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Bernard Baruch's 10 Commandments for Investors, Part 2

The Lone Wolf of Wall Street knew what it took to survive and thrive in an evolving market

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John Engle
Apr 25, 2019
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Known as the “Lone Wolf of Wall Street” in his youth, Bernard Baruch gained numerous other epithets over the course of a long and varied career as a stock operator. Woodrow Wilson called him “Dr. Facts” for his seemingly encyclopedic knowledge. The media dubbed him the “Adviser to Presidents” for counsel he provided to numerous administrations, in times of both peace and war.

In his memoir, “My Own Story,” Baruch recounted 10 pieces of advice to help budding investors find greater success in their chosen trade. We recently discussed the first five of these “10 Commandments” for successful investing:

  1. Don’t speculate unless you can make it a full-time job.
  2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of "inside" information or "tips."
  3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
  4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.
  5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

In this note, we cover the remaining five commandments, each of which should serve investors operating in any market and any era.

6. Don’t buy too many different securities. Better to have only a few investments which can be watched.

This advice may sound controversial today, given the ascendancy of ETFs and index-tracking funds. Concentrated stock portfolios are for active investors; they do not serve the passive investor particularly well. Even so, there are many major asset managers, such as

Ray Dalio (Trades, Portfolio), who recommend extensive diversification.

Yet, if you are looking to beat the market, buying index funds will offer no help. We consider the strategy of choosing a few high-quality eggs and then watching the basket closely to be best-suited to delivering long-term positive returns. That requires extreme discipline and constant attention.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

The market is constantly changing, and investors must react to those changes. Bombarded with noise and other useless informational stimuli, investors can sometimes find themselves analytically disorientated.

Just as all investors should keep close attention on each of their positions, an occasional deep dive may also be warranted. Instead of simply adjusting one’s thesis at the margins in response to news or fresh data, it can help to go back to the start, redeveloping the case from the bottom up. This may sound like a waste of time at first, but it can allow you to review your positions with fresh eyes.

8. Study your tax position to know when you can sell to greatest advantage.

While it is usually possible to find sane arguments on either side of virtually every debate, when it comes to the U.S. tax code, there is no debate. Anyone who has experienced it knows that it is a byzantine nightmare.

But with complexity comes opportunity. Paying attention to changes in the treatment of capital gains, as well as to your other income throughout a given year, it is possible to get the best of Uncle Sam from time to time (though it is usually more a matter of avoiding the worst of him). Investors should always work out the tax implications of their decisions, since they can have very considerable effects on what they take home at the end of the day, once the taxmen have taken their cut.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

When faced with a truly exceptional investment opportunity, the impulse to go all-in may feel overpowering. Investors must learn to resist this urge. No opportunity is a sure thing, a fact that many stock operators have learned the hard way through the ages.

This attitude should be taken toward an investor’s portfolio as a whole. The risks of going all-in on a single security may be greater and more idiosyncratic than committing all of your funds to a range of investments, but the species of risk is the same. Without a cash reserve, you will miss out on new opportunities as they arise, but, more importantly, it leaves you exposed to sudden shocks. The importance of maintaining a degree of liquidity, for both opportunity and security, should never be forgotten.

10. Don’t try to be a jack of all investments. Stick to the field you know best.

Investors cannot know everything. Even big institutions have blind spots. The best way to develop an investing edge is to understand everything about the securities in which you deal. Knowing the company like the back of your hand is just a starting point. You must also learn everything there is to know about its industry, competitors, market risks, cyclical factors and more.

Ultimately, such depth of knowledge cannot extend to every industry or type of security. That means you must be willing to prioritize the things you understand and build up your edge in that niche. This does not mean you have to be boxed into any one asset class or industry for life. The important thing is to understand your limitations and skill set in order to cultivate an edge, i.e. persistent abnormal positive returns.

Disclosure: No positions.

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