20 Rules for Markets and Investing – 2020 Edition

By Charlie Bilello

30 Dec 2020

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, however, are not one of them. More confident investors tend to trade more and take on undue risk, leading to worse performance.

If you were overconfident entering 2020, by the end of March you had learned a valuable lesson in humility.

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

The Nasdaq 100 Index is on pace to advance for the 12th year in a row.

Seems like risk-free reward, until you dig a bit deeper into the many painful declines over the years, including a 30% drawdown in 2020…

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And these are the good times, where all-time highs have been a frequent occurrence.

Following the March 2000 peak, Nasdaq 100 investors would have to wait 15 years before hitting a new high again, with an 83% drawdown along the way…

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 75%. 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.

Prior to 2020, the shortest bear market in history was just under 2 months, with the S&P 500 declining 36% during the 1987 crash.

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On March 23 of 2020, the S&P 500 was down 35% in a little over a month. At the time, the entire world was on lockdown and the US was said to be facing an economic collapse reminiscent of the Great Depression.

Looking at prior history back on March 23, one would have reasonably assumed that there had to be more downside to come.

But there wasn’t. The S&P 500 started rallying the very next day (March 24) and never looked back. A new shortest bear market in history was born (33 days), with the market back at all-time highs by August.

5) Price targets are pointless. Forecasts are foolish.

Investors love few things more than price targets.


Because they give certainty (a specific number on a specific date) to an inherently uncertain endeavor (investing).

Each year, Wall Street is more than happy to give the people what they want. These were the 2020 year-end price targets from some of the largest firms…

Amazingly, they all ended up being below the actual year-end number despite the fact that we had a global pandemic, the largest quarterly contraction in the economy ever, and the highest spike in the unemployment rate since the Great Depression.

Who could have foreseen such events and the subsequent markets reaction?

No one, which is precisely the point.

6) Plans > Prophesies. Evidence > Opinions.

Presidential election years inevitably bring out the soothsayers, and this year was no different.

“The stock market will crash if Joe Biden wins.”

Sound familiar?

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

What evidence did they have backing these cataclysmic predictions?


What actually happened?

In both years, stocks rallied in vertical fashion the very next day after the election.

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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 over 600% since its closing low in March 2009. Up and to the right, as the saying goes.

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Easy money?

Far from it. There were 27 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. Coronavirus. Global Depression Fears. 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.

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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.

This is what the history of Crude Oil looked like at the end of 2019…

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And this is what it looks like today…

Notice something different about that picture?

You got it: negative prices.

Crude Oil futures actually turned negative in April for a brief moment as the world was awash with supply and demand had collapsed. What that meant was traders were actually paying others to take delivery of their Oil because there was nowhere to store it.

Using statistical forecasting based on all prior data, this should never 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 the 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.

“You get what you pay for” is a valid assertion in many walks of life.

Many assume the same logic should apply in the complicated world of investing and Hedge Funds are happy to fill that void, charging a handsome fee in the process.

Over the last 10 years, how have long/short equity hedge funds fared relative to a simple 60/40 portfolio of stocks ($SPY) and bonds ($AGG)?

Lower returns (65% vs. 161%) with higher volatility (8.5% standard deviation vs. 8.2%).

In investing, you don’t always get what you pay for. Whenever possible, try to keep costs down and simplify.

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 most important trait you can have in this business.

Without exception, every great investment has experienced periods of severe pain along the way.

Even Tesla?

Yes, even Tesla.

From September 2017 to June 2019 Tesla stock declined over 53%. At the same time, the Nasdaq 100 was up over 18%.

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Tesla was the worst performing stock in the Nasdaq 100 at that point (June 3, 2019), down over 45% on the year. These are some of the headlines on the day of the low…

Sticking with Tesla through such a difficult period required an unbelievably high tolerance for pain.

What happened next would become the stuff of legend (Tesla outperforming every other Nasdaq 100 stock by a wide margin), but never forget the suffering that had to be endured to get there…

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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 2021?
  • What about the 10-year Treasury yield?
  • Is Gold a good investment today?
  • What about Bitcoin?
  • When will the Fed raise rates again?

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


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.

Wait a minute – this wasn’t in the script…

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.

In 2020, assets have poured into the ARK Innovation ETF as it has gained an astounding 170% on the year (as of Dec 22). Will these new investors stick around when the inevitable drawdowns come? History says the odds are low.

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

What asset class is going to be the best over the next 10 years? 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.

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.


Click here for Printable PDF of the 20 Rules

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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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