Bernard Baruch’s 10 Investing Rules

Bernard Baruch was an American financier and foreign policy adviser to Presidents Wilson, Roosevelt, and Truman.

After becoming attaining great success as an investor, Baruch left Wall Street in 1916 to advise President Woodrow Wilson on issues of foreign policy and national defense. During the Second World War, his close personal friend, President Franklin Roosevelt, tapped him as an adviser. In 1943, Roosevelt offered Baruch the chance to lead the War Production Board, before ultimately reneging. He was often referred to as the “elder statesman” because through three wars the presidents of our country called upon him for his advice and expertise.

Bernard Baruch once said that Wall Street provided an extended course on investor behavior. It taught him that human nature was the driving force behind markets and investing mistakes.

He realized the hardest part of investing or speculation was separating emotions from decisions. Investing is a game where rational, thoughtful decisions often take a backseat to emotionally-driven actions. Baruch in fact said:

One of the worst mistakes anyone can make is to hold on blindly and refuse to admit that his judgment has been wrong.

Baruch failed to heed his own warning. What’s worse, he had placed his bet using a margin account in the hopes of boosting his returns. He only needed coffee to rise a few cents to make a small fortune. Instead, it compounded his losses.

Rather than cut his losses on the spot, he sold shares of Canadian Pacific — at a tidy profit — to cover his rising margin cost on coffee. It wasn’t until after he sold out all his Canadian Pacific shares that he finally came to his senses.

His mistake cost him $800,000! In 1905 dollars! He knew better and still did everything wrong.

Baruch would reiterate this lesson in a list of rules on how to invest. The list is pulled from the lessons he learned over a lifetime in the markets.

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.

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

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

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

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

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

These “rules” mainly reflect two lessons that experience has taught me — that getting the facts of a situation before acting is of crucial importance, and that getting these facts is a continuous job that requires eternal vigilance.

Besides the rules, here are the main points of his investing approach:

• “Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.” Treat a share of stock as a proportional ownership of the business. A share of stock is not the equivalent of a baseball card or a collectible car. It is a real business that you must understand deeply to be a successful investor. For someone like Buffett, this process of learning about the business is the most fun part of investing. If you do not find understanding businesses interesting, I suggest that you find a low-cost diversified portfolio of index funds/ETFs and be content with your profession and hobbies.
• “Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.” “Bears can make money only if the bulls push up stocks to where they are overpriced and unsound.” “Whatever men attempt, they seem driven to overdo. When hopes are soaring, I always repeat to myself that two and two still make four.” “The main purpose of the stock market was to make fools of as many people as possible.” Make bi-polarMarketyour servant rather than your master. Trying to time markets in the short term is a fool’s errand. People, of course, fib about their success as stock speculators all the time — mostly to themselves. Mr. Market is a drunken psycho. Markets are not wise in the short term nor always efficient. He is the source of opportunity since his bi-polar swings up and down produce the mispricing that allows some people to beat the market.
• “When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.” There is a big difference between investing and speculating. Investors are focused onvaluewhereas speculators are focused on how the changing psychology of large numbers of people impactsprice. In order to buy a stock at a discount to value, you must do the work. Of course, if it is not working but fun to understand businesses then you have what Warren Buffett likes so much- something that is both profitable and fun.
• “In the search for facts, I learned that one had to be as unimpassioned as a surgeon. And if one had the facts right, one could stand with confidence against the will or whims of those who were supposed to know best.” Being rational is the fourth bedrock principle of value investing. Charlie Munger calls rationality “a moral duty.” Unfortunately, it is hard to be rational all the time and in all situations given the many human biases that have been identified by behavioral economists. Even though it is not easy to be rational, it is worth the effort, especially in investing.
• “Don’t try to be a jack of all investments. Stick to the field you know best.” This statement by Baruch is another way of saying: stay within your circle of competence. Risk comes from not knowing what you are doing. Charlie Munger says: “There are a lot of things we pass on. We have three baskets: in, out, and too tough…We have to have a special insight, or we’ll put it in the ‘too tough’ basket. All of you have to look for a special area of competency and focus on that.”
• “Don’t buy too many different securities. Better to have only a few investments which can be watched.” Baruch is saying that he is a “focus investor” like Charlie Munger: “Our investment style has been given a name — focus investing — which implies 10 holdings, not 100 or 400.” Especially if you have a day job there are only so many businesses you can genuinely follow and understand.
• “Beware of barbers, beauticians, waiters — of anyone — bringing gifts of ‘inside’ information or ‘tips’. The longer I operated on Wall Street the more distrustful I became of tips and ‘inside’ information of every kind. Given time, I believe that inside information can break the Bank of England or the United States Treasury. A man with no special pipeline of information will study the economic facts of a situation and will act coldly on that basis. Give the same man inside information and he feels himself so much smarter than other people that he will disregard the most evident facts.” Perhaps there should be something called a “stock tip” heuristic/bias. People who get a stock tip will often suspend disbelief and stop being rational. It is best to “just say no” to stock tips.
• “Mankind has always sought to substitute energy for a reason as if running faster will give one a better sense of direction.” Baruch is pointing out that there is no prize for hyperactive trading in markets. There is in fact a penalty in the form of fees, costs, and taxes. If stock prices drop some people think they can fix that with more activity which often leads to mistakes,
• “Always keep a good part of your capital in a cash reserve. Never invest all of your funds.” Cash is like financial Valium. Cash can keep an investor calm and more importantly give them the ability to buy a bargain when it becomes available.
• “The wisest course is to sell to the point where one stops worrying.” “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.” Buffett makes the point that if your stock holdings make it hard for you to sleep you should be holding a greater percentage of less volatile assets in your portfolio like cash and bonds. Having said that he also says: “Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”
• “In the stock market, one quickly learns how important it is to act swiftly.” Markets are not perfectly efficient, but they are most efficient. Bargains that you can spot within your circle of competence don’t come along that often and when they do you must be ready to pounce since the bargains won’t be available for long. You must be patient and yet brave enough to act quickly and aggressively when an opportunity presents itself.
• “Nobody ever lost money taking a profit.” “It is one thing to make money and another thing to keep it. In fact, making money is often easier than keeping it.” There is an old saying that you can make a profit as a bull or bear but never a pig. Baruch is also saying once you take a profit it can be hard not to spend it. The more you spend the more you feel pressure to push the edge of the envelope which can lead to mistakes. I’ve never found that more expensive stuff makes you any happier.

$S&P 500(.SPX)$$NASDAQ(.IXIC)$ $DJIA(.DJI)$

Follow me to learn more about analysis!!