20 Rules for Markets and Investing

By Charlie Bilello

23 Dec 2019

1) Be humble or the markets will eventually find a way to humble you.

Having more confidence is a good thing in many areas of life. Markets are not one of them. More confident investors tend to trade more and take on undue risk, leading to worse performance.

Men are generally more confident in their trading abilities than women and have lower average returns to show for it.

2) There is no reward without risk. If it seems too good to be true, it probably is.

Enticingly high yields. Smooth returns. Perfect market timing.

These are just a few of the siren songs that can lead investors astray.

Take a look at the second column in the table below:

  • No down years from 1990 to 2008.
  • 10.6% annualized return with less volatility than bonds.
  • A maximum drawdown of less than 1%.

Does that seem too good to be true?

It was. These were the false returns of the largest feeder fund invested with Bernie Madoff. Billions and billions of dollars, chasing what appeared to be risk-free reward.

3) The longer your holding period, the higher your odds of success.

On any given day in the stock market, your odds of a positive return are just 53%, little better than a coin flip. Increase your holding period to a year, and your odds of success jump to 74%. At a 20-year holding period, there has never been a negative return for U.S. equity investors.

The big money is made in the big move. The most important lesson from perhaps the most famous trading book of all time (Reminiscences of a Stock Operator) had nothing to do with trading…

It never was my thinking that made the big money for me. It always was my sitting.

4) Every time is different. You haven’t seen this movie before. No one has.

In September 2014, U.S. jobs had grown for 48 consecutive months, tying the prior record from 1990 and mirroring other streaks that ended in 2007 (46 months) and 1979 (45 months).

All of these streaks would soon be following by a stock market peak and recession, leading many to state the ominous “we’ve seen this movie before.”

Earlier this month, we learned that jobs in the U.S. had expanded for the 110th consecutive month, surpassing the prior record by more than 5 years.

5) Price targets are pointless. Forecasts are foolish.

Let’s rewind for a moment to December 2008. In the midst of the worst recession since the Great Depression, these were the dire predictions from some of the “market’s sharpest thinkers”…

6) Plans > Prophesies. Evidence > Opinions.

In November 2016, the largest hedge fund in the world had a prophesy: stocks would “crash” if Donald Trump was elected.

What evidence did they have backing their cataclysmic prediction?


The S&P 500 is 60% higher since the 2016 election, and the Nasdaq 100 is up 86%. When did rally begin? The very next day after the election.

Never let a prophesy get in the way of your plan.

7) Cycles and Trends exist. That does not mean they are easy to predict or navigate.

The S&P 500 is up almost 500% since its closing low in March 2009. Up and to the right, as the saying goes.

Easy money?

Far from it. There were 25 corrections in the S&P 500 of more than 5%. Each had troubling “reason” associated with it…

Trade wars. Tariffs. Inverted yield curves. Rising rates. Election fears. Brexit. European debt crises. And on and on and on.

They all seemed like the end of the world at the time.

8) Concentration = fastest way to build wealth & fastest way to destroy it.

Bezos. Gates. Buffett. Zuckerberg.

A list of the wealthiest Americans all have one thing in common: concentration in a single company’s stock that they founded.

It’s tempting to believe that is the model you should follow in your own investment portfolio, but for most, that would be a mistake.


The odds of you picking a single stock and it becoming one of the big winners are not in your favor.

Most companies (72%) vastly underperform Treasury bills over the long term and more than half earn a negative lifetime return.

Any individual stock can go to $0. Remind yourself of this next time you’re tempted to go all-in on a single name.

9) The only certainty is uncertainty. Expect the unexpected. Suspend disbelief.

Given enough time, the market will make a fool out of anyone basing their expectations for the future on what has happened in the past.

Financial markets do not follow a bell curve. Instead, they operate in the world of fat tails, where extreme events are much more likely to occur than a normal (or Gaussian) distribution would predict.

Following the Brexit vote on June 24, 2016, the British Pound fell over 8% against the US Dollar, more than double its previous record decline of 4%.

This was a “15-sigma event” which basically means that it should not have happened even once in the history of the universe. But it did, and given enough time, it will happen again.

10) Time is infinitely more valuable than money.

Prudent asset allocation is the foundation of a successful long-term investment plan while prudent time allocation is foundation of a successful long-term life plan.

Investors often think about the former, and rarely give thought to the latter.

No amount of money can buy the past. Focus more on the latter.

11) Saving is more important than investing. No savings = no investing.

Investment returns get all attention but for most people, how much they save is much more important.

Over 30 years, saving 8% of your income with a 1% rate of return handily beats an 8% return with a 1% savings rate.

Note: Savings amounts in table are based on after-tax median household income. Analysis does not factor in taxes or inflation.

This is a good thing, for saving more is something you can actually control, whereas earning a higher investment return is not a function of effort.

12) Lower fee beats higher fee on average. Passive beats active on average. Simplicity beats complexity on average.

It is impossible to predict how any given fund will perform in the future, but if you had to do so based on a single factor, it would be the expense ratio.

In all categories lower fee funds outperform higher fee funds on average.

Source: Derek Horstmeyer , WSJ. Jan 9, 2019.

There will always be active funds that outperform their benchmarks, but the odds of an investor finding such a fund in advance are not high. The longer the holding period, the more true this statement becomes.

13) Being good at suffering is a superpower.

When you think about the great investors in history, suffering probably isn’t the first word that comes to mind. But having a high threshold for pain is just about the important trait you can have in this business.

Without exception, every great investor has experienced periods of severe pain.

Even Warren Buffett?

Yes, even him.

From June 1998 through March 2000, Berkshire Hathaway declined by over 49% while the tech-heavy Nasdaq 100 Index advanced 270%.

Sticking with a value investing strategy through such a period required an unbelievably high tolerance for pain.

What happened next? You guessed it…

14) Doing nothing (low frequency) usually beats doing something (high frequency). First, do no harm.

In markets, we are constantly being enticed to just do something. Buy. Sell. Short. Cover.

But for most investors, such action comes without any credible evidence to suggest it would preferable to doing nothing at all.

It should come as no surprise then to learn that activity is inversely correlated with return.


15) Don’t be afraid to say “I don’t know.” Stay within your “circle of competence.”

  • Where is the S&P 500 going to be at the end of 2020?
  • What about the 10-year Treasury yield?
  • Who will win the election next year?
  • Is Gold a good investment today?
  • When will the trade war be resolved?
  • Will the Fed cut continue to cut rates next year?
  • When is the next recession coming?

It’s tempting to believe that you must have the answer to such questions to succeed as an investor, but the opposite is true.

Thinking you know something and acting on that opinion can be far more harmful than admitting you just don’t know.

16) Volatility and Sentiment are mean-reverting at extremes.

When volatility spikes and fear abounds, it can seem as if the bad news will never end.

But it will. Time heals all fears and good news is on the horizon.

When volatility spikes to extremes, it tends to fall. When it plummets, it tends to rise.

Reversion to the mean is the iron rule of the financial markets.

Jack Bogle

17) No one rings a bell at the top or the bottom. Many ring it in hindsight.

Take a look at this chart. Does it look like a top to you?

How about this one?

Or this one?

Not yet? Surely this one looks like a top, right?

Yup, there it is. As clear as day. If only someone rang a bell.

18) The best strategy is the one you can stick with long enough to reap the benefits of compounding.

Identifying the “best” performing strategy is an impossible task, but harder still is sticking to such a strategy.

Take the “fund of the decade” from 2000 to 2009: CGM Focus. It gained over 18% annually (more than 3% better than its closest rival) while its shareholders lost 11% annually.

How is that possible?

Investors poured money into the fund after strong performance and pulled money out after weak performance. They bought high and sold low, unable to stick with it when times got tough.

19) Diversification and asset allocation protect us from the inability to predict the future.

What asset class is going to be the best in 2020? How about the worst?

If we could predict the future, we would own all of the best and none of the worst.

But alas, such prognostications are impossible, which is why we diversify.

Data via YCharts

20) Learn to control your emotions or your emotions will control you.

Fear and greed are primal emotions. We’re wired to respond to them. This served us well from an evolutionary perspective but in investing they do more harm than good.

When markets are falling, we fear losing everything and are induced to sell to stop the pain.

When markets are rising, we fear missing out on future gains and are driven to buy to end the regret.

When tempted to act based on fear or greed, step away. Take a deep breath, go for a long walk, read a book, watch your favorite movie. The market will be there when you get back and you’ll be in a better state of mind to make any decision.

There are three great forces in the world: stupidity, fear and greed.

-Albert Einstein

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

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