PROCESS

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Thirteen years ago, in what is an ongoing effort to explain and simplify concepts in investing, I wrote a column titled Rules of the Road.  In it, I list four simple rules that everyone needs to adhere to an order to become successful investors.  They are as follows…

#1.  Compounding is the royal road to riches

#2.  Don’t Lose Money

#3.  Invest like a multi-millionaire

#4.  Buy assets on sales

I am a big fan of simplicity.  Laws, rules and regulations need to be straightforward-black and white.  However, maybe I was a little too simplistic back then.  The old saying that successful investing is like getting one’s self in great shape, it’s simple, not easy.  So, what I would like to do is expand on these rules and share with everyone our mindset, our process for success. 

It is not important to be right in the here and now, but right eventually.  In other words, what conventional wisdom says is the greatest investment or idea today is more often than not a lousy investment or idea.  Markets are not efficient over the short-term.  Many of the major calls that we have made over the years in regards to market conditions, the overall economy and various companies were contrarian at the time, but were proven true over time.  This means that one of the most important attributes one needs to have to be successful is patience. 

Another necessary trait is courage.  Sometimes things will not go your way.  You need to have the courage to stand in the face of the chattering classes and pundits.  The financial crisis of 2008-2009 is an example of an equity market that went off the rails.  Many investors acted out of fear, and made very poor choices.  Courage involves thorough consideration of all the facts.  Keep emotion out of the decision-making process.  The reality is that humans are not hard-wired to be good investors.  They buy high and sell low because emotions take over much too easily. 

People need to understand that stocks are not a part of a video game or an electronic blip on a screen.  I realize that in today’s day and age they may behave as such due to high frequency traders and other charlatans that have adversely affected the marketplace.  Stocks are an underlying ownership in companies.  The price of the stock and the overall value of the company can be evaluated based upon the money the company makes, what industry and what the expectations are for the future. 

When it comes to managing risk in one’s portfolio.  It is important to understand that it is justifiable to love risk as long as the risk does not lead to ruin. Nassim Nicholas Taleb, perhaps the greatest risk-management expert alive today states, “In a strategy that entails ruin, benefits never offset risks of ruin.  Rationality is avoidance of systemic ruin.”

I have always hated the term financial plan.  How does one plan for decades of uncertainty?  How does one really know when they want to retire, change careers, start a new business, find their spouse, etc.?  We would rather think of what we do as a process that is going to be able to adapt to the unknowable terrain of life.  For the past two decades on our radio show and even longer in our newsletter we have tried to alert everyone regarding the poison that is conventional wisdom.  This poison is not limited to economics and finance, it is everywhere.  The importance in recognizing the narratives and self-destructive strategies that are being pushed upon you from what I like to call the Watchdog on Wall Street Axis of Evil (big business, politicians, and the media) is critical.  We pride ourselves in recognizing and exposing narratives and hidden agendas. 

About a decade and a half ago I started a lacrosse program in Southwest Florida with some other lacrosse junkie friends of mine.  Lacrosse was completely foreign to where I was living.  When we got started our group of very young and very raw players would go up and play clubs in Tampa that had been around for a while and we would get shellacked.  After a five-loss day in a tournament in our first year, I made the skeptical parents and players a promise. If they trusted our process, (focus on the fundamentals, embrace the fact that everything in life that has meaning value and worth, involves work time and effort) that within two years we would dominate. Our practices were focused almost entirely on the fundamentals, throwing catching, shooting, proper defense and off-ball movement.  Within two years, I made good on that promise.  Today, almost all of the kids that trusted the process are now playing in college or will be soon. 

I was a big fan of the television show Friday Night Lights.  If you are not familiar, it was a program about a high school football team in a small town in Texas.  The head coach Eric Taylor had said something to his players that stuck with me, in its truth and simplicity…

“Clear Eyes, full hearts, can’t lose.” 

See the world, the terrain, obstacles for what they are.  Not what you wish they are or what someone is telling you they are.  Accept the challenges, embrace the challenges whole-heartedly and you cannot lose.

The process, that we lay out is applicable to just about everything in life.  I will conclude with a list prepared by my favorite living philosopher and risk-management expert Nassim Nicholas Taleb that manages to encapsulate many concepts and beliefs I have shared with my listeners over the past twenty years.  If wish I could be as epigrammatic…

NO…

muscles without strength

friendship without trust

opinion without consequence

age without values

life without effort

water without thirst

food without nourishment

love without sacrifice

power without fairness

facts without rigor

statistics without logic

mathematics without proof

teaching without experience

politeness without warmth

values without embodiment

degrees without erudition

militarism without fortitude

progress without civilization

friendship without investment

virtue without risk

probability without ergodicity

wealth without exposure

complication without depth

fluency without content

decision without asymmetry

science without skepticism

religion without tolerance

and nothing without skin in the game. 

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