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Don’t Do Stupid Stuff
The key to investment success is not making unforced errors. Strive to be consistently not stupid like Buffett and Munger.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
— Charlie Munger
Be Rational, Not Emotional
Key to that is acting rationally and not emotionally. Emotional decisions equal stupid decisions. If you can’t handle a selloff without emotionally selling into it, then you’d better cut your permanent allocation to stocks.
Allowing fear to make you sell into a decline is to line the pockets of more rational investors. Don’t be the patsy for Seth Klarman or Warren Buffett.
“Rather than buy from smart, informed sellers, we want to buy from urgent, distressed or emotional sellers.”
— Seth Klarman
Manage Your Risks
An investor needs staying power to succeed in the marathon of investing. Think about managing your risk in the good times so you can make it through the bad times without losing your cool.
“Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”
— Seth Klarman
Focus on Value
If you focus on price and not on value, you are like Charlie Munger’s one-legged man in an ass-kicking contest. All else equal, the lower the price, the better the value.
“Fallible, emotional people determine price; cold, hard cash determines value.”
— Christopher Davis
Selloffs Are The Price Of Good Long-Term Returns
A stock market selloff is a feature, not a bug, of the investment world. Selloffs are the price you pay for the good long-term returns you can get from stocks.
Look For Opportunities and Margins of Safety
Stocks are the only thing people hate to buy when they go on sale. Rational investors look to a market selloff as an opportunity to find good businesses at cheaper prices. Unless the fundamentals of a business have deteriorated, a lower price means higher forward returns. It also may give you a margin of safety.
“Smart investors look to the market not as a guide for what to do but as a creator of opportunity.”
— Seth Klarman
Buy Businesses, Not Ticker Symbols
Think about the business underlying the stock. Have the fundamentals changed? How about the cash flow outlook? Is the dividend still well-supported? Thinking this way and looking to the long term is the only sensible way to invest. Otherwise, you are just speculating.
“The gambling nature of Wall Street has little or no interest in the serious, underlying nature of businesses.”
— Irving Kahn
Less Is Usually More
If you have a good plan, often the right action is to do nothing. Don’t confuse activity with productivity.
“Patience is the individual investor’s greatest advantage over the market.”
— Todd Wenning
Keep Company With Other Rational, Sensible Investors
Your peers are those who will influence your behavior. So keep company with other calm, sensible investors, and weed out the information sources and people that tend to be Chicken Littles and scaremongers. This will make it easier to do the rational thing.
“Try to socialize — in the real world and in online social media — only with investors who are calm and methodical. After all, whatever your peers pay attention to, you will also concentrate on — so following more-sensible people will help inoculate you against panic.”
— Jason Zweig
Some rational reads:
A Dozen Things I’ve Learned from Charlie Munger about Making Rational Decisions: 25iq
To Sleep Well at Night Buy Businesses Not Sardines: Total Return Investor
Zone of Competence 