20 Rules for Markets and Invest!

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20 Rules for
Markets and
Investing
BY CHARLIE BILELLO
23 DEC 2019

1) Be humble or the markets will

eventually find a way to humble you.

Having more confidence is a good

thing in many areas of life. Markets are
not one of them. More confident
investors tend to trade more and take
on undue risk, leading to worse
performance.

Men are generally more confident in

their trading abilities than women and
have lower average returns to show for
it.

2) There is no reward without risk. If

it seems too good to be true, it
probably is.

Enticingly high yields. Smooth returns.

Perfect market timing.

These are just a few of the siren songs

that can lead investors astray.

Take a look at the second column in

the table below:

No down years from 1990 to 2008.

10.6% annualized return with less

volatility than bonds.

A maximum drawdown of less

than 1%.

Does that seem too good to be true?

It was. These were the false returns of
the largest feeder fund invested with
Bernie Madoff. Billions and billions of
dollars, chasing what appeared to be
risk-free reward.

3) The longer your holding period,

the higher your odds of success.

On any given day in the stock market,

your odds of a positive return are just
53%, little better than a coin flip.
 Increase your holding period to a year,
and your odds of success jump to 74%.
At a 20-year holding period, there has
never been a negative return for U.S.
equity investors.

The big money is made in the big

move. The most important lesson from
perhaps the most famous trading book
of all time (Reminiscences of a Stock
Operator) had nothing to do with
trading…

“ It never was my thinking that

made the big money for me. It
always was my sitting.
4) Every time is different. You
haven’t seen this movie before. No
one has.

In September 2014, U.S. jobs had

grown for 48 consecutive months, tying
the prior record from 1990 and
mirroring other streaks that ended in
2007 (46 months) and 1979 (45
months).

All of these streaks would soon be

following by a stock market peak and
recession, leading many to state the
ominous “we’ve seen this movie
before.”

Earlier this month, we learned that jobs

in the U.S. had expanded for the 110th
consecutive month, surpassing the
prior record by more than 5 years.

5) Price targets are pointless.

Forecasts are foolish.

Let’s rewind for a moment to

December 2008. In the midst of the
worst recession since the Great
Depression, these were the dire
predictions from some of the “market’s
sharpest thinkers”…

6) Plans > Prophesies. Evidence >

Opinions.
In November 2016, the largest hedge
fund in the world had a prophesy:
stocks would “crash” if Donald Trump
was elected.

What evidence did they have backing

their cataclysmic prediction?

None.

The S&P 500 is 60% higher since the

2016 election, and the Nasdaq 100 is
up 86%. When did rally begin? The very
next day after the election.

Never let a prophesy get in the way of

your plan.

7) Cycles and Trends exist. That does

not mean they are easy to predict or
navigate.
The S&P 500 is up almost 500% since
its closing low in March 2009. Up and to
the right, as the saying goes.

Easy money?

Far from it. There were 25 corrections

in the S&P 500 of more than 5%. Each
had troubling “reason” associated with
it…
Trade wars. Tariffs. Inverted yield
curves. Rising rates. Election fears.
Brexit. European debt crises. And on
and on and on.

They all seemed like the end of the

world at the time.

8) Concentration = fastest way to

build wealth & fastest way to destroy
it.

Bezos. Gates. Buffett. Zuckerberg.

A list of the wealthiest Americans all

have one thing in common:
concentration in a single company’s
stock that they founded.

It’s tempting to believe that is the

model you should follow in your own
investment portfolio, but for most, that
would be a mistake.

Why?
The odds of you picking a single stock
and it becoming one of the big winners
are not in your favor.

Most companies (72%) vastly

underperform Treasury bills over the
long term and more than half earn a
negative lifetime return.

Any individual stock can go to $0.

Remind yourself of this next time
you’re tempted to go all-in on a single
name.

9) The only certainty is uncertainty.

Expect the unexpected. Suspend
disbelief.

Given enough time, the market will

make a fool out of anyone basing their
expectations for the future on what has
happened in the past.

Financial markets do not follow a bell

curve. Instead, they operate in the
world of fat tails, where extreme events
are much more likely to occur than a
normal (or Gaussian) distribution
would predict.

Following the Brexit vote on June 24,

2016, the British Pound fell over 8%
against the US Dollar, more than
double its previous record decline of
4%.

This was a “15-sigma event” which

basically means that it should not have
happened even once in the history of
the universe. But it did, and given
enough time, it will happen again.
10) Time is infinitely more valuable
than money.

Prudent asset allocation is the

foundation of a successful long-term
investment plan while prudent
time allocation is foundation of a
successful long-term life plan.

Investors often think about the former,

and rarely give thought to the latter.

No amount of money can buy the past.

Focus more on the latter.

11) Saving is more important than

investing. No savings = no investing.

Investment returns get all attention but

for most people, how much they save
is much more important.

Over 30 years, saving 8% of your

income with a 1% rate of return handily
beats an 8% return with a 1% savings
rate.
Note: Savings amounts in table are based on after-
tax median household income. Analysis does not
factor in taxes or inflation.

This is a good thing, for saving more is

something you can actually control,
whereas earning a higher investment
return is not a function of effort.

12) Lower fee beats higher fee on

average. Passive beats active on
average. Simplicity beats complexity
on average.

It is impossible to predict how any

given fund will perform in the future,
but if you had to do so based on a
single factor, it would be the expense
ratio.

In all categories lower fee funds

outperform higher fee funds on
average.
 Source: Derek Horstmeyer , WSJ. Jan 9, 2019.

There will always be active funds that

outperform their benchmarks, but the
odds of an investor finding such a fund
in advance are not high. The longer the
holding period, the more true this
statement becomes.

13) Being good at suffering is a

superpower.
When you think about the great
investors in history, suffering probably
isn’t the first word that comes to mind.
But having a high threshold for pain is
just about the important trait you can
have in this business.

Without exception, every great investor

has experienced periods of severe pain.

Even Warren Buffett?

Yes, even him.

From June 1998 through March 2000,

Berkshire Hathaway declined by over
49% while the tech-heavy Nasdaq 100
Index advanced 270%.

Sticking with a value investing strategy

through such a period required an
unbelievably high tolerance for pain.

What happened next? You guessed it…

14) Doing nothing (low frequency)

usually beats doing something (high
frequency). First, do no harm.

In markets, we are constantly being

enticed to just do something. Buy. Sell.
Short. Cover.

But for most investors, such action

comes without any credible evidence
to suggest it would preferable to doing
nothing at all.

It should come as no surprise then to

learn that activity is inversely
correlated with return.
 Source: “Trading is Hazardous to Your Wealth.”

15) Don’t be afraid to say “I don’t

know.” Stay within your “circle of
competence.”

Where is the S&P 500 going to be

at the end of 2020?

What about the 10-year Treasury

yield?

Who will win the election next

year?

Is Gold a good investment today?

When will the trade war be

resolved?

Will the Fed cut continue to cut

rates next year?
 When is the next recession
coming?
It’s tempting to believe that you must
have the answer to such questions to
succeed as an investor, but the
opposite is true.

Thinking you know something and

acting on that opinion can be far more
harmful than admitting you just don’t
know.

16) Volatility and Sentiment are

mean-reverting at extremes.

When volatility spikes and fear

abounds, it can seem as if the bad
news will never end.
 But it will. Time heals all fears and
good news is on the horizon.

When volatility spikes to extremes, it

tends to fall. When it plummets, it
tends to rise.

“ Reversion to the mean is the iron

rule of the financial markets.
―–JACK BOGLE

17) No one rings a bell at the top or

the bottom. Many ring it in hindsight.

Take a look at this chart. Does it look

like a top to you?
How about this one?

Or this this one?

Not yet? Surely this one looks like a

top, right?
Yup, there it is. As clear as day. If only
someone rang a bell.

18) The best strategy is the one you

can stick with long enough to reap
the benefits of compounding.

Identifying the “best” performing

strategy is an impossible task, but
harder still is sticking to such a
strategy.

Take the “fund of the decade” from

2000 to 2009: CGM Focus. It gained over
18% annually (more than 3% better
than its closest rival) while its
shareholders lost 11% annually.

How is that possible?

Investors poured money into the

fund after strong performance and
pulled money out after weak
performance. They bought high and
sold low, unable to stick with it when
times got tough.

19) Diversification and asset

allocation protect us from the
inability to predict the future.

What asset class is going to be the best

in 2020? How about the worst?
If we could predict the future, we
would own all of the best and none of
the worst.

But alas, such prognostications are

impossible, which is why we diversify.

Data via YCharts

20) Learn to control your emotions or

your emotions will control you.

Fear and greed are primal emotions.

We’re wired to respond to them. This
served us well from an evolutionary
perspective but in investing they do
more harm than good.

When markets are falling, we fear

losing everything and are induced to
sell to stop the pain.
When markets are rising, we fear
missing out on future gains and are
driven to buy to end the regret.

When tempted to act based on fear or

greed, step away. Take a deep breath,
go for a long walk, read a book, watch
your favorite movie. The market will be
there when you get back and you’ll be
 in a better state of mind to make any
decision.

“ There are three great forces in

the world: stupidity, fear and
greed.
―-ALBERT EINSTEIN

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20 Rules

ABOUT THE AUTHOR

Charlie Bilello

Charlie is the founder and CEO of Compound

Capital Advisors.

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