The Rules of Investment

To ensure against substantial error and develop comfortable policies for the investor.

In General

1. Value does not depend on price.
2. The principles of sound investment do not change.
3. Never spend more for an investment than you have to.
4. Achieving satisfactory results is easier than expected.
5. Achieving superior results is harder than assumed.

On Markets

6. You cannot control the market.
7. You can only control yourself.
8. Price adjustments always happen.
9. Sell to optimists, buy from pessimists.
10. Predictions are already priced in.
11. In the short run the market is a voting machine.
12. In the long run the market is a weighing machine.
13. Enthusiasm increases risk, not growth.
14. The longer the bull market, the stronger the amnesia.
15. It is unrealistic to wait for a bear market before buying.
16. When the market destroys value, it creates value elsewhere.
17. The great bulk of investors are amateurs.
18. Great expectations lead to great disappointment.
19. Wall Street has prudent principles that are always forgotten when needed.
20. Indices ignore companies that go bankrupt.
21. Ideas and discovers are shared on Wall Street.
22. Formulas become less effective as they become adopted.
23. Insiders often possess only the illusion of knowledge.
24. Well-defined and protracted market situations may return.
25. Bull markets have low dividend yields against bond yields.
26. Bull markets have high P/E multipliers against bond yields.
27. Bull markets have much speculation on margin.
28. Bull markets have many new IPOs of poor quality.
29. Never count on being able to sell for the quoted price.
30. A conversion privilege often betrays an absence of quality.
31. Regulations cannot prevent investors from overdosing on greed.
32. Most loss comes from bad issues bought at good times.

On Stocks

33. There are no good stocks, only good prices.
34. The advantage of stocks are lost if you overpay.
35. Find suitable issues by forgoing brilliant prospects.
36. Only buy a stock if it is a cheap way to own a good business.
37. A good business generates more cash than it consumes.
38. Ideal stock analysis compares value to current price.
39. Group estimates are often more dependable.
40. Performance can only be maintained with high profits.
41. High profits attract competition.
42. High valuations entail high risk.
43. Only buy if you do not need to know daily price.
44. Dread bull markets that make stocks more costly to buy.
45. Welcome a bear markets that put stocks back on sale.
46. Better prospects means less realistic prices.
47. A stock can stay overvalued for a long time.
48. Most growth stocks are overpriced.
49. Margins on pricing errors are not wide enough for trading.
50. Be wary of new issues.
51. Preferred stocks should be bought by corporations.
52. Small companies risk more loss in spite of better earnings.
53. New conditions, policies, or management can correct poor earnings.
54. Prospects should be measured in the context of an industry.
55. Few companies have shown high rates of growth over time.
56. Larger companies rarely suffer ultimate extinction.
57. Companies with low stock prices often go out of business.
58. The bigger they get, the slower they grow.
59. Don't take a single year's earnings seriously.
60. Annual figures hardly fail to have an impact.
61. Higher forecasts are more subject to error.
62. Longer term forecasts are more subject to error.
63. Ignore pro forma earnings.
64. Ignore forward P/E ratios.
65. Forecasts must take future interest into account.
66. Increased sales magnify losses on unprofitable products.
67. New shares from options cause dilution.
68. Special charges must be deducted from primary earnings.
69. Assume all convertible bonds will be converted.
70. Beware of companies that pile charges in to a bad year.
71. Beware of companies that alter depreciation models.
72. Beware of companies that alter R&D financing models.
73. Taxation can greatly distort after-tax earnings.
74. Read financial reports backwards, starting with footnotes.
75. Avoid companies that obfuscate financial statements.
76. Avoid companies with recurring extraordinary charges.
77. Accountants can transform expenses into assets.

On Management

78. Managerial competence is not reliably measurable.
79. Good management does not win against bad business.
80. Smooth and steady growth is a sign of health.
81. Good EPS growth is 6% to 7% over the past 10 years.
82. Long term debt should be under 50% of total capital.
83. Earnings should cover fixed charges.
84. Companies should buy back shares when they are cheap.
85. Relying on a single customer is dangerous.
86. Operating loss with financing gain is bad business.
87. Spending nothing on R&D is as bad as spending too much.
88. Avoid companies with opaque books.
89. Aggressive revenue recognition is a sign of trouble.
90. Avoid companies that report good prospects on bad business.
91. Prolonged turnover eventually devolves into turmoil.
92. Management should be considered when it has changed.
93. A company cannot manage more than three acquisitions per year.
94. Executives should say what they will do, and do what they say.
95. Executives should manage, not promote stock.
96. Good companies communicate problems candidly.

On Bonds

97. Bond prices fluctuate less than stock prices.
98. The 100% maturity value of bonds moderate their prices.
99. Low yields for bonds correspond to high prices.
100. High yields for bonds correspond to low prices.
101. If interest rates rise, bond prices fall.
102. If interest rates fall, bond prices rise.
103. Bonds may sell at large discounts from their claim.
104. High-grade and short maturity insulate bonds from price changes.
105. Long term bonds vary with interest rates.
106. If interest is not covered, corporate bonds devalue.
107. Avoid foreign-government bond issues.
108. Second-grade bonds suffer severely in bad markets.
109. Second-grade bonds recover in favorable conditions.
110. Corporate bond value depends on size, stock/equity and asset value.
111. Convertible bonds vary with stock price, credit rating and interest rates.
112. Never convert a convertible bond.
113. Only own taxable bonds in a tax sheltered account.
114. After bankruptcy, bondholders often receive stock.
115. Typical investors will be best off with low cost bond funds.

On Portfolios

116. Never confuse speculation for investment.
117. Do not judge your success by the success of strangers.
118. The point is to earn enough money to meet your needs.
119. Your E/P ratio should be higher than the high-grade bond rate.
120. It requires more effort to keep a fortune than to make it.
121. Avoid fund favourites or own them more patiently.
122. Keep no less than 25% of your assets in either stocks or bonds.
123. Keep some assets in cash.
124. Increase your stock holdings in bear markets.
125. Decrease your stock holdings in bull markets.
126. Replace fast growers with issues that are reasonably priced.
127. Rebalance your holdings on a predictable, patient schedule.
128. The true investor is scarcely ever forced to sell his shares.
129. Sell into a bear market if it creates a tax windfall.
130. Tax swaps can be mishandled easily.

On Speculation

131. An investor values businesses. A speculator values opinions.
132. A long term investor is the only kind of investor there is.
133. Investors have no interest in being temporarily right.
134. The more you trade, the less you keep.
135. Market timing is a practical and emotional impossibility.
136. Never buy after a big rise or sell after a big drop.
137. Skepticism grows the farther you get from Wall Street.

On Advisors

138. Do not expect to be told how to make a profit.
139. You hire an adviser to manage you, not your money.
140. The best advisers already have as many clients as they can handle.
141. A good adviser will ask you questions.
142. Brokers cater to speculators.
143. Free advice is seldom cheap.
144. If fees consume more than 1% annually, find another adviser.
145. Returns over 8% to 10% are unrealistic.
146. Read the disclosure reporting pages of an advisor's ADV.

On Funds

147. What happens to the market, happens to funds.
148. Size is the anchor of performance.
149. Indexes beat funds over the long run.
150. Patience is the fund investor's most powerful ally.
151. For the skilled, wide diversification is foolish.
152. For the average, not diversifying is foolish.
153. Look at a funds expenses, risk, reputation, and performance in that order.
154. You lose the money you pay as fees.
155. It costs more to trade in large blocks than in small ones.
156. Good funds don't want your money.
157. Good funds are owned by their managers.
158. Strong funds are specialized, limited and not actively sold.
159. Closed-end shares are obtainable at less than asset value.
160. Fast growing funds are left with nothing to buy.
161. If you can't bear a funds worst performance, don't own it.
162. Spectacular results may indicate undue risk.
163. Average fund performance rarely covers cost.
164. Buying funds on past performance alone is foolish.
165. Bright, young people have always promised miracles.
166. Someone has to sell the funds you cash.
167. Volatile funds are likely to stay volatile.
168. Good managers migrate between funds.

On Inflation

169. Inflation is one of your worst enemies.
170. Measure success by how much you keep after inflation.
171. Precious metals outpace inflation.
172. Stocks protect against inflation.
173. Stocks do not guard against high inflation.
174. Bonds guard from principal loss and deflation.

On Defensive Investment

175. The safest investments do not rely on prediction.
176. Emphasize diversification over individual selection.
177. "I don't know and I don't care" is a powerful position.
178. Safety resides in earning power.
179. Uniform purchases of stock is a sound defensive strategy.
180. The majority of investors should be defensive.
181. For most, selecting stocks is unnecessary and inadvisable.
182. Defensive investment is emotionally taxing.
183. Never buy into a lawsuit.
184. Defensive companies are large, prominent, and conservatively financed.
185. Defensive investors limit price paid for average earnings.
186. Current assets should be at least twice liabilities.
187. Long term debt should not exceed net current assets.
188. Require earnings for the common in each of the past ten years.
189. Require an uninterrupted 20 year dividend record.
190. Require a 1/3 per-share earnings increase over ten years.
191. Require prices less than 15 times average three year earnings.
192. Require prices less than 1.5 times book value.

On Enterprising Investment

193. Enterprising strategies start from a defensive base.
194. Selections must meet rational tests of soundness.
195. The enterprising should only buy bargains.
196. Investment is a profession for the enterprising.
197. Be enterprising or defensive. You cannot be both.
198. Merger arbitrage is inappropriate for individuals.
199. Lawsuits can create bargains.
200. Enterprising investment is intellectually taxing.
201. Small companies may be safe if bought in groups.
202. Smaller issues are overvalued in bull markets.
203. Smaller issues suffer big declines.
204. Smaller issues have delayed recoveries.
205. The cost of trading low-priced stocks can be very high.
206. A bargain is less than 66% of the value.
207. Require cheap stock assets at least 1.5 times liabilities.
208. Require no deficit on cheap stocks in the last five years.
209. Require Cheap stock prices less than 120% of tangible assets.
210. Favor firms that limit options to roughly 3% of shares.

On Decision Making

211. The secret of sound investment is a large margin of safety.
212. A margin of safety does not guarantee profit; it protects from loss.
213. No one can predict the future.
214. You can never eliminate the risk of being wrong.
215. You can only predict something that is predictable.
216. Hindsight profits are missed opportunities. Ignore them.
217. Nothing important recurs exactly.
218. Extreme movements result from events that cannot not be foreseen.
219. A wise man expects exactness that the subject permits.
220. In uncertain conditions, consequences dominate the probabilities.
221. Familiarity breeds complacency.
222. People always cling to their prejudices.
223. Decisions are based on the experience of a year, not a lifetime.
224. Loss is twice as memorable as gain.
225. Act on reasonable conclusions from evidence, though others may differ.
226. Losing money is an inevitable part of investing.
227. Mathematics is prevalent where it is least reliable.
228. The fool confuses effort for knowledge.
229. Study is the only defence against risk.
230. If a formula works today, it will not work tomorrow.
231. When you pay a premium, you depend on the market for validation.
232. Ignore the current price, or turn an advantage into a disadvantage.
233. Do not accept promises in exchange for value.
234. If I am buying, someone else is selling.
235. If I am selling, someone else is buying.
236. This too shall pass.