“Rule No. 1: Never lose money. Rule No.2: Never forget Rule No. 1” – Warren Buffett
While sailing on the seas or during times of stormy weather, the seamen look up to the lighthouse to guide them safely back to the shores. Similarly, while investing in the markets or during times of uncertainty, when dark financial clouds loom over the stock markets, investors can look up to the wisdom of the investing legends to guide them safely to their financial goals.
Charlie Munger famously quipped “I believe in the discipline of mastering the best that other people have ever figured out”. The money masters of our times have already figured out the rules of investing for stock market success. Whether one is an investing beginner or a seasoned professional at the top of their game, understanding and mastering these rules for investing increases the odds for stock market success.
With this in mind, I scoured the internet as well as poured over my investing notes to collate useful rules for investing from the top investors. I ended up with a fine collection of 126 investment rules from 11 investing masters.
Rules for the road
Before we hit the road to check out the various rules for investing in the stock market, few things from my end:
a) The rules of investing outlined here are from superinvestors who need no introduction and hence no attempt has been made to provide one.
b) I have made no attempt to either interpret or explain these rules. Almost all of them are very simple to understand yet extremely potent.
c) For those who need additional clarity or seek an explanation, a reference link has been provided at the end of each set of rules.
d) It is a tough task to read, understand and most importantly internalize all the rules at one go (You are staring at a 3000+ word post). Suggest you to kindly bookmark this page and revisit it as desired.
e) This is by no means the complete list of rules for investing. If you feel there is another set of useful rules from an investing legend that needs to be included then please call it out in the comments section.
The following rules for investing are covered in this post:
Jesse Livermore’s 21 rules for investors
John Bogle’s 7 rules for successful stock market investing
Philip Carret’s 12 principles of investing
Templeton’s 16 Rules for investment success
James Montier’s 7 immutable laws of Investing
Pat Dorsey’s 5 Rules for Successful Stock Investing
Bob Farrell’s 10 Market Rules to Remember
John Maynard Keynes 3 rules for successful investing
Bernard Baruch’s 10 rules of investing
Charlie Munger’s 10 point checklist for investing
Peter Lynch’s 25 Golden rules for Investing
Let us hit the road.
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Jesse Livermore’s 21 rules for investors
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1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.
2. Money cannot consistently be made trading every day or every week during the year.
3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
4. Markets are never wrong – opinions often are.
5. The real money made in speculating has been in commitments showing in profit right from the start.
6. At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
7. One should never permit speculative ventures to run into investments.
8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
9. Never buy a stock because it has had a big decline from its previous high.
10. Never sell a stock because it seems high-priced.
11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.
12. Never average losses.
13. The human side of every person is the greatest enemy of the average investor or speculator.
14. Wishful thinking must be banished.
15. Big movements take time to develop.
16. It is not good to be too curious about all the reasons behind price movements.
17. It is much easier to watch a few than many.
18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
19. The leaders of today may not be the leaders of two years from now.
20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.
Additional Reading: 21 investing rules that have stood the test of time for 77 years
[sta_anchor id=”bogle”]John Bogle’s 7 rules for successful stock market investing[/sta_anchor]
1) Invest you must
2) Time is your friend
3) Impulse is your enemy
4) Basic arithmetic works
5) Stick to simplicity
6) Never forget reversion to the mean
7) Stay the course
Additional Reading: Seven investing rules for successful stock market investing
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Philip Carret’s 12 principles of investing
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Carret in his 1930 seminal book “The Art of Speculation” outlines his 12 investing principles:
1) Never hold fewer than 10 different securities covering five different fields of business;
2) At least once every six months, reappraise every security held;
3) Keep at least half the total fund in income producing securities;
4) Consider (dividend) yield the least important factor in analyzing any stock;
5) Be quick to take losses and reluctant to take profits;
6) Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available;
7) Avoid inside information as you would the plague;
8) Seek facts diligently, advice never;
9) Ignore mechanical formulas for value in securities;
10) When stocks are high, money rates rising and business prosperous, at least half a given fund should be placed in short-term bonds;
11) Borrow money sparingly and only when stocks are low, money rates low and falling and business depressed;
12) Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.
Additional Reading: My 3 takeaways reading on Philip Carret
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Templeton’s 16 Rules for investment success
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Sir John Templeton is considered as one of the greatest investors of all time. He came up with 16 rules for investing success which was published in “The Christian Science Monitor” all the way back in the year 1933.
1) Invest for maximum total real return
2) Invest—don’t trade or speculate
3) Remain flexible and open-minded about types of investment
4) Buy low
5) When buying stocks, search for bargains among quality stocks
6) Buy value, not market trends or the economic outlook
7) In stocks and bonds, as in much else, there is safety in numbers
8) Do your homework or hire wise experts to help you
9) Aggressively monitor your investments
10) Don’t panic
11) Learn from your mistakes
12) Begin with a prayer
13) Outperforming the market is a difficult task
14) An investor who has all the answers doesn’t even understand all the questions
15) There’s no free lunch
16) Do not be fearful or negative too often
Additional Reading: Templeton’s 16 rules for investment success
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James Montier’s 7 immutable laws of Investing
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1) Always insist on a Margin of Safety
2) This time is NEVER different
3) Be patient and wait for the fat pitch
4) Be Contrarian
5) Risk is the permanent loss of capital, never a number
6) Be leery of leverage
7) Never invest in something you don’t understand
Additional Reading: The seven immutable laws of investing
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Pat Dorsey’s 5 Rules for Successful Stock Investing
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1) Do your homework
2) Find economic moats
3) Have a margin of safety
4) Hold for the long haul
5) Know when to sell
Additional Content: Pat Dorsey on Economic moats
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Bob Farrell’s 10 Market Rules to Remember
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1. Markets tend to return to the mean over time
2. Excesses in one direction will lead to an opposite excess in the other direction
3. There are no new eras — excesses are never permanent
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
5. The public buys the most at the top and the least at the bottom
6. Fear and greed are stronger than long-term resolve
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree — something else is going to happen
10. Bull markets are more fun than bear markets
Additional Reading: 10 rules that will help you weather this stormy market
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John Maynard Keynes 3 rules for successful investing
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1. Stay invested and don’t try to time the market
2. Focus on ‘value’ stocks, particularly big dividend payers
3. Keep your portfolio very different from the broader stock market
Additional Reading: Three rules for successful investing
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Bernard Baruch 10 rules of investing
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1. Don’t speculate unless you can make it a full-time job.
2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”
3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.
5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
6. Don’t buy too many different securities. Better have only a few investments which can be watched.
7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.
8. Study your tax position to know when you can sell to greatest advantage.
9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.
10. Don’t try to be a jack of all investments. Stick to the field you know best.
Additional Reading: Baruch’s 10 rules for investing
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Charlie Munger’s 10 point checklist for investing
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In “Poor Charlie’s Almanac“, Munger puts forth a 10-step checklist (rules) for investors to follow for having investing success-
1. Measure risk: All investment evaluations should begin by measuring risk, especially reputational.
2. Be independent: Only in fairy tales are emperors told they’re naked
3. Prepare ahead: The only way to win is to work, work, work, and hope to have a few insights
4. Have intellectual humility: Acknowledging what you don’t know is the dawning of wisdom
5. Analyze rigorously: Use effective checklists to minimize errors and omissions
6. Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.
7. Have patience: Resist the natural human bias to act.
8. Be decisive: When proper circumstances present themselves, act with decisiveness and conviction
9. Be ready for change: Accept unremovable complexity
10. Stay focused: Keep it simple and remember what you set out to do.
Additional Reading: Munger’s 10 rules for investment success
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Guy Spier’s 9 rules for Investors
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1. Don’t check stocks price so often
2. If someone is selling you something, don’t buy it
3. Avoid speaking to management
4. Do your investment research in the right order
5. Avoid discussing your investment ideas with biased people
6. Do not buy or sell stocks during market hours
7. Do not sell after a big drop
8. Avoid talking about your current investments
9. Develop your own investing checklist
Additional Reading: Nine rules to be a better investor
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Peter Lynch’s 25 Golden rules for Investing
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Rule 1: Investing is fun and exciting, but dangerous if you don’t do any work.
Rule 2: Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
Rule 3: Over the past 3 decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
Rule 4: Behind every stock is a company. Find out what it’s doing.
Rule 5: Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.
Rule 6: You have to know what you own, and why you own it. “This baby is a cinch to go up” doesn’t count.
Rule 7: Long shots almost always miss the mark.
Rule 8: Owning stocks is like having children – don’t get involved with more than you can handle. The part-time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time.
Rule 9: If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
Rule 10: Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.
Rule 11: Avoid hot stocks in hot industries. Great companies in cold, non-growth industries are consistent big winners.
Rule 12: With small companies, you are better off to wait until they turn a profit before you invest.
Rule 13: If you are thinking of investing in a troubled industry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.
Rule 14: If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10,000 or even $50,000 over time if you are patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.
Rule 15: In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.
Rule 16: A stock market decline is as routine as a January blizzard in Colorado. If you are prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
Rule 17: Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
Rule 18: There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
Rule 19: Nobody can predict interest rates, the future direction of the economy, or the stock market, Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you have invested.
Rule 20: If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall Street.
Rule 21: If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Rule 22: Time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
Rule 23: If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it’s a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value small companies, large companies etc. Investing the six of the same kind of fund is not diversification.
Rule 24: Among the major stock markets of the world, the U.S. market ranks 8th in total return over the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.
Rule 25: In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.
Final Thoughts
In life we generally say that it is not necessary for reinventing the wheel. Similarly in investing, there is no need for reinventing the rules for investment success. The money masters of our times have already figured out how to invest smartly and have been magnanimous in sharing their wisdom by spelling out the rules for investing.
For a newbie learning to invest or for a seasoned veteran trying to beat the market, a sound knowledge of the rules of the game helps them to be a better and smarter investor.
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