966
Fax 0219144912
Email info@seedinvestments.co.za
Website www.seedinvestments.co.za

Seed is hiring: Click through to our LinkedIn page to see available vacancies

Tue, 23 Jun 2015

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