By Doug Tengdin

The Ten Commandments For Investors

Charlton Heston made the Ten Commandments famous on the big screen. And they can be practical for investors as well.
A classical approach to investing recognizes that investing is just part of life. Markets reflect human nature, with all its strengths and weaknesses. And the great works of civilizationin literature, art, music, and religioncan also illuminate our character. The Ten Commandments rank as one of the most influential texts of any age. They have been described as negative morality. They lay out a series of proscriptions and Thou Shalt Nots that keep followers of Jehovah from straying. With investors, negative exhortations and prohibitions are similarly useful. Much of investing is a losers game, in which you win by not making mistakes. Thou Shalt Nots keep us from making simple, unforced errors that cause many investment losses.

follower of Jehovah shall have no other gods. That is, Jehovah is jealous: no cheating! Followers of the markets understand that the market is jealous as well. There is no substitute for sticking to your goals and your plan. Investors need to know what they want out of their money: income, growth, support for retirement, or something else. Understanding what you want comes before deciding what to do. Investing is complex, and there are all sorts of pitfalls, not the least of which is the temptation to stray off course. If you want capital growth, its a mistake to focus on income. Likewise, if youre looking for a stable and growing after-tax income stream, dont get tempted by the latest hot IPO. If they didnt stay faithful to their god, the Israelites would have never reached the Promised Land. Investors need to be faithful to their plans, if they want to reach their goals
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The First Commandment - is that a

Children of Israel was No idols: dont make any visual depictions of God. The idea was that since God was the author of creation, God could not be represented by creation. For investors, its not pictures that are the problem, but distractiondistraction by market noise, distraction by scary news stories, distraction by our own restless minds. The second commandment is a reminder that the goal of investing isnt simply financial gain; the goal is satisfying financial needs. Heres the difference. If youre just pursuing investment gains, youll tend to get swept up in the latest investment fadoil companies in the 70s; Japanese companies in the 80s; biotech and internet companies in the 90s, and so on. These fads almost always lead to overpricing. Then the investment cant keep up with the implicit promises embedded in the investment price, and investors lose.

The second commandment -to the

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But investors focused on financial needs build diversified portfolios that provide the combination of cashflow and capital growth sufficient to meet those needs. They wont be tied up in illiquid speculations when then need money in a few months--so they dont need to sell and create permanent losses at just the wrong time.

of hive mind reflecting investors views of current financial and economic reality as they apply to thousands of stocks and bonds. And while individuals can profit by going against this consensus, they need to be circumspect and careful as they do. Thus, the Third Commandment, properly understood, enjoins us to respect the market. And respect is always a good thing.

cipline to develop. Investors need to give their portfolios time to grow and to respond to the events of the day. While sometimes we need to react to new developments, other times its better to wait and see how things pan out. Regular rest and reflection is paradoxically one of the best ways to be more productive. It was true in ancient times, and its still true today.

The Third Commandment

is not to take the name of the Lord in vain. How does this apply to investors? The Third Commandment is often viewed as a proscription against cursing and profanity, and it certainly is that. In modern culture, certain words and phrases are off limits. Even more significant to the ancient Hebrews, however, was the actual name of their God. For in the ancient world, to name something was to have power over that thingthus the Third Commandment was an exhortation to be humble in the presence of the deity. They didnt have power over God; God had power over them. In the same way, investors need to be humble in their approach to the markets. There are all kinds of schemes and strategies that supposedly exploit the markets inefficiencies, and on paper these look reasonable. After all, the entire premise of active portfolio management is that markets can act irrationally, and rational investors can profit when then analyze and interact with irrational markets. But beating the market is hard; there are millions of other rational investors looking for similar opportunities. Prices then incorporate their collective opiniona sort

The Fourth Commandment

Remember the Sabbath day. It was an injunction to the ancient Hebrews to stop work for at least one day and remember how they had been delivered from slavery. It hearkens back to the account of Creation in Genesis, where God is described as creating the world in six days, and on the seventh day, God rested. In the same way, the Israelites were told to only work six days per week, and rest on the seventh day. Whatever ones religious views, the utility of rest is beyond dispute. It has been shown to be critical for health, creativity, and our overall well-being. Taking a break from the daily demands of our jobs gives our minds and bodies a chance to recover and reset. Investors need to take breaks as well. Investing can be a demanding intellectual process, with quantitative and qualitative information about companies, governments, and markets coming at us 24/7. While its tempting to remain continually connected, sometimes we need to turn off our computers and cell phones and go for a walk. In addition, doing nothing is often the most important investment dis-

The Fifth Commandment

People may have difficulty remembering all of the Ten Commandments. But the Fifth Commandment, Honor your Father and Mother, is one that many recognize right away. The wisdom of honoring your parents seems self-evident: their experience, their greater knowledge, and the effort they put in to care for and raise their children is naturally worthy of respect. And we even have special days set aside for this purpose: Mothers Day and Fathers Day. But its easy to forget. We seem to have attention deficit disorder when it comes to remembering the work and sacrifice of our parents as we were growing. So its a good thing to be reminded. Because its easy to imagine that things are different now, that the trials and pressures that we face are nothing like those our parents experienced, and so their wisdom and insight just dont apply to our current situation. But history, while not repeating itself, often does rhyme, as Mark Twain once said. The challenges and tests we experience arent so different from what our mothers and fathers faced, and we can learn from their success and failure.
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In the same way, its easy to dismiss the lessons of investment history and say, Its different now. In many ways, its always differentthere is always new technology, new geopolitical challenges, and new investment opportunities. This is why the market periodically puts its faith in go-go young people who arent burdened by the wisdom of experience. But its never really different. Theres no new history, only old history happening to new people. Those go-go periods in the 60s, 80s, and 90s didnt end well. The lessons of history shouldnt be slavishly copied, but they need to be honored and respected. And what are some of those lessons? Valuation matters, risk matters, and what has happened before will happen againalthough not right away or the same way.

love your neighbor as yourself. In applying these principles to managing money, investors need to focus on their attitude first towards the markets, and second towards other investors. The first command tells us to respect the markets, their complexity, integrity, and wisdom. Its not a small thing to disagree with the markets assessment of what a stock or a bond may be worth. Jesus second command which is like the firstadvises us to respect other investorstheir rights and protectionsnot just under investing law, but also under ethical and moral codes of fiduciary conduct that have been worked out over centuries. For example, respecting other investors means keeping confidential matters confidential. If someone shares his or her personal information with you, you have no right to tell others about this, unless they give you permission. Confidentiality is crucial. Other fiduciary duties can similarly be derived from this simple principle of respect. Jesus synopsis of the Ten Commandments is a reminder that much investment wisdom is simple, but not easy. Respecting the market means that investing is hard work, and requires significant mental and emotional energy. And respecting other investors is a good way to stay out of trouble.

context is the key to applying the text. At the time of the Exodus when the Ten Commandments were givenIsrael was a tribal confederation. They may have all traced their heredity back to a single ancestorJacob, or Israel, Abrahams grandsonbut their real loyalty was to their closest family members. In a pre-literate society, close relatives are often the only people you can trust. In such a situation, mistakes and misunderstandings can get magnified until one party takes offence and violence breaks out. Then a blood-feud develops between the families, and the nation may be riven by civil war. This simple prohibition keeps people from letting their emotions take them somewhere thats bad for them and the whole society. In the same way, investors need to be ruled by their heads, not their hearts. When we make emotional decisions, apart from the analytical support needed to back them up, its likely that were just following the fashions of the day. And thats rarely a profitable strategy. At best, it allows you to ride a trend for a while. But usually, once a trend is identifiable, the forces are in place to reverse it, leaving you holding the bag. Furthermore, the investment world is littered with folks who fell in love with a stock, or have some behavioral bias for or against an approach. But money has no politics, and a stock doesnt know you own it. Its a mistake to fall in love with something that cant love you back.

Many have noted that the second five of the Ten Commandments have a different focus than the first five: while the first group focuses on the believers relationship towards God, the second set emphasizes the believers relationship with others. This may be the reason why Jesus, in a famous encounter, is said to have summarized the Ten Commandmentsand indeed the full corpus of Jewish lawinto two principles: love God, and love your neighbor. His first and greatest command, to love God, is taken directly from the Jewish shema, the Hebrew creed that a faithful Jew would recite daily. The second, while less prominent in the Old Testament, effectively encapsulates commandments six through ten, and indeed much of Jewish law:
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The Sixth Commandment

Do not murder seems pretty straightforward. How does this help us invest? On the face of it, the sixth commandment couldnt be more simple: murder is a universal human prohibition. But understanding the

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The Seventh Commandment

Commandment 7 is famous: no adultery. Adultery is another one of the universal prohibitions in human society. There are few if any cultures that sanction a married partner abandoning his or her spouse. Family life enjoys social, civil, and legal protection because in many ways, domestic life is a basic building block of society. If promises made in the family break down, other social institutions suffer. In the same way, the fiduciary responsibilities that investors undertake are the basic building blocks of investment advice. At the heart of the fiduciary relationship is the duty of loyaltyto undertake investment advice and transactions as if the advisor were the client, and to act solely in the clients best interest. This seems simple and basic, and indeed a lot of grey areas would be resolved if a strict fiduciary standard were applied. For example, suppose a manager is having lunch in a public park and overhears two junior associates from a legal firm nearby discussing a pending merger. The merger hasnt been announced, and the target company is trading at a significant discount to the deal price. What should he do? Fiduciary standards indicate that such an inadvertent disclosure puts him in the position of a constructive insider. He didnt figure out that a merger might happen through his own analysishe was accidentally told. As such, he now has a duty to refrain from trading in the two stocks involvedjust as if he were a principal in the law firmuntil the news is made public. The law-firm

personnel just made him an insider, and trading on that information would be insider trading. Fiduciary duties matter. Loyalty matters. They allow us to trust in the integrity of the markets, and in one another.

into the same assets could lever the portfolio 1.5 to one, and potentially increases the net return from 8% to 10% after interest. Is this better living through leverage? Theres no free lunch, though, and that increased return comes at the cost of increased volatility. The returns will swing more wildly, and in a severe downturn a levered portfolio can run short of collateral and be forced to liquidate, leading to a permanent loss of capital. You cant borrow your way to performance, and you cant steal return from the market. This principle makes the Eighth Commandment instructive.

The Eight Commandment

The prohibition against stealing, seems obvious. Investors deal with money, and money is the object of most theft. But the investment lessons go further. Stealing has been called the most basic human failure. In The Kite Runner, a bestselling novel and movie, Baba, one of the main characters, maintains that there is no more basic transgression in life than stealing. When you kill a man, you steal a life, when you lie, you steal someones right to the truth. Every other sin is a variation of theft, he says. While of course we condemn the outright theft of Bernie Madoff s Ponzi scheme or the lawyer Marc Dreiers fraudulent promissory notes--frauds that amounted to billions--there are smaller thefts that tempt investors every day. Expanding on Babas definition, dealing in inside information is a theft of the markets integrity; breaking confidentiality is a theft of a persons right to privacy; and so on. Such an expansive view of theft is illuminating. Theres another, more controversial view of theft, however, and thats using borrowing to lever returns out of a portfolio. If a portfolio grows by 8% and you can borrow at 4%, borrowing 50% of the portfolios value and putting those borrowings

The Ninth Commandment

says to avoid bearing false witness. It enjoins people to tell the truth, especially in interpersonal matters. The Commandment is consistent with other scripturesthe Old Testament is full of prohibitions against false testimony, spreading false reports, lying, and so on. It is an encouragement to show oneself true in deeds and truthful in words, guarding against duplicity, dissimulation, and hypocrisy. Imagine how market integrity would be improved if everyone adopted such a policyexcessive fees would be disclosed, fraudulent investments would be abandoned, scandals like the rate-fixing imbroglio that cost Robert Diamond head of Barclays Bank, PLChis career wouldnt happen. But thats not the world we live in. In the real world, people lie, cheat, and steal in order to gain an advantage for themselves. FinanPage 15

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cial products are especially prone to distortion and deception, with complicated provisions and mathbased payment formulas. Expecting financial professionals to abide by the Ninth Commandment seems hopelessly nave. But the point of the Ten Commandments isnt to describe what people do, its to prescribe what they ought to do. Its a normative code. And the advantages to investors from truthtellingfacing the brutal facts, acting in a timely manner, and so onare significant. The Ninth Commandment focuses on integrity: doing what you say, saying what you mean. Spin is excluded. It helps us to focus on whats real. Because eventually, the truth comes out.

dont lead to any social services. They may motivate commercial activity, but they stimulate other social problems, too. Excessive desire for someone elses stuff leads to what other cultures call The Evil Eye. In investing, coveting someone elses success can lead you to try to adopt their approach when youre not prepared to, and often causes people to chase after high-flying markets, buying high and selling low. Greed isnt good, and coveting doesnt clarify. Anyone who has ever watched a couple three-year olds struggle in a sandbox knows this.

Farewell Address is considered to be one of the most important documents in American history, and is still read annually in the Senate. A sound moral and ethical framework is crucial for all aspects of society to work smoothly, but it is especially true in finance. The bank robber Willie Sutton is said to have robbed banks because thats where the money is, and crooks and criminals are perennially drawn to finance. The swindles and scams that we see so regularly are a discouraging reminder that we need to be careful with our money. By contrast, the Decalogue stands out as a moral and ethical foundation. Their simplicity makes them memorable. Its been said that if you want to be able to recognize counterfeit currency, you should study the genuine article. And if we want to avoid the next Madoff or MF Global or Peregrine Financial, being familiar with a fundamental moral text should prove helpful. The Ten Commandments offer us investment lessons that can inform our money-management. And they are part of a moral code that helps us operate in an atmosphere of trust, where we can have confidence that the people we work with have our financial interests at heart.
Doug Tengdin is Chief Investment Officer of Charter Trust Company. Doug can be reached at 603-8565216 or email dtengdin@chartertrust.com Follow Doug on Twitter - @Tengdin

Are the Ten Commandments just for the religiously-minded?

The Tenth Commandment

prohibits coveting, in all its forms. But theres a problem in relating this to capitalism and investments. Isnt greed good? Doesnt it cut through, clarify, and capture the essence of what makes things work? After all, thats what Gordon Gekko said in the movie Wall Street. But capitalism isnt based on greed, its based on interest. Its not based on wanting what someone else has; its based on doing whats needed to make a business work. Adam Smith famously noted that it isnt the benevolence of the butcher or baker that provides our dinner, but their regard to their own interest. People earning money benefit themselves, but they also benefit society by providing goods and services that others value. Their free exchange makes an economy work. By contrast, coveting and greed
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Thats a fair question, as is the question as to why a finance article is spending so much time on a biblical text. The short answer is that we can learn investment lessons from any great work of literature, religious or secular. Great literature, after all, is a reflection on human nature, in all its complexity. Investing is also a reflection on human nature, but written in the language of finance. But there is a deeper reason why the Ten Commandments are especially poignant for us. Almost 216 years ago George Washington, late in his second presidential term, asserted that a sense of religious and moral obligation is essential to a wellfunctioning political economy. His

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