1. Do not use market-timing or technical analysis. These techniques can only cost you money.
2. Respect the difficulty of working with a mass of information. Few of us can use it successfully. In-depth information does not translate into in-depth profits. Having too much information and thinking that one has mastered the details causes the investor to become overconfident.
3. Do not make an investment decision based on correlations. All correlations in the market, whether real or illusory, will shift and soon disappear.
4. Trade carefully with current investment methods. Our limitations in processing complex information correctly prevent their successful use by most of us.
5. There are no highly predictable industries in which you can count on analysts’ forecasts. Relying on these estimates will lead to trouble. Analysts cannot predict the future any better than you and me.
6. Analysts’ forecasts are usually optimistic. Make the appropriate downward adjustment to your earnings estimate.
7. Most current security analysis requires a precision in analysts’ estimates that is impossible to provide. Avoid methods that demand this level of accuracy.
8. It is impossible, in a dynamic economy with constantly changing political, economic, industrial, and competitive conditions, to use the past accurately to estimate the future. The past gives some frame of reference but cannot be exact.
9. Be realistic about the downside of an investment, recognizing our human tendency to be both overly optimistic and overly confident. Expect the worst to be much more severe than your initial projection.
10. Take advantage of the high rate of analyst forecast error by simply investing in out-of-favor stocks.
11. Positive and negative surprises affect “best” and “worst” stocks in a diametrically opposite manner. Interesting point is saying that beaten down stocks don’t go down as much because nobody expects much, but if it does better, everyone is surprised and up it goes. Vice versa for darlings.
12. (A) Surprises, as a group, improve the performance of out-of-favor stocks, while impairing the performance of favorites. (B) Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites. (C) Negative surprises result in major drops in the price of favorites, while having virtually no impact on out-of-favor stocks. (D) The effect of an earnings surprise continues for an extended period of time.
13. Favored stocks under-perform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially.
14. Buy solid companies currently cut of market favor, as measured by their low price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields.
15. Don’t speculate on highly priced concept stocks to make above-average returns. The blue chip stocks that people traditionally choose are equally valuable for the more aggressive businessman or woman.
16. Avoid unnecessary trading. The costs can significantly lower your returns over time. Low price-to-value strategies provide well above market returns for years, and are an excellent means of eliminating excessive transaction costs.
17. Buy only contrarian stocks because of their superior performance characteristics.
18. Invest equally in 20 to 30 stocks, diversified among 15 or more industries (if your assets are of sufficient size).
19. Buy medium-or large-sized stocks listed on the New York Stock Exchange, or only larger companies on Nasdaq or the American Stock Exchange.
20. Buy the least expensive stocks within an industry, as determined by the four contrarian strategies, regardless of how high or low the general price of the industry group.
21. Sell a stock when its P/E ratio (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock.
22. Look beyond obvious similarities between a current investment situation and one that appears equivalent in the past. Consider other important factors that may result in a markedly different outcome.
23. Don’t be influenced by the short-term (3 or five year) record of a money manager, broker, analyst or advisor, no matter how impressive; don’t accept cursory economic or investment news without significant substantiation.
24. Don’t rely solely on the “case rate.” Take into account the “base rate“– the prior probabilities of profit or loss.
25. Don’t be seduced by recent rates of return for individual stocks or the market when they deviate sharply from past norms (the “case rate”). Long term returns of stocks (the “base rate”) are far more likely to be established again. If returns are particularly high or low, they are likely to be abnormal.
26. Don’t expect the strategy you adopt will prove a quick success in the market; give it a reasonable time to work out.
27. The push toward an average rate of return is a fundamental principle of competitive markets.
28. It is far safer to project a continuation of the psychological reactions of investors than it is to project the visibility of the companies themselves.
29. Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, don’t sell.
30. In a crisis, carefully analyze the reasons put forward to support lower. Stock prices more often than not they will disintegrate under scrutiny
31. (A) Diversify extensively. No matter how cheap a group of stocks looks, you never know for sure that you aren’t getting a clinker. (B) Use the value lifelines as explained. In a crisis, these criteria get dramatically better as prices plummet, markedly improving your chances of a big score.
32. Volatility is not risk. Avoid investment advice based on volatility.
33. Small-cap investing. Buy companies that are strong financially (normally no more than 60% debt in the capital structure for a manufacturing firm).
34. Small-cap investing. Buy companies with increasing and well-protected dividends that also provide an above-market yield.
35. Small-cap investing. Pick companies with above-average earnings growth rates.
36. Small-cap investing. Diversify widely, particularly in small companies, because these issues have far less liquidity. A good portfolio should contain about twice as many stocks as an equivalent large-cap one. 40-60 small caps in a portfolio?
37. Small-cap investing. Be patient. Nothing works every year, but when smaller caps click, returns are often tremendous.
38. Small-company trading (e.g., Nasdaq). Don’t trade thin issues with large spreads unless you are almost certain you have a big winner.
39. When making a trade in small, illiquid stocks, consider not only commissions, but also the bid/ask spread to see how large your total cost will be. Many brokers usually charge more for sub $1 stocks. Commissions get out of control.
40. Avoid the small, fast-track mutual funds. The track often ends at the bottom of a cliff.
41. A given in markets is that perceptions change rapidly.