Our BEST Investing Laws
1) Net worth should be calculated after all potential taxes. After paying taxes on their latent gains and inheritance/estate taxes after dying, the picture wouldn’t really look the same for many people. Real wealth is built over multiple generations (and after paying taxes).
2) Your investing strategy should take into account the tax benefits you have access to, your AUM and the rotation (and therefore resulting fees) of your portfolio. Potential and abstract gross returns don’t mean anything if those 3 factors are not considered.
3) Private equity returns expressed as IRRs are BS returns. The only real return is the cash-on-cash return expressed as a MOIC over the life of a fund. You can’t eat IRR. If you think differently, good luck reinvesting those early returns at the same « high » IRR.
4) The best investors in history (in terms of % returns) are people you don’t know and they don’t want to be known. They all share the same traits: they are frugal, humble, honest and independent. They all play the long game and love what they do.
5) When investing in a new company, it’s better to approach valuation in terms of expected annual return than multiple (always invert). Keep it simple no matter what: 10% after-tax return will always make sense.
6) One bird in hand is worth 2 in the bush. I’d rather invest in small but established companies with proven/difficult-to-disrupt biz models as well as stable/moderately growing earnings bought at good prices. Future and high LT growth in new industries is often a mirage...
7) Simply put, I’d rather have a 10% earnings yield with stable earnings (and a big pile of cash spent overtime in the form of dividends/buybacks) than relying mostly or totally on an uncertain future growth. Call it a lack of ambition. I call it taking care of the downside...
8) You should have at least 20-30% of your net worth in cash to manage your personal « tail risk ». It’s a laughable statement until s... hits the fan in the form of a health problem, job loss or having to help a family member.
9) This cash can also be used to seize opportunities when markets tank. How many times have I heard in March 2020: « But I am fully invested... ».
10) Leverage is good when it’s very long-term, limited vs. your total assets, low-cost, with no margin calls attached to it. Otherwise, forget about it.
11) Don’t marvel at Medallion (or anyone else for that matter) 40% p.a. returns. It’s done with a 5-10x average financial leverage and strategies also using questionable tax leverage / loopholes. In short, don’t try this at home..
12) Don’t marvel either at the average private equity returns. Assuming an IRR could be trusted, the average 12% IRR is not even 6% unlevered (and pre-tax). Yuck.
13) Don’t own a house or a property as an investment. The only upside is being at home, paint the walls your favorite color and not to be kicked out by a landlord. Plus, the long and cheap available leverage. Without an unfair advantage, you can ignore this asset class entirely.
14) The most interesting asset class in terms of potential unlevered returns for the small investor is listed microcaps. You can fish deeper and fish alone. Almost no competition from smart and sophisticated pro investors. Plus, much more liquid than PE or RE.
15) PE and VC are just microcap investing with either too much leverage or too much hype/risk.
16) Don’t buy into the « daily 500 pages reading », « reading entire annual reports » or « 15-page research reports are the best ». With modern tools, common sense and an obsession about protecting the downside, all this is BS to brag and impress the beginner.
17) Some AR / 10-K footnotes or DD elements are important but not all of them are. Don’t miss the forest for the trees. Keep it simple. Protect the downside: first and always.
18) Don’t listen to the pros, ever. They play a different game, mostly fraught with career risk and BS. They wish they could play yours. Stick to the amateur game, which is made of plentiful opportunities, a long runway and no institutional imperative / BS.
19) Don’t listen to anyone. Not even me of course. Be and stay an independent thinker. Draw inspiration and listen to others only if they are transparent (especially about their failures) and walk their talk with their own money (skin in the game, always).
20) If someone writes something about investing and says « it’s not advice », it should then be what they do with their own money. If it’s not, tell them to shut up and stop writing. You should own what you write.
21) The best investing approach for you is that when you sleep well at night. If it keeps you awake with anxiety, just drop it.
22) Risk is not volatility. Risk is not beta. Risk is the downside that makes you lose everything overall or in a single investment. Managing risk is protecting this downside by avoiding too much leverage and keeping a cash cushion. No matter what.
23) Munger is fond of saying that 3 things can cause your ruin: ladies, liquor and leverage. Manage those 3 properly and you will protect your downside, avoid catastrophe and survive.
24) Survive. Survive. Survive. That is the first goal of investing. That should have been the first tweet of this storm. That’s the ultimate downside protection.
25) Don’t respect the smart investor. Don’t respect the bright investor. Respect the investor who has survived and thrived for multiple decades. This is the only reason you should worship (if you have to) Buffett and Munger.
26) I have a simple heuristic with investments as a buyer. If I can’t figure out the payoff and it’s mechanics, I pass. Especially when the seller is smarter than I am. Which is most of the cases.
27) Investing is so difficult because you make it so. Because you want to belong. Because you want to follow. Because you want to be liked. It’s not about bragging about what you own. It’s about doing the right thing.
28) Intelligent investing is about focus. Focus on an asset class. Focus on a geography. Focus on a market segment. Focused portfolio. That’s the price to pay to outperform.
29) Ignore the financial advisor’s advice. He’s a salesman and lives to get paid a commission (and he needs it to pay for this latest Mercedes model). If there’s someone whose interests could be further aligned from yours, it’s him. So don’t pay the 1%. Ever.
Investing contains risks and opportunities.
It's a very complex long-term game