HUMMONEY - Advocacy for the Individual Investor (Perspective)

- by Greg Lewin

First and foremost, excess capital is precious! The money you generate over and above that needed to house, feed, clothe, educate and care for your family is the product of all your education, hard work and sacrifice. How is it possible that an opinion read on the internet or heard on the television or a few lines drawn on a chart would embolden you to simply sit at a computer screen and commit your precious capital? We advocate The Big Rock Rule, which states, there should be a 50 pound rock in the middle of your study and every time you get the inclination to spend investment capital you must carry the rock around your study two times. This is our way of reminding you that capital must not be taken lightly. The effort put forth in creating your wealth must in some manner be equaled by the effort given before spending your wealth. With this in mind, here are some observations that may be worthwhile for you to consider when developing a more disciplined investment process.

OBSERVATIONS FOR A DISCIPLINED INVESTOR:

1.     Investing is an unbounded problem on which you must put boundaries to guide you to your strengths and shield you from your weaknesses.

2.     Investors must establish clear measures of success and failure which includes all fees, expenses and taxes incurred.

3.     Patience is amongst the most important attributes of a disciplined investor.

4.     Doing nothing when nothing is obvious is a perfectly legitimate strategy.

5.     Studies have shown that investors regret loses over 2 times more than similar sized gains. This leads to poor decision making which negatively impacts performance. Investing must be a dispassionate exercise and strategies must be devised to manage emotional behavior.

6.     Value each dollar of capital. There are no small decisions.

7.     Wait until things are so obvious, that if your calculations or judgments prove only partially correct the investment will still be successful.

8.     Technical analysis is only a tool, not a solution.

9.     Stock market diversification is a grossly misunderstood concept. It is not a risk reduction strategy.  It will simply ensure that you perform similarly to the market before expenses.

10.  Market timing is a failed concept.  An incredibly small percentage of days account for a disproportionate percentage of annual stock market performance. Seeking them out is a fool’s errand.

11.  Investing is ultimately a question of earnings and interest rates. Unfortunately, a million variables go into answering these two questions.

12.  All investing is value investing.  Your task is to estimate the future stream of cash a business can generate relative to the price you are paying for that business.

13.  In periods of acceleration, the amount of things that will go right is entirely unpredictable and in periods of deceleration, the amount of things that will go wrong is entirely unpredictable.

Investing is unquestionably a fundamental exercise. It our intent to help you construct a durable and disciplined strategy which will help you think independently and profitably over a long period of time.

---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.