2821: 6 Principles The Best Investors Use to Crush The Market by Phil Town on Investment Advice

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[00:01:06] [SPEAKER_00]: This is Optimal Finance Daily.

[00:01:09] [SPEAKER_00]: Six Principles the Best Investors Use to Crush the Market by Phil Town of RuleOneInvesting.com.

[00:01:16] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:20] [SPEAKER_00]: This is the show where I read to you from the best personal finance blogs on the web, with the author's permission, of course.

[00:01:27] [SPEAKER_00]: And now let's get right to it and start optimizing your life.

[00:01:35] [SPEAKER_00]: Six Principles the Best Investors Use to Crush the Market by Phil Town of RuleOneInvesting.com.

[00:01:43] [SPEAKER_00]: The following six principles come from the rule number one tradition.

[00:01:47] [SPEAKER_00]: In 2014, the nonprofit group, the American Association of Individual Investors, rated the rule number one hedge fund strategy, the number one hedge fund strategy last year.

[00:02:01] [SPEAKER_00]: Our hedge fund produced 50% returns last year.

[00:02:05] [SPEAKER_00]: The best investors in the world use these six principles.

[00:02:08] [SPEAKER_00]: They are awesome.

[00:02:09] [SPEAKER_00]: They have been around since the 1930s and they are still practiced today by the best investors in the world.

[00:02:15] [SPEAKER_00]: Investors like Warren Buffett, Charlie Munger, David Einhorn, Manish Pabri, and myself all use these six principles and we get great returns.

[00:02:25] [SPEAKER_00]: Rule number one states don't lose money.

[00:02:28] [SPEAKER_00]: And these six principles are always on my mind to help me avoid violating that critical rule.

[00:02:34] [SPEAKER_00]: Number one, radar.

[00:02:36] [SPEAKER_00]: This is easier said than done when you're investing real money.

[00:02:40] [SPEAKER_00]: Money you can't afford to lose tends to be hot or emotional.

[00:02:44] [SPEAKER_00]: Pro gamblers try avoid sitting down with more than they can lose.

[00:02:48] [SPEAKER_00]: But anyone investing all of their own hard-earned money is always sitting down with more than they can lose.

[00:02:54] [SPEAKER_00]: Fear of losing more than you can afford to lose tends to make the mind go irrational.

[00:02:59] [SPEAKER_00]: You start guessing.

[00:03:00] [SPEAKER_00]: You can't tell the difference between a good idea and a bad idea.

[00:03:04] [SPEAKER_00]: Investing decisions are not life and death decisions.

[00:03:08] [SPEAKER_00]: But still, remaining rational in the face of intense emotions is an art that's learned in the trenches.

[00:03:14] [SPEAKER_00]: Number two, understand the business.

[00:03:17] [SPEAKER_00]: Understand what you're buying.

[00:03:20] [SPEAKER_00]: Stick with what you know and realize what you don't know.

[00:03:23] [SPEAKER_00]: Focus your attention on industries that you're already comfortable with.

[00:03:27] [SPEAKER_00]: Imagine that you are going to have to own and operate a business.

[00:03:31] [SPEAKER_00]: Can you do that in an industry where you're seriously thinking of making an investment?

[00:03:35] [SPEAKER_00]: You need to be able to understand the business if you want to buy it.

[00:03:39] [SPEAKER_00]: Number three, love what you own.

[00:03:42] [SPEAKER_00]: Put your money where your values are.

[00:03:45] [SPEAKER_00]: Many of us have the intention to make the world a better place,

[00:03:48] [SPEAKER_00]: but seem to forget that in the businesses that we invest in and have a direct impact on what's going to exist in the world in 20 years.

[00:03:56] [SPEAKER_00]: 85% of all the money in the stock market is little guy money.

[00:04:00] [SPEAKER_00]: This is money from our 401ks, our retirement plans, and our pension plans.

[00:04:05] [SPEAKER_00]: Vote for the future that you want to see by investing your own money into businesses that you want to see 20 years from now.

[00:04:11] [SPEAKER_00]: Investing in companies that you love transforms it from a chore or obligation into something that you're passionate about, something that's fun.

[00:04:19] [SPEAKER_00]: Number four, wait for an event.

[00:04:22] [SPEAKER_00]: When you boil it down, we buy fear and we sell greed.

[00:04:26] [SPEAKER_00]: Fear creates a lot of selling action.

[00:04:29] [SPEAKER_00]: When stock prices are set by the most fearful or the most greedy investors,

[00:04:33] [SPEAKER_00]: those who are fully in the sway of emotion,

[00:04:36] [SPEAKER_00]: it's clear that the market prices are often far from rational.

[00:04:40] [SPEAKER_00]: The big players in the market, mutual fund managers, pension fund managers,

[00:04:44] [SPEAKER_00]: insurance fund managers, and bank fund managers,

[00:04:47] [SPEAKER_00]: are not the most cold-blooded rational creatures on the planet.

[00:04:50] [SPEAKER_00]: When the market begins to go down, these greedy investors get out quickly to avoid losses.

[00:04:56] [SPEAKER_00]: If the company is wonderful and you understand it, that's when you take advantage.

[00:05:01] [SPEAKER_00]: Number five, reduce your basis.

[00:05:04] [SPEAKER_00]: Your basis is the amount of money that you have on the table.

[00:05:08] [SPEAKER_00]: All reduced basis means is getting your money off of the table.

[00:05:12] [SPEAKER_00]: This is the unsung hero of the rule number one saga.

[00:05:16] [SPEAKER_00]: You can lower your basis with return of capital.

[00:05:19] [SPEAKER_00]: That means cash flow strategies from dividends, buybacks, derivatives, really safe options trades.

[00:05:25] [SPEAKER_00]: When you reduce basis, your risk of losing money goes down proportionately.

[00:05:30] [SPEAKER_00]: You lower your risk of losing money by reducing your basis.

[00:05:33] [SPEAKER_00]: When my basis goes to zero, where is my market risk?

[00:05:37] [SPEAKER_00]: If I start spending the money to live on instead of reinvesting it,

[00:05:40] [SPEAKER_00]: then the basis stays the same, but the return still goes up because you're getting dividends every year.

[00:05:45] [SPEAKER_00]: In essence, I've created for my retirement a kind of special bond,

[00:05:50] [SPEAKER_00]: one that's backed by one of the best companies in the world and yet pays out based on an ever-increasing coupon rate.

[00:05:56] [SPEAKER_00]: One that within 10 years is over 20% a year and rising.

[00:06:01] [SPEAKER_00]: Number six, create a story.

[00:06:03] [SPEAKER_00]: Create a story for the company you want to invest by combining all of the previous principles into a cohesive idea about why this is a great company.

[00:06:13] [SPEAKER_00]: Then once you have that story, invert it by flipping it to the opposite point of view.

[00:06:19] [SPEAKER_00]: You should try to create the argument that this investment is a dumb idea.

[00:06:22] [SPEAKER_00]: And if you can't, then that's a sign that you don't know enough about the company yet.

[00:06:30] [SPEAKER_00]: You just listened to the post titled,

[00:06:32] [SPEAKER_00]: Six Principles the Best Investors Use to Crush the Market by Phil Towne of Rule1Investing.com.

[00:06:38] [SPEAKER_00]: And I'll be right back with my commentary.

[00:06:41] [SPEAKER_00]: Buy low, sell high.

[00:06:43] [SPEAKER_00]: It's easy to say, hard to do.

[00:06:46] [SPEAKER_00]: For example, high interest rates are crushing the real estate market right now.

[00:06:51] [SPEAKER_00]: Demand is dropping and prices are falling, even for many of the best assets.

[00:06:56] [SPEAKER_00]: It's no wonder the Fundrise flagship fund plans to go on a buying spree,

[00:07:02] [SPEAKER_00]: expanding its billion-dollar real estate portfolio over the next few months.

[00:07:06] [SPEAKER_00]: You can add the Fundrise flagship fund to your portfolio in just minutes and with as little as $10

[00:07:13] [SPEAKER_00]: by visiting Fundrise.com slash OFD.

[00:07:18] [SPEAKER_00]: That's F-U-N-D-R-I-S-E dot com slash OFD.

[00:07:24] [SPEAKER_00]: Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise flagship fund

[00:07:32] [SPEAKER_00]: before investing.

[00:07:33] [SPEAKER_00]: This and other information can be found in the Funds Perspectus at Fundrise.com slash flagship.

[00:07:41] [SPEAKER_00]: This is a paid advertisement.

[00:07:44] [SPEAKER_00]: I think this article might have something to offer for people who are interested in actively managing

[00:07:49] [SPEAKER_00]: their investments or for people who are buying and selling individual stocks.

[00:07:53] [SPEAKER_00]: I personally prefer passive investing with low-fee total market index funds.

[00:08:00] [SPEAKER_00]: I don't need to worry about researching individual companies or thinking about how I would run the business

[00:08:05] [SPEAKER_00]: because I'm investing in indexes that mimic the entire U.S. stock market.

[00:08:10] [SPEAKER_00]: I prefer this strategy because it enables me to manage my investments myself without spending a ton of time on active management.

[00:08:17] [SPEAKER_00]: I'm also not paying any management fees for someone else to actively manage my portfolio for me.

[00:08:24] [SPEAKER_00]: I'm a bit weary of an investor boasting 50% returns.

[00:08:28] [SPEAKER_00]: Notice that he stated that this was in one year.

[00:08:32] [SPEAKER_00]: Studies have shown that the majority of active investors don't beat the market over time.

[00:08:37] [SPEAKER_00]: So while a 50% return is impressive in one year, I think it's much more important to look at performance over a longer period of time.

[00:08:45] [SPEAKER_00]: As a long-term investor, I'm not trying to beat the market.

[00:08:48] [SPEAKER_00]: I want to match the market.

[00:08:51] [SPEAKER_00]: I do think there's some merit in the third point here.

[00:08:54] [SPEAKER_00]: Love what you own.

[00:08:55] [SPEAKER_00]: I'm seeing more and more friends move towards sustainable and socially responsible investing,

[00:09:00] [SPEAKER_00]: which focuses on investing in companies that are engaged in social justice, environmental sustainability, and alternative energy or clean technology efforts.

[00:09:11] [SPEAKER_00]: There are indexes available for this type of investing as well.

[00:09:14] [SPEAKER_00]: And you may also hear them referred to as ESG funds, which stands for environmental, social, and governance.

[00:09:23] [SPEAKER_00]: And that's it for today.

[00:09:24] [SPEAKER_00]: Thank you for listening.

[00:09:26] [SPEAKER_00]: Have a great rest of your day.

[00:09:27] [SPEAKER_00]: And I'll see you in tomorrow's show where your optimal life awaits.