Before pilots take off, they have procedures, rules and check lists that they follow in order to make sure that the flight is safe and smooth.
Have you ever considered adopting rules and check lists for your investing practice?
I suggest you do, and you don’t have to build one from scratch.
You should have at least two lists:
A. A check list that you use to screen the companies you are interested in. This is the most important list. I have developed one that you are welcome to use. You can download it here.
B. Some rules for how to proceed with buying, selling and discussing stocks. I’ve not had one so far, but after reviewing Guy Spier’s work, I can see how important it is to set up boundaries for your investing practice. Luckily for me, I don’t have to develop one from zero.
The value investor Guy Spier shared his list of rules in the book ‘The Education of a Value Investor’.
Here are his eight rules for investing:
1. Stop checking the stock price
When you open your laptop to check on your investments, you’ll receive a lot of sensory inputs that act as a call to action.
You’ll see stock prices move up and down, and your brain will be stimulated to react with the questions: Should I sell? Should I buy more?
It’s hard for our brain to withstand the pressure when it gets an overload of information and questions.
Guy Spier explains that he can go weeks without checking the stock prices, and that it’s a wonderful liberating feeling to realize that your investments will do fine without you constantly checking them.
2. If someone tries to sell you something, don’t buy it
Our brain is bad at making good decisions when it’s confronted with sales arguments.
Guy Spier has a rule that he will never buy anything that anyone is trying to sell him, be it stocks, newspaper subscriptions or anything else.
He explains this straight out to sales people who try to convince him of buying something.
This also means that he avoids IPOs (initial public offerings) as there is a team of sales people behind a company that is about to go public.
He also avoids people who try to convince him of a stock idea at a cocktail party. They might not get commission or any other financial benefit, but they could get a psychological validation if he buys into the stock idea.
3. Don’t talk to management
Most top managers have excellent sales skills, and close contact or any conversation about the firm with the management can warp your judgement.
If an investor feels that he has to meet and talk to the management before buying a stock, it’s a sign that he has not made enough research. Remember this is Guy Spier’s rule.
Some succesful investors make a point of discussing company performance with the management.
4. Gather investment research in the right order
As Guy Spier explains: the first idea that enters the brain tends to be the one that sticks.
You have to keep your mind blank about the company and avoid other people’s opinions until you have done your research.
This is Guy Spier’s preferred order:
A. The annual report, the quarterly report and any other financial documents directly from the company
B. Conference calls and press releases
C. Books and articles about the company
D. Equity research
5. Only discuss investment ideas with people who have no axe to grind
Guy Spier refuses to talk with management, analysts and anyone from the world of sales.
So who can he speak too?
He will speak to peers on the buy side (read: other value investors), and he has set up certain rules for the conversation:
A. The conversation must be confidential
B. Neither can tell the other person what to do
C. There can be no business relationship
D. There should be mutual trust
6. Never buy or sell stocks when the market is open
This comes back to the first point: the movement of the stock price is a call to action.
The danger of trading “live” is that you get caught up in the mood swings of the market.
As a private investor, you can enter your orders when the market is closed and let it do its work while you’re doing something else.
7. If a stock tumbles after you buy it, don’t sell it for two years
Investing is an emotional activity.
When stocks go up, you feel joy.
When they fall, it’s emotional and fraught with negative emotions such as remorse and self-loathing that can short-circuit your ability to think clearly.
Inserting this rule, that you cannot sell for two years after a stock falls in price after you have bought it, acts as a circuit breaker that helps you take rational decisions.
8. Don’t talk about your current investments
Talking about your investments messes with your head.
Have you heard of commitment and consistency bias? It’s what makes you cave in when your kids say “but you promised.”
If you have said publicly that you would do something, it’s painful and embarrassing not to do it.
If you tell other people that you have invested in a particular company, it’ll become harder for you to revert your position.
Guy Spier only does a post-mortem on his portfolio stocks to his investors. He’ll happily give details on stocks he has already sold. But only then.
I hope you’ve found this list of rules useful. I have implemented my own version into my investing methodology.
Remember that you don’t have to use all them all, and you may not feel some are right for you, but it’s invaluable to have access to this type of information from a succesful value investor, it’s an invaluable set of insights that we can use on our investing journey.
The Education of a Value Investor is an interesting book with much more to it than the investing rules. Next week I will write about some of the more general life and investing lessons that I got out of the book.
If you have any questions or comments, feel free to ask them in my free Facebook group Managing Money Freedom, here.
If you want to learn more about investing, you are welcome to download my free e-book here.