Can A Rules-Based Investing Framework Improve Your Stock Market Results?

The following is a guest post. Jay Delaworth is the founder of Intelligent Trend Follower, where each week you can get actionable investment ideas and free educational content designed to help you apply a rules-based framework to limit risk and reduce stress in the stock market.

When you were a kid, did you follow the rules?

Did you clean your room, wash your hands before dinner, and always play nice with others?

It’s funny, as children, we are constantly told to obey all kinds of rules. Then, as we grow up and acquire our independence, the shackles of rules slowly loosen their grip.

We get more freedom, more leniency and more trust. Suddenly, you realize you’re an adult who can do whatever you want, whenever you want (so long as you don’t break any laws).

But why does this matter?

Well, let me put it this way:

  • Do you ever look at your investment portfolio and wonder why you own some of the stocks in there?
  • Do you ever scratch your head and wonder whether you should buy, sell or hold?
  • Have you ever bought a stock based on a tip or news story, only to end up unsure what to do with it?

The reason I ask is because I believe these common errors can easily be avoided. All it takes are a few simple rules you can use to make better investment decisions. So in this blog post, I want to show you why (and exactly how) you can start using rules to help your investing.

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Why Gold?

Gold — It is the oldest form of currency, universally accepted by the human species across the world in different cultures and different eras of civilization. This shiny metal has always been attractive by one and all for a variety of reasons. But we are in interesting times….and while we get more educated and complicate our monetary system, the more people tend to forget what gold even is. Is it a currency? A commodity? Or as some claim, is it a pet rock (Hint: No)? In this article, I visit and present a few reason to own gold.

Money vs Currency

Over the past few months, I have been spending a lot of time reading and learning about gold and its place in human history and our current monetary system. Our present state has become overly complicated where central bankers control every little aspect of our lives through the currency. The fiat currency is only a piece of paper, a promise from the government that the value you hold in your hand is worth something. We can argue all day long about which paper is stronger than other forms of paper from around the world, but the point is just that — its a piece of paper that is worth something today but may not be worth the same tomorrow. In fact, that is the hope — that it is worth less tomorrow.

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Aswath Damodaran Podcast Interview

I was listening to this podcast yesterday and thought that it was a great resource that investors need to hear and keep in mind. It fits in nicely with a lot of the discussion I’ve been having with others in the investing community regarding valuation. It addresses a lot of points that I was trying to make in this post on Market Timing. Have a listen and feel free to share your thoughts/comments below.

Short Bio: Aswath Damodaran is Professor of Finance at New York University Stern School of Business. Professor Damodaran received a B.A. in Accounting from Madras University and a M.S. in Management from the Indian Institute of Management. He earned an M.B.A. (1981) and then Ph.D. (1985), both in Finance, from the University of California, Los Angeles. His student accolades are no less impressive: he has been voted “Professor of the Year” by the graduating M.B.A. class five times during his career at NYU. In addition to myriad publications in academic journals, Professor Damodaran is the author of several highly-regarded and widely-used academic texts on Valuation, Corporate Finance, and Investment Management. Professor Damodaran currently teaches Corporate Finance and Equity Instruments & Markets. His research interests include Information and Prices, Real Estate, and Valuation.

Podcast length: 1hr 22m

Masters in Business: Aswath Damodaran Interview

 

The Hardest Thing To Do In Investing

Recently I got into a discussion about the hardest to do in investing. Like it or not, emotions always come into play when it comes to investing. Some investors identify the fallacies and try to remove emotion from the decision making process and succeed, while most people tend to fall for the inherent psychological nature we humans are programmed with. Investing at some point in time becomes more about understanding human/market emotions and psychology than anything else.

Investing to grow our assets over the long run is a shared goal that we all have, but it is also important to remember that it is a zero sum game. Every time you buy a security on the market, there is a seller and vice versa. So, we need to ask ourselves the question: what does the counterparty know that we do not. Is the other person buying or selling with potentially more information/knowledge on the matter or is the move based on ignorance? This is really hard to fathom on a scale as big as the stock or bond market and macro issues that are not under anyone’s control. Chances are, there is no one single answer for all cases. As they say, predicting the future is a fools errand, but so is ignoring market psychology.

With that mind, I wanted to discuss what is the hardest thing to do in investing? I gather it is one of the three options below. Whether you agree or disagree, feel free to share your thoughts in the comments section below.

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Market Timing

“It is About Time in the Market, Not Market Timing!” — this is a quote that is repeated over and over in the media and blogosphere by anyone and everyone, until those words completely lose their meaning and simply become something that is repeated as a mantra. While I agree with the overall premise of the argument, the concept is a bit more nuanced and needs addressing. In one way or another, market timing has to play a role in each investor’s moves else you might as well just set your cash on fire and watch the flames.

What is Market Timing

Over the course of last few months, as I have resorted to selling more of my broad equities, I have received a lot of emails and comments calling me out that I am trying to time the market and making “one of the biggest mistakes of my life”.  Really? Biggest mistake of life? How exactly? How is going to cash and not participating in this stock market charade the biggest mistake of my life? It is not just me…I see similar comments on other blogs when they sell their equities and move to safer investments or cash.

Market timing for most people seem to equate with trading in and out of securities on a daily or weekly basis. While there are traders who can make a living doing this, I am not smart enough to figure this out and will go as far as to say that its extremely difficult to make money when you compete with the big institutions who have far better resources at hand. But as the time horizon increases — medium and long term investments (again, this is subjective — but for me, medium term is 1-5 yrs and long term is 5+ years) provide more unknowns and no one knows how things progress. This added uncertainty levels the playing field in a way by bringing in more randomness to the world.

Sticking your head in sand is not a strategy!

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