Dave's Investing Rules

Over my 21 year career as a COO & CFO for multi-billion dollar hedge funds including 6 years of managing capital, I have observed some very successful Portfolio Managers and have witnessed some quite dismal ones as well. Throughout my tenure, I started to notice a pattern of why some PMs succeed while others fail. Based on these patterns, I put together a set of rules to help guide my investment decisions. This is not financial advice. Everyone should develop their own set of investment rules.

Dave’s Rules:

1. Don’t be Stupid.

   1. Where am I wrong?

   2. What am I missing?

   3. Would I buy it now if I didn’t already own it?

2. Remember drawdown math. This one is super important.

   1. Never take a loss of 25% or more…never ride a position down.

   2. Never “catch a falling knife.”

   3. “Losers Average Losers” - Paul Tudor Jones

3. Split investments among HODL, GTFO and Coupons.

   1. HODL (“Hold” or “Hold On for Dear Life”) amazing assets. How do I know when I am wrong...this one is difficult. Stay the course if your research suggests that you are correct, but don’t be stupid...you might have missed something.

   2. GTFO (“Get The F@ck Out”) when wrong. How do I know when I am wrong...this one is easier, the market is kind enough to tell me. Let your winners run; punt your losers.

   3. Clip Coupons when market conditions merit. (Straddles, Strangles, Iron Condors, Vertical Spreads, Covered Calls, etc.)

4. Pick and Size positions appropriately.  

   1. Trade what you know.

   2. Wait for a Set-Up (Need a catalyst: macro data, new product, M&A, Change in management, etc.)

   3. Trade it in Size, but not too big that you can’t sleep at night.

5. It’s ok to be ‘late to the trade.’ In fact, it might be better. The trend is your friend.

6. Macro trumps micro.

   1. Understand where we are in the cycle. Pay particular attention to market regime changes.

   2. Don’t fight the Fed.

   3. Pay attention to seasonality. Don’t worship it, just pay attention.

7. Embrace volatility. Volatility is not your enemy, it is your friend. Volatility is mean reverting.

8. Just like poker...understand the probabilities.

9. What are the game changing mega trends, ideas, technologies that will change our world forever?  These are worth investing in.

10. For each loss...ask and write down, “what is the lesson.” (e.g. I missed AAPL – continuous innovator, gatekeeping coupon clipper, impregnable moat).

11. Remember drawdown math. This one is super important and worth repeating.

12. Don’t be Stupid. Also worth repeating.

Bonus Rules:

1. Ego is the enemy.

   1. Be a stoic and let the facts dictate what they may.

   2. Be “happy” to be wrong – learning is more important than defending your ego or a wrong thesis. Do you want to be rich or do you want to be right?

2. Hang out with Subject Matter Experts. Ask questions and listen.

3. Be willing to change your mind (and your thesis) when you learn new information.

   

Enjoy and be safe.