The latest monthly issue of AAII Journal has a great piece written up by Guy Spier – manager of the Aquamarine Fund and author of the excellent book “The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment“. Here, Guy Spier gives 9 rules for smarter investing. His book goes into more detail on each of these topics (and many more), but this provides a great starting point.
1. Stop checking the stock price so often.
I’m as guilty as anyone for breaking this rule. For me, it’s a daily habit to check the market at lunch, and once again when I get home. Thankfully I think I have learned to tune out the noise so to speak, I make very few buys and sells during the year, so I’m not “acting” on what I see everyday. But maybe what I have seen recently effects my decisions when the time comes for me to make an investment.
Guy Spier recommends checking the price of your stocks once per quarter, or even once per year!
I have trouble with this because I want to read news and events about my stock. But it’s almost impossible to do that without seeing the up to date stock price in big bold font.
Here are a couple of ways you can read up on company news, but miss out on a stock’s price:
Here, only story headlines are shown in a simple layout.
You can subscribe to RSS feeds and get links collected for you for multiple stock tickers, or insert your company’s stock ticker symbol in the link below:
for example, IBM:
Of course, this is only as good as the stories in the RSS feed. You have to be able to ignore the articles about analyst upgrades and downgrades, opinion pieces from sites like Seeking Alpha, etc. Just browse headlines for important stories.
Simply use the company search: http://www.sec.gov/edgar/searchedgar/companysearch.html , enter the company name or ticker, and up will come the latest filings:
Guy Spier starts his research with these reports of EDGAR (as we will see in Rule #4).
2. If someone tries to sell you something, don’t buy it.
Guy Spier talks about this in context of people looking to sell their research to his fund, but it holds true for individual investors also.
Think about all the pitches for investment newsletters, courses, seminars, penny stocks etc. And I think this rule also applies to opinion sites like Seeking Alpha (see rule #4 below).
The goal in investment research is not to be persuaded by outside forces. If all you read is headlines about how bad IBM’s most recent quarter was, you are probably much less likely to buy than if you only read the most recent 10 q report.
3. Don’t talk to management.
Individual investors most likely only have the opportunity to meet management once per year – at the company’s annual shareholder meeting.
Guy Spier admits this rule is not widely accepted, but I think he has a great point. CEOs at big investor events (like the annual meeting) are effectively acting as salespeople, painting their company’s most recent year in the best possible light. Effectively clouding your judgment of the company.
However Guy also gives exceptions to this rule (Berkshire Hathaway and Warren Buffett, Fairfax Financial, Leucadia National Corporation and Markel Insurance). What is the tone of the company’s CEO in the annual meeting? If it seems too good to be true, take warning. Is the CEO open, honest and willing to admit mistakes? Then maybe he/she is worth listening to.
Interestingly enough, Guy Spier does include conference call transcripts in his investment research (see rule #4 below), which to me seems like should fall under the same skepticism as personnel meetings with management.
4. Gather investment research in the right order.
Guy Spier says he finds that he needs to be very specific in the order of what he reads when evaluating a company. The purpose of this is to ensure that you do not get caught up in other investor’s emotions and opinions on a certain stock.
What’s Guy Spier’s order of investment research? From Chapter 10 in his book The Education of a Value Investor:
“My routine is to start with the least biased and most objective sources. These are typically the company’s public filings, including the annual report, 10K, 10Q, and proxy statement. These aren’t perfect, but they are prepared with a good deal of care and attention, especially in the United States, and they are reviewed by lawyers. The company doesn’t want to get sued, so there is an incentive to produce financial statements that investors can rely upon.
In the annual report, the management’s introductory letter is also important. Is it a public relations puff piece, or is there a genuine desire to communicate what’s going on? I want to avoid promotional companies that are bent on showing things in the best possible light. By contrast, when Berkshire released the offering document for its B class shares, it candidly stated that Warren and Charlie wouldn’t buy them at that price.
After working my way through the corporate filings, I typically turn to less objective corporate documents – things like earning announcements, press releases, and transcripts from conference calls. There might also be helpful information to glean from a book about the company or its founder. Investors looking at Berkshire for the first time would do well to read the books that Roger Lowenstein and Alice Schroeder wrote about Buffett.
I avoid reading any press coverage until after of studied the corporate filings… As for the equity research published by the brokerage firms, I read little of it, and I never rely on it.”
5. Discuss your investment ideas only with people who have no axe to grind.
I think by now the purpose of this rule is self-explanatory. Don’t let others affect your ability to make decisions.
6. Never buy or sell a stock when the market is open.
Guy Spier says that he purchases stock by emailing his broker.
Individual investors probably don’t have that ability, which means that they are logging in to their brokerage account and exposing themselves to a barrage of information (which is designed to make you want to take action and buy or sell and generate commissions for your broker)
By waiting to log in until after hours, the madness has subsided, and you feel no pressure to act immediately because your order will not go through until the next day.
In additional, I would add that you have a clear goal before you log in to your brokerage account to buy or sell a stock. Know your exact action to be accomplished. Don’t log in until your know the exact number of shares to be purchased (and obviously what company and whether to buy or sell!)
7. If the stock tumbles after you buy it, don’t sell it for two years.
Here is another way that Guy Spier attempts to slow down his brain and invest more rationally.
On the onset, knowing that you are going to be holding a stock for AT LEAST 2 years should cause you to think twice about purchasing the stock.
But more so, this prevents investors from overacting to the “noise” of Wall Street. Stocks can swing wildly up and down, most of that movement is meaningless for the average investor. When we start making actions based on Wall Street’s noise, we are bound to underperform.
8. Don’t talk about your current investments.
Guy Spier says the reason for this rule is very similar to the reason for rules 2 and 5 above.
If you owned 1000 shares of a company’s stock, and told all your friends, and that stock started dropping – what would you do? Undoubtedly, you would face questions from your friends about how much you have lost, or asking when you are going to sell, or questioning your reason for the investment.
This would make rational decision making very hard, as you feel tons of pressure to act in a way that immediately improves your standing with your friends.
9. Create your own investing checklist.
This is a topic that I want to touch on in much more detail in a separate post later on BeginToInvest.com.
For those interested in pursuing the creation of an investment checklist right now, Chapter 11 of “The Education of a Value Investor” covers this topic exclusively and Guy Spier also recommends the book “The Checklist Manifesto: How to Get Things Right”.
What’s on Guy Spier’s investing checklist? Most items made it on the list due to mistakes he has made in the past.
So think about your investment mistakes, what could you have done to avoid them? Add that to your list.
Some of Guy’s include:
- Is a top executive going through a tough time personally that might cloud his or her judgment?
- Is there a key part of the company’s value chain that is vulnerable?
- Is the stock cheap, not just based on what I think will happen in the future, but on where it is trading today?
His list consists of about 70 items!
How many of these rules do you use yourself?