Home

(http://streettalklive.com)

10InvestmentQuotesToLiveBy
LanceRoberts

Wednesday,18March2015

Share:

As markets hover near alltime highs, investors have become quite complacent that the current bull
market trend will continue indefinitely. But why shouldn't they? After all, the Central Banks of the world
have made it a primary mission to ensure that asset prices don't fall in order to keep extremely weak
economies limping along. Interest rates hover near historic lows, and inflationary pressures are non
existent.Ofcourse,theseargumentsareusedtojustifythesecondhighestlevelsofvaluationinhistory
and a market that has set records for the longest stretch without a 10% correction. This time is truly
different...right?
Ofcourse,aquicklookathistorytellsusthatthistimeisnotdifferent.InMarchof2008,Iwasgivinga
seminardiscussingwhywehadalreadylikelyenteredintoarecessionandthatamarketswoonofmass
proportionswasapproaching.Whilethatadvicefellondeafearsaswewereina"Goldilocks" economy,
and "subprime" was contained, the bubble ended just a few short months later. Why? Because that
"bubble"wasno"different"thananyothertimeinhistory.Theslidebelowwasfromthepresentation:

(/images/stories/1dailyxchange/001thistimeisdifferent.PNG)
Ofcourse,thenexttimeImakethispresentationIwillhavetoadd"CentralBankInterventions"tothelist.
The reality is that markets cycle from peaks to troughs as excesses built up during the previous bull
marketcycleareliquidated.Thechartbelowshowsthesecularcyclesofthemarketgoingbackto1871
adjusted for inflation. What is important is that historically, bull markets are launched from ver low
valuations(buylow)andhavehistoricallyendedwithvaluationsaround23xearnings(sellhigh).

(/images/1dailyxchange/2015/SP500PERecessions031815.PNG)
This time is not different. The excesses being built up in the markets today will eventually revert just as
theyhavebeenateveryotherpeakinmarkethistory.Theonlyquestion,ofwhichnoonehastheanswer
to,isexactlywhenthisoccurs.
With this in mind, there are 10basic investment rules that have historically kept investors out of trouble
overthelongterm.Thesearenotuniquebyanymeansbutratheralistofinvestmentrulesthatinsome
shape,orform,hasbeenutteredbyeverygreatinvestorinhistory.
(/images/1dailyxchange/misc/Saving.jpg)1) You are a "saver" not an
investor
UnlikeWarrenBuffetwhotakescontrolofacompanyandcanaffectitsfinancial
directionyouarespeculatingthatapurchaseofashareofstocktodaycanbe
soldatahigherpriceinthefuture.Furthermore,youaredoingthiswithyourhard
earnedsavings.Ifyouaskmostpeopleiftheywouldbettheirretirementsavingsonahandofpokerin
Vegastheywouldtellyou"no."Whenaskedwhy,theywillsaytheydon'thavetheskilltobesuccessfulat
winningatpoker.However,onadailybasisthesesameindividualswillbuysharesofacompanyinwhich
they have no knowledge of operations, revenue, profitability, or future viability simply because someone
ontelevisiontoldthemtodoso.
Keepingtherightframeofmindaboutthe"risk"thatisundertakeninaportfoliocanhelpstemthetideof
losswhenthingsinevitablygowrong.Likeanyprofessionalgamblerthesecrettolongtermsuccesswas
bestsungbyKennyRogers"Yougottaknowwhentohold'em...knowwhentofold'em."
(/images/1dailyxchange/misc/Investment.png)2)Don'tforgettheincome.
Asstatedbythe"InvestmentBrothers,"aninvestmentisanassetoritemthatwill
generateappreciationORincomeinthefuture.Intoday'shighlycorrelatedworld,
there is little diversification left between equity classes. Markets rise and fall in
unisonashighfrequencytradingandmonetaryflowspushrelatedassetclasses
inasingulardirection.Thisiswhyincludingotherassetclasses,likefixedincome

which provides a return of capital function with an income stream, can reduce portfolio volatility. Lower
volatility portfolios will consistently outperform over the long term by reducing the emotional mistakes
causedbylargeportfolioswings.
(/images/1dailyxchange/misc/BuyLowSellHighRogers.jpg)3) You can't
"buylow"ifyoudon't"sellhigh"
Mostinvestorsdofairlywellat"buying"butstinkat"selling."Thereasonispurely
emotional driven primarily by "greed" and "fear." Like pruning and weeding a
garden a solid discipline of regularly taking profits, selling laggards and
rebalancingtheallocationleadstoahealthierportfolioovertime.
Most importantly, while you may "beat the market" with "paper profits" in the short term, it is only the
realizationofthosegainsthatgenerate"spendablewealth."
(/images/1dailyxchange/misc/PatienceandDicipline.jpg)
4)PatienceAndDisciplineAreWhatWins
Most individuals will tell you that they are "longterm investors." However, as
Dalbar studies have repeatedly shown (/index.php/component/flexicontent/2thedailyxchange/2438
whydoinvestorsreallyunderperformovertime.html?Itemid=164)investorsaredrivenmorebyemotions
than not. The problem is that while individuals have the best of intentions of investing longterm, they
ultimatelyallow"greed"toforcethemtochasinglastyear'shotperformers.However,thishasgenerally
resultedinsevereunderperformanceinthesubsequentyearasindividualssellatalossandthenrepeat
theprocess.
Thisiswhythetrulygreatinvestorssticktotheirdisciplineingoodtimesandbad.Overthelongterm
sticking to what you know, and understand, will perform better than continually jumping from the "frying
panintothefire."
(/images/1dailyxchange/misc/2rulesWarrenBuffett.jpg)5) Don't Forget Rule
No.1
As any good poker player knows once you run out of chips you are out of the
game. This is why knowing both "when" and "how much" to bet is critical to
winning the game. The problem for most investors is that they are consistently
betting"allin,allofthetime."
The"fear"ofmissingoutinarisingmarketleadstoexcessiveriskbuildupinportfoliosovertime.Italso
leadstoaviolationofthesimpleruleof"sellhigh."
As discussed recently (/index.php/blog.html?id=2646), the reality is that opportunities to invest in the
marketcomealongasoftenastaxicabsinNewYorkCity.However,tryingtomakeuplostcapitalbynot
payingattentiontotheriskisamuchmoredifficultthingtodo.
(/images/1dailyxchange/misc/TimevsMoney.jpg)6) Your most valuable,
andirreplaceablecommodity,is"time."
Since the turn of the century, investors have recovered, theoretically, from two
massivebearmarketcorrections.After15years,investorsarenowbacktowhere
theywerein2000afteradjustingforinflation.Theproblemisthattherehasbeen
an irreplaceable loss the "time" that was available to "save" for retirement is
gone,forever.
Forinvestorsgettingbacktoevenisnotaninvestmentstrategy.Weareall"savers"thathavealimited
amount of time within which to save money for our retirement. If we were 15 years from retirement in
2000wearenowstaringitinthefacewithnomoretoshowforitthanwhatwehadoveradecadeago.
Donotdiscountthevalueof"time"inyourinvestmentstrategy.

(/images/1dailyxchange/misc/Thetrendisyourfriend.gif)7)Don'tmistakea
"cyclicaltrend"asan"infinitedirection."
There is an old Wall Street axiom that says the "trend is your friend."
Unfortunately, investors repeatedly extrapolate the current trend into infinity. In 2007, the markets were
expected to continue to grow as investors piled into the market top. In late 2008, individuals were
convincedthatthemarketwasgoingtozero.Extremesareneverthecase.
Itisimportanttorememberthatthe"trendisyourfriend."Thatisaslongasyouarepayingattentiontoit
andrespectingitsdirection.Getonthewrongsideofthetrend,anditcanbecomeyourworstenemy.
(/images/1dailyxchange/misc/Overconfidence.PNG)8) Success breeds over
confidence
Individuals go to college to become doctors, lawyers, and even circus clowns.
Yet, every day, individuals pile into one of the most complicated games on the
planetwiththeirhardearnedsavingswithlittle,orno,educationatall.
For most individuals, when the markets are rising, their success breeds
confidence.Thelongerthemarketrisesthemoreindividualsattributetheirsuccesstotheirownskill.The
reality is that a rising market covers up the multitude of investment mistakes that individuals make by
takingonexcessiverisk,poorassetselectionorweakmanagementskills.Theseerrorsarerevealedby
theforthcomingcorrection.
(/images/1dailyxchange/misc/BuyFearSellGreed.png)9)
contrarianistough,lonelyandgenerallyright.

Being

HowardMarksoncewrotethat:

""Resisting and thereby achieving success as a contrarian isn't easy. Things combine to make it difficult
includingnaturalherdtendenciesandthepainimposedbybeingoutofstep,sincemomentuminvariablymakes
procyclicalactionslookcorrectforawhile.(That'swhyit'sessentialtorememberthat'beingtoofaraheadof
yourtimeisindistinguishablefrombeingwrong.')
Giventheuncertainnatureofthefuture,andthusthedifficultyofbeingconfidentyourpositionistherightone
especiallyaspricemovesagainstyouit'schallengingtobealonelycontrarian."

Thebestinvestmentsaregenerallymadewhengoingagainsttheherd.Sellingtothe"greedy"andbuying
from the "fearful" are extremely difficult things to do without a very strong investment discipline,
management protocol, and intestinal fortitude. For most investors the reality is that they are inundated
by"mediachatter" which keeps them from making logical and intelligent investment decisions regarding
theirmoneywhich,unfortunately,leadstobadoutcomes.
(/images/1dailyxchange/misc/paintdry.png)10) Comparison is your worst
investmentenemy
The best thing you can do for your portfolio is to quit benchmarking against a
random market index that has absolutely nothing to do with your goals, risk
toleranceortimehorizon.
Comparisoninthefinancialarenaisthemainreasonclientshavetroublepatientlysittingontheirhands,
lettingwhateverprocesstheyarecomfortablewithworkforthem.Theygetwaylaidbysomecomparison
alongthewayandlosetheirfocus.Ifyoutellaclientthattheymade12%ontheiraccount,theyarevery
pleased. If you subsequently inform them that 'everyone else' made 14%, you have made them upset.
Thewholefinancialservicesindustry,asitisconstructednow,ispredicatedonmakingpeopleupsetso
they will move their money around in a frenzy. Money in motion creates fees and commissions. The
creationofmoreandmorebenchmarksandstyleboxesisnothingmorethanthecreationofmorethings
toCOMPAREto,allowingclientstostayinaperpetualstateofoutrage."

The only benchmark that matters to you is the annual return that is specifically required to obtain your
retirementgoalinthefuture.Ifthatrateis4%,thentryingtoobtain6%morethandoublestheriskyou
have to take to achieve that return. The end result of taking on more risk than necessary will be the
deviationawayfromyourgoalswhensomethinginevitablygoeswrong.
It'sallintherisk
RobertRubin,formerSecretaryoftheTreasury,changedthewayIthoughtaboutriskwhenhewrote:

"AsIthinkbackovertheyears,Ihavebeenguidedbyfourprinciplesfordecisionmaking.First,theonly
certaintyisthatthereisnocertainty.Second,everydecision,asaconsequence,isamatterofweighing
probabilities.Third,despiteuncertaintywemustdecideandwemustact.Andlastly,weneedtojudgedecisions
notonlyontheresults,butonhowtheyweremade.
Mostpeopleareindenialaboutuncertainty.Theyassumethey'relucky,andthattheunpredictablecanbe
reliablyforecast.Thiskeepsbusinessbriskforpalmreaders,psychics,andstockbrokers,butit'saterriblewayto
dealwithuncertainty.Iftherearenoabsolutes,thenalldecisionsbecomemattersofjudgingtheprobabilityof
differentoutcomes,andthecostsandbenefitsofeach.Then,onthatbasis,youcanmakeagooddecision."

Itshouldbeobviousthatanhonestassessmentofuncertaintyleadstobetterdecisions,butthebenefits
of Rubin's approach goes beyond that. For starters, although it may seem contradictory, embracing
uncertainty reduces risk while denial increases it. Another benefit of "acknowledged uncertainty" is it
keepsyouhonest.Ahealthyrespectforuncertainty,andafocusonprobability,drivesyounevertobe
satisfied with your conclusions. It keeps you moving forward to seek out more information, to question
conventionalthinkingandtocontinuallyrefineyourjudgmentsandunderstandingthatdifferencebetween
certaintyandlikelihoodcanmakeallthedifference.
The reality is that we can't control outcomes the most we can do is influence the probability of certain
outcomeswhichiswhythedaytodaymanagementofrisksandinvestingbasedonprobabilities,rather
thanpossibilities,isimportantnotonlytocapitalpreservationbuttoinvestmentsuccessovertime.

LanceRoberts
LanceRobertsistheGeneralPartnerandChiefPortfolioStrategistforSTAWealthManagement.Heisalsothe
hostof"StreetTalkwithLanceRoberts",ChiefEditorof"TheXFactor"InvestmentNewsletterandthe
Streettalklivedailyblog.(http://streettalklive.com/index.php/blog.html)FollowLanceonFacebook
(https://www.facebook.com/STAWealth),Twitter(https://twitter.com/LanceRoberts)andLinkedIn
(https://www.linkedin.com/profile/view?
id=125338026&locale=en_US&trk=tyah&trkInfo=tarId%3A1397835407743%2Ctas%3Alance%2Cidx%3A111)

XfactorNewsletter
JoinOver35,000Readers
XFactorReport

SectorAnalysis
401kPlanManager
NewsletterArchives
FinancialToolsandMore!

Subscribe>>
Bysubscribingtothenewsletter
youagreetothetermsand
conditionsoftheprivacypolicy,
disclosureandnewsletter
disclaimer.

StreettalkRadioShow
AboutTheShow(/thecast.html)
ListenNow!(http://v5.player.abacast.com/v5.1/player/index.php?uid=6089)
iTunes(http://itunes.apple.com/us/podcast/streettalklive/id461109169)
ArchiveVault(/radio.html)
ListenerFeedback(/listenerfeedback.html)

FeaturedBlogs
TheManyErrorsOfTheActivevs.PassiveDebate
(/index.php/themanyerrorsoftheactivevspassivedebate2.html)
WhyMarketBullsShouldHopeRatesDon'tRise
(/index.php/whymarketbullsshouldhoperatesdontrise.html)
It'sOnlyLikeThis,UntilIt'sLikeThat
(/index.php/itsonlylikethisuntilitslikethat.html)
TheProblemWithForwardP/E's
(/index.php/theproblemwithforwardpes.html)
10LegendaryInvestmentRulesFromLegendaryInvestors
(/index.php/10legendaryinvestmentrulesfromlegendaryinvestors.html)
TheMathOfLoss
(/index.php/themathofloss.html)
10InvestmentRulesToLiveBy
(/index.php/10investmentrulestoliveby.html)
EconomistsStunnedByHousingFade,ToldYouSo
(/index.php/economistsstunnedbyhousingfade.html)
WhatIsA"LiquidityTrap"AndWhyIsBernankeCaughtInIt?
(/index.php/whatisaliquiditytrapandwhyisbernankecaughtinit.html)
The7DeadlySinsOfInvesting
(/index.php/the7deadlysinsofinvesting.html)
ReiteratingBond"Buy"35YearsOfHistoryConfirms
(/index.php/reiteratingbondbuy35yearsofhistoryconfirms.html)
4ToolsOfCorporateProfitability&TheEconomicConsequences
(/index.php/4toolsofcorporateprofitabilitytheeconomicconsequences.html)
InterestRatePredictionsMeetBobFarrell'sRule9
(/index.php/interestratesmeetbobfarrellrule9.html)
HowLongIsLongTerm?
(/index.php/howlongislongterm.html)
ExpectLowReturnsOverTheNext10Years
(/index.php/expectlowreturnsoverthenext10years.html)

TheFallacyOfTheFedModel
(/index.php/thefallacyofthefedmodel.html)
MarketAndInvestingWisdoms
(/index.php/marketandinvestingwisdoms.html)
VisualizingBobFarrell's10InvestingRules
(/index.php/visualizingbobfarrells10investingrules.html)
10ImmutableLawsOfMoney
(/index.php/10immutablelawsofmoney.html)
TheNextSecularBullMarketIsStillAFewYearsAway
(/index.php/thenextsecularbullmarketisstillafewyearsaway.html)
AdvertisewithStreettalk

Disclosure&PrivacyPolicy

NewsletterDisclaimer

(/index.php/advertisestreettalk.html)

(/index.php/disclosureprivacypolicy.html)
TheriotCreative

(/index.php/newsletterdisclaimer.html)

(http://theriotcreative.com/)