“If we are looking to make better investment decisions, it helps immeasurably to develop a series of rules and routines that we can apply consistently.”– Guy Spier
In The Education Of A Value Investor, the Aquamarine Fund manager Guy Spier sets our eight rules which have helped him become a better investor.
1. Stop Checking the Stock Price
Every time you check the price of a stock it’s a trigger that causes you to make a decision. Buy, sell or hold. The human brain has a limited amount of willpower to make intelligent decisions each day. Constantly checking stock prices expends energy that can be better used on more productive things. It also increases the likelihood that you will make a silly decision.
“If I were managing solely my own account, I’d set up a system in which I’d look at the price of my holdings only once a quarter, or possibly even once a year”– Guy Spier
2. If Someone Tries to Sell You Something Don’t Buy It
“My brain (and most likely your brain too) is awful at making rational decisions when confronted with a well-argued, detailed pitch from a gifted salesperson.”– Guy Spier
As soon as you hear a pitch from someone your brain has been persuaded. This clouds your judgement and can cause you to make decisions that may not be purely rational. It is best to buy things on your own terms.
3. Don’t Talk to Management
Similar to the previous rule, managers tend to be gifted salespeople, that’s how they got to where they are.
“This isn’t to say the CEOs, CFOs and other top executives are malicious or immoral. It’s just that their job, their agenda, and their skills lead them to present information in a way that accentuates the positive while discounting any business problems by describing them as either temporary or solvable.”– Guy Spier
It may be safer to make an investment decision from a distance rather than be influenced by fruitful stories.
4. Gather Investment Research in the Right Order
“The first idea to enter the brain tends to be the one that sticks”– Guy Spier
It’s important to gather research in the right order. You dont want your first impression to be from a salesman or management. You want to start with the least biased sources such as the company’s annual reports, quarterlies and proxy statements. Next, you can look at less corporate documents such as earnings announcements, press releases and conference calls or a book about the company. Lastly, you can read articles from the press and research from brokerage firms.
You want to have formed an opinion on the company from the facts before you can be influenced by the opinions of others.
5. Discuss Your Investment Ideas Only with People Who Have No Axe to Grind
“Axe to grind: to have a strong personal opinion about something that you want people to accept and that is the reason why you do something”– Cambridge Dictionary
Here a 3 Rules Guy Spier enforces when discussing stocks:
- The conversation must be confidential
- Neither person can tell the other what to do
- We can’t have any business relationship because this would add financial agenda
6. Never Buy or Sell Stocks When the Market Is Open
The daily price actions of the market can stir your emotions and cloud your judgment causing you to make irrational decisions. To prevent this from happening Guy Spier suggests waiting for the market to close, and then placing an order at the average price for the day. By doing so we are as Ben Graham would suggest, making the market our servant, not our master.
7. If a Stock Tumbles after You Buy It, Don’t Sell It for Two Years
It is easy to get caught up in your emotions when one of your stocks has been beaten down and you’ve lost a lot of money. One way to deal with this is to make a rule that you will not sell a losing stock for two years after buying it. This does two things:
- It stops you from making an impulsive decision
- It means you must truly be confident with your investment decision. If you go into every investment with the notion that you must hold it for a minimum of two years you will avoid many lesser conviction choices.
“Before buying a stock I consciously assume that the price will immediately fall by 50 per cent and I ask myself if ill be able to live through it”.– Guy Spier
8. Don’t Talk about Your Current Investments
As soon as you tell someone about an investment you have made you will feel obliged to stick with it. If you sell, then you are admitting a mistake and it’s much easier to keep mistakes private than it is to share them. By keeping your investments private you can change your mind without the potential embarrassment.
“Once you’ve made a public statement, it’s psychologically difficult to back away from what we’ve said.”– Guy Spier
Read Guy Spiers’s book The Education of a Value investor (affiliate link)
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