12 Investment Principles
Here are a dozen guidelines from Doug Kass.
These were developed, according to Doug, regardless of market conditions, as sound investing practices:
1. Err on the side of conservatism.
2. Learn from the best, in classic investing books or through conversations with trustworthy individuals.
3. Avoid advice from those who lack flexibility and are dogmatic.
4. Be more concerned with return of capital than return on capital.
5. Trade/invest with below-average positions in order to take advantage of the market's volatility and opportunity.
6. Take a base on balls, hit a single, but don't go for the fences.
7. Buy straw hats in the winter (meaning, but out of favor items).
8. Buy only the best of breed in periods of economic/market uncertainty.
9. Always leg into a position.
10. Be patient.
11. Buy when your hands are shaking; sell when you become overconfident and complacent.
12. Always remember investing is about common sense.
Good stuff. Thanks, Doug.
>
Source:
12 Investment Principles for the Abyss
Doug Kass
RealMoney Silver, 1/17/2008 11:40 AM EST
http://tinyurl.com/3xujp6
Sunday, January 20, 2008 | 11:21 AM | Permalink
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"4. Be more concerned with return of capital than return on capital."
I've been working chart models all morning. So far so good. If the models are correct:
1) DOW crashes within a few years.
2) Russel 2000 is extremely under valued.
3) S&P500 is valued correctly.
4) Metals, miners etc are extremely overvalued and crash.
Anyone here is welcome to use my charts in any way they seem fit as long as you give me name credit for doing to footwork.
Nasdaq Chart Exponential Model (Pre Crash)
http://i265.photobucket.com/albums/ii204/jmborchers/NasdaqAtPeak.jpg
Nasdaq Chart Current Model
http://i265.photobucket.com/albums/ii204/jmborchers/Nasdaq.jpg
DOW Current Model
http://i265.photobucket.com/albums/ii204/jmborchers/Dow.jpg
Russell 2000
http://i265.photobucket.com/albums/ii204/jmborchers/russell2000.jpg
Again this model indicates everyone is thinking incorrectly I.E. Big Caps. There are more charts in the album.
Posted by: John Borchers | Jan 20, 2008 11:53:08 AM
Interesting points- basic points nothing new.
Yes, but it is important to always return to the basics. It's about discipline.
Posted by: Florida | Jan 20, 2008 12:02:32 PM
@John Borchers:
If you want to toy with something that has provided generally accurate $SPX guidance for at least 30 years, construct a weekly chart using 13 and 34 week EMAs and look for the points when the 13 crosses the 34. With the exception of 1987 (when every system failed), following the crossovers would have taken you in and out of the market within 10% of actual bottoms and tops with few if any false signals (i.e., you would have exited near the top in 2001 at around 1400, re-entered around 900, and bailed about 3 weeks ago somewhere around 1400).
I don't know how well this works for anything but $SPX, but it is a pretty accurate long term trend indicator. Naturally, I failed to follow it recently, but we should get a bounce pretty soon at which point I will take my longs off and sit back and wait for another crossover.
==whipsaw==
Posted by: whipsaw | Jan 20, 2008 12:15:08 PM
But moving averages aren't forward looking?
Posted by: John Borchers | Jan 20, 2008 12:24:05 PM
Aren't 7 and 8 somewhat contradictory?
Posted by: Dave | Jan 20, 2008 12:27:54 PM
I disagree with 11:
11. Buy when your hands are shaking; sell when you become overconfident and complacent.
Lots of folks were buying when the Dow was at 12,600 (their hands were shaking). Also, I still see plenty on bulls on message boards.
Posted by: Suge Knight | Jan 20, 2008 12:48:26 PM
You can't drive a car looking in the rear view mirror. True, but if you're on the Autobahn (where most are killed from the rear) you need a rear view mirror also. Agree with both points.
Posted by: Ross | Jan 20, 2008 12:55:36 PM
Very good rules. I would add " Be good to your parents" in the same category. :)
Rob,
www.WallastonInvestments.com
Posted by: Rob | Jan 20, 2008 1:11:14 PM
Those charts do not contain useful information. For example, just because COMPQ was above the green line exceeding the natural growth curve in 98 doesn't mean one should have shorted it.
Perhaps applying the growth curves to a shorter time period would be more useful.
Posted by: Chris | Jan 20, 2008 1:11:18 PM
Hands were shaking when folks were buying Countrywide at $15 and look where is at now. Point 11 makes no sense, should not even be there.
Posted by: Suge Knight | Jan 20, 2008 1:12:56 PM
Chris. Look at the R squared value. Notice no matter what index they are relatively the same. Of course no model could perfectly predict the future all the time but what it does tell you is that if suddenly prices increase throughout the entire index, something is probably wrong.
If you used this model on Nasdaq in 2000 you would have known something was wrong. Now DOW is deviating from the model when none of the other indexes are.
Of course single stocks may have a growth rate which is high, but if you have enough data over a long historical period including times of good or bad I think that's at least worth taking a look and considering.
Interestly enough the exponential model of Nasdaq in 2000 was too bullish.
Posted by: John Borchers | Jan 20, 2008 1:24:42 PM
okay i sold my house in florida
i will have around 50,000
seriously, where should i invest it?
Posted by: kuros | Jan 20, 2008 1:27:10 PM
@John Borchers:
But moving averages aren't forward looking?
I don't think that a single moving average is very predictive, but crossovers are directional and provide inflection points without estimating where anything will ultimately wind up. The 13/34 EMA system that I mentioned can result in some deep drawdowns but generally avoids being on the wrong side of the tape over the long term as well as being jerked around during short term volatility.
I think that your exponential curves are interesting, but how do they guide you? If I understand it correctly, you expect the Dow to drop in order to kiss or cross the curve at some point, but it appears to me that this has been true since 1996. Where is the point that you either get out or go short or go long? Thanks.
==whipsaw==
Posted by: whipsaw | Jan 20, 2008 1:34:50 PM
The Rules of the Road don't apply when you're careening down a rocky hillside at high speed, headed directly for deep water.
BTW, you've got a headlight out.
Posted by: Marcus Aurelius | Jan 20, 2008 1:35:36 PM
kuros,
Are you serious? Asking for what to do with your money on a blog? (No disrespect to other posters who are very knowledgeable).
Posted by: Suge Knight | Jan 20, 2008 1:36:16 PM
13. Remember that only 1% of newcomers win.
Posted by: kio | Jan 20, 2008 1:44:07 PM
Whipsaw,
It hasn't guided me in any direction yet. I just discovered it yesterday. I'm currently short EEM via EEV and have been since the inception of the fund.
The R squared value suggests to me that Asian stocks growth rate is unsustainable. The problem is I can't build models for them well because of lack of data. So I'll stick with EEV at least for a while (6 months min).
If you notice the DOW was also for ten years over the model line during the late 50's. Then we hit the seventies and it went under the model for 10 years. So even though from 1996 it has been ahead of the model that wouldn't necessarily indicate it's correct. The fact that the DOW is clearly deviating from the trend and S&P500, Russell 2000 and Nasdaq aren't I believe is an indicator.
I am going to play this model and try it with new money input. I'll begin shorting DOW and long of Rus 2000. Interestingly enough this is completely opposite of most fund managers.
Posted by: John Borchers | Jan 20, 2008 1:51:19 PM
Kuros...
i am not an expert...but looking at all the uncertainity and volatility....i would say savings account is better till things become crystal clear where we are headed.
if you want to be prepared....keep an eye to go short as soon as FED is done with major rate cut and you still dont see good signs in housing or credit markets.
and then maybe after couple of months if market is still shaky but the world has not come to an end, keep an eye on good stocks which may have become extremely cheap...
Posted by: techy | Jan 20, 2008 1:55:29 PM
Prosecutors: Failed Subprime Mortgage Executive Killed Wife, Himself Due to Personal Problems
http://www.foxnews.com/story/0,2933,324119,00.html
Posted by: Suge Knight | Jan 20, 2008 2:07:07 PM
If you want to learn more about buying with shaky hands, ask someone who used that strategy during the last bear market -- it can be detrimental unless you buy when aversion to stocks is rampant.
That contrary indicator is rarely as low risk as people believe UNLESS you are buying when you can barely give stocks away. Hence Buffett sitting on the side lines for years at a time during previous bear markets. The real fortunes are made when everyone completely hates stocks and no one wants to talk about them anymore (e.g., 2002). We are not even close. The average Joe still thinks international funds will save them and that agriculture and solar will buck the trend.
Just look on Seeking Alpha at all the CPA's and CFP's who have been touting value in financials and homebuilders. The buy recs on that blog still far outweight the sell recs. Read all the "How to invest in 2008" special edition magazines at B&N. They are all still bullish on the second half, thus encouraging buy and holders to hold.
If we truly are unwinding excesses in the credit and housing markets that are unprecedented, a couple months of selling does not truly make for shaky hands.
The quote must be used in context ...
Posted by: D H | Jan 20, 2008 2:07:48 PM
I used to value Doug's advise. During the 2000 - 2002 bear, I had frequent email exchanges (he always responded to emails, even if it was only a one liner). He has experience and is nimble.
However, he appears to have lost himself lately. On RealMoney he had his thesis well laid out, but as is with most bearish cases, he was early. I think the stress of being wrong for a couple of years got to him (RealMoney reader recall his tequila and fetal positions on cold linoleum posts). Now he is changing his trading position every other hour and based on his posts, no one can track if he is in or out or if he is making money. Too confusing. We already have Jim Cramer to flip-flop every other minute, but sadly Doug Kass appears to be following Cramer's example.
Maybe Doug realized, based on Cramer's media success, that you had to be sensational to be a media success instead of being coherent.
If you want examples of coherent, steady analysts who recently turned bearish and are sticking to their guns, look at Richard Suttmeir (sp?) of realmoney.com.
Posted by: bt | Jan 20, 2008 2:10:34 PM
My basic trading concept is based on limiting downside risk - I want to have at least a 3:1 ratio for any trade, and hopefully better.
At present my view is that the least risk versus possible reward is in silver; it carries now a 50:1 price ratio to gold when historical ratios are 15:1.
Posted by: Winston Munn | Jan 20, 2008 2:21:09 PM
Forgot to add. All traders and analysts are wrong at some point. We shouldn't expect them to be right more than 60% of the time. We expect their advise and their action, however, to be consistent 90% of the time. If you were bearish for 5 years based on your thesis of a crumbling credit cycle, make your case, update it once in a while, and stick to it. That advise helps traders understand the bear case and even if they trade on the long side because that is what is working in the market, when the worm turns, the trader realizes that the worm has turned.
Such is the case now. The credit bubble has indeed popped and is likely to have huge ramifications for several years. Many bears were pointing this out for the last 5 years, but the markets managed, as they usally do, to humiliate the bears before making them look good.
Lesson I learned from 1998 - 2002 bull/bear is that it is very painful and unproductive to be a Cassandra. You don't make money when you are wrong and when you are ultimately proven right, you have to be quiet lest you appear to be saying "I told you so." Also, having waited for the bubble to pop for several quarters and with the market going against you, you lose confidence in your ability to be an "investor."
Posted by: bt | Jan 20, 2008 2:21:12 PM
good advice but I would amend #6 to say don't be afraid to let a winner ride - I've left a lot of money on the table over the years by taking a quick profit (AAPL, RIMM, TXN, DE, you name it).
Posted by: drey | Jan 20, 2008 2:32:03 PM
Buckle up. From the articles I see China's booming housing market is starting to significantly cool.
What a freggin surprise! Right on time for me.
Korea is next!
Posted by: John Borchers | Jan 20, 2008 2:32:31 PM
