10 Investing Guidelines by Financial Legends That Have Stood the Test of Time

Golden Words From Legends of the Stock Market

While the world of investing is rarely unanimous, there's one thing that everybody agrees upon. All financial experts understand the need to have a set of rules for your money-making strategy when it comes to the stock market. Yes, there are a lot of investors who take the unconventional path and still get the desired results but more often than not it's by observing the existing rules that one succeeds at investing. Today, we are looking at a few guidelines from legends of the stock market. There's something for everyone looking to up their investing techniques in this list.

1. Ray Dalio, Bridgewater Associates

"The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment." It's important to understand that nothing goes on forever. It's a given that whatever goes up also comes down eventually. This is why, it's important to look at other factors and not just the numbers from the past.

2. Jeffrey Gundlach, DoubleLine

"The trick is to take risks and be paid for taking those risks but to take a diversified basket of risks in a portfolio." Risk management is a common theme in the world of the stock market. While not taking risks is never the answer, it's choosing which risks to take and which to pass. Also, an underlying lesson that we can learn from this is that "herd mentality" is never good and something doesn't become the truth just because everybody believes in it. As a good investor, one should be mindful of their investments and not just invest because everybody else is. 

3. Jeremy Grantham, GMO

"You don’t get rewarded for taking risks; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it." With time, one might notice that investors try to avoid risks at any cost. In some cases, they are not scared to even underperform in the short run if that means avoiding risks. 

4. Seth Klarman, Baupost

"Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose." Buying high and selling low is more common than you think. Therefore, it's important to pay attention to how much money you can lose. It's common for people to evaluate how much money they will make and therefore, one needs to become conscious of the money they might lose. This also teaches us how greed is something we should be careful of at all costs. 

5.  Jesse Livermore, Speculator

"The speculator’s deadly enemies are ignorance, greed, fear, and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human-animal…." It's extremely important to not let your emotions dictate your financial decisions. It has been pointed out by many investors and speculators that letting your emotions control you can be disastrous. It's important to know that all great investors have a strict discipline that they follow no matter the situation. 

6. James Montier, GMO

“There is a simple although not easy alternative to forecasting. Buy when an asset is cheap, and sell when an asset gets expensive. Valuation is the primary determinant of long-term returns and the closest thing we have to a law of gravity in finance.” It is important to understand that even high-priced stocks can be called cheap. "Cheap" doesn't mean a low price per share, and therefore, the valuation is the key as rightly pointed out by James Montier in the above quote.

7. Jason Zweig, Wall Street Journal

"Regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance." It has been seen time and again that when returns exceed 10%, they also fall by 10% eventually, and those reversions can be disastrous for investors. This sheds light on the importance of regression analysis. Yes, it's extremely important to calculate the volatility of returns in comparison to the overall market. 

8. Howard Marks, Oaktree Capital Management

"Rule No. 1: Most things will prove to be cyclical. Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1." As they say, nothing lasts forever, and the saying is true in the world of the stock market as well. Marks intelligently points out that whenever a share sees a long price increase, it is a sign of the future plummet. Remember, "to buy low, one needs to sell high."

9. George Soros, Soros Capital Management

"It’s not whether you’re right or wrong that’s important but how much money you make when you’re right and how much you lose when you’re wrong." Even the best financial advisors know that there's no way we can stay in the world of finance without losing money. What's important is how much money you lose when you go wrong. Training your analytical skills will help you to lose less money but can't stop you from losing it together. This is where risk management becomes crucial.

10. Howard Marks, Oaktree Capital Management

"The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological." A large part of this whole game is cognitive and therefore, if you can wrap your head around the psychological aspect of the stock market, things will become smooth. Factors like fear, euphoria, greed, and expectations contribute to market psychology greatly and the ability to understand when to take a risk and when to refrain can only come with years of experience and thorough research.