My 72 Rules For Investing In Stocks And Winning In The Market

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My 72 Rules for Investing in Stocks and Winning in the

My 72 Rules for Investing in Stocks and Winning in the MarketMy 72 Rules for Investing in Stocksand Winning in the MarketWritten by Robin R. Speziale ([email protected])National Bestselling Author, Market MastersBrought to you by Stockchase: what the experts are saying!Dedicated tomy family“The person thatturns over themost rocks winsthe game.”– PeterLynchAll Rights Reserved.Copyright 2017 by Robin

My 72 Rules for Investing in Stocks and Winning in the MarketMy journey in writing the best-selling book, MarketMasters, was an inflection point for me. By meeting withand learning about top investors’ investing strategies andtheir frameworks, I upgraded my own investing approachin the stock market. My experience also played a crucialrole, having invested through the financial crisis (’08), twobear markets (2011 and 2015), and a handful of correctionsover a 12-year period. So, while it’s not all perfectlystructured, with lots of rough notes, I’ve outlined belowMy 72 Rules on Investing in Stocks.These rules will give you access to my investmentthought-process for the first time ever.For the budding investor, these 72 Rules will hopefully bevaluable information to help you get started in the stockmarket. And for the experienced investor, maybe there’ssomething new that you didn’t think about before, or atleast that my rules validate how you’re already investing inthe market. By the way, I chose 72 Rules (it was originally70) because of the “Rule of 72”, where one can divide 72 bytheir investment return (e.g. 15%) to determine how

My 72 Rules for Investing in Stocks and Winning in the Marketyears it would take for their invested money to double. Inthis example, every 4.8 years, which is how often my stockportfolio doubles (if I keep compounding at 15% returns).01.Hold 25-40 core stocksI’ll only hold 25-40 core stocks in my portfolio, because atthat point I’m well-diversified, and am not diluting myportfolio with ‘so-so’ picks. I have high conviction in mycurrent holdings. Plus, I can more easily follow 25-40stocks on a quarterly basis than I can 40 stocks. Anynumber above that and it becomes a circus to

My 72 Rules for Investing in Stocks and Winning in the Market02.Don’t let any stock grow larger than 10%I don’t let any stock grow larger than 10% of my portfolio.That opens me up to potential risk. My winners willapproach 10% position size as they grow, so I take profitoff the table, and allocate those funds to my new emerginggrowth opportunities.03.Project future cash flowsI only invest in companies where I can confidently projectfuture cash flows. I can’t confidently project cash flows forcompanies in cyclical industries like mining, financialservices, and pharmaceuticals, etc. I lost a lot of money onLundin Mining in 2007/2008 (-85%). I learned my lessonand now avoid the mining sector like the plague. But

My 72 Rules for Investing in Stocks and Winning in the Marketinvestors actually make money on junior mining stocks.Robert Hirschberg, a family friend, for example.In this video, he explains how he parlayed 20k into 15million speculating in junior mining stocks. Robertexplains the four things he looks for in a junior miningcompany: 1) executives with successful track recordsbuilding up junior companies; 2) good assets; 3) access tofunding; and 4) lots of upside (“blue sky potential”).Source: Me and My Money, Globe and Mail. I find itfunny when I see complex excel models that project 10years of cash flow in unpredictable businesses. That’s likeputting lipstick on a pig. And an ill-fated attempt atfortune-telling. Especially when past earnings haven’t evenbeen consistent, like 10% growth in year 1, 50% in year 2,and -10% in year 3. Those earnings are volatile. Andvolatile earnings disable my ability to project the path offuture earnings in a

My 72 Rules for Investing in Stocks and Winning in the Market04.Don’t invest in “price-takers”Similarly, I don’t invest in “price-takers”, like oil & gascompanies that have to price what they sell based onprevailing crude oil market prices, but rather invest in“price-setters”, that can raise prices year- after-year togenerate higher revenues.05.Look for price and volume growthThere’s only two ways a company can continually increaserevenue over time: by raising prices or increasing volume(whether that’s through increasing the number ofcustomers, average transaction size, or transactions percustomer). I invest in companies that can achieve bothprice and volume growth. I like analyzing revenue becauseit’s virtually impossible to fudge top-line revenue

My 72 Rules for Investing in Stocks and Winning in the Marketthrough financial engineering, like it can be done with netincome / profit. Further, revenue needs to be sustainableand recurring over time. I don’t like lumpy, andinconsistent ‘one-off’ revenue. To illustrate, I find itamazing that a ‘dollar’ store – Dollarama – canconsistently do both; increase its store count (volume) andits prices (higher than a dollar!) over time like clockwork.That’s why I’m a happy Dollarama shareholder.06.I like companies that can expand globallyI really like companies that can expand globally. Thinkabout a company’s product’/services’ addressable market.The growth potential is enormous when the addressablemarket is virtually everyone in the world. That’s whycompanies that can become near-monopolies, with littleto-no competition, like Google, are ideal investments,especially at early stages in their business life

My 72 Rules for Investing in Stocks and Winning in the Market07.Look for a competitive advantageThe companies that I invest in need to have a competitiveadvantage, whether that’s through their operating model,distribution network, brands, niche products/services,patents, technology, regulatory protection, goodwill, etc. Iask, “How hard would it be for a competitor to take any oftheir business?” And, “Can technology or innovationdisrupt this company’s business model?” I also employPorter’s Five Forces to validate a company’s competitiveadvantage. Porter’s Five Forces should be analyzed for anyweaknesses as shown:Threat of new entrants;Threat of substitutes;Bargaining power of customers;Bargaining power of suppliers, and;Industry

My 72 Rules for Investing in Stocks and Winning in the Market08.Cost cutting isn’t a business strategyCost cutting isn’t a business strategy. Companies that costcut to generate profit, and appease the street for howeverlong, aren’t worth my time. You can only cut costs so muchuntil there’s really nothing great that remains. I wantrevenue growth. Companies that are growing are hiring,investing, and spending.09.Invest in wealth recipientsI don’t invest in any industries or traditional businessesthat are going bust. Newspapers, anyone? And as of late,department-size brick and mortar stores. The best casestudy is the Blockbuster-to-Netflix virtual wealth transfer.That’s why I always invest in relatively new businesses andavoid mature business models. I want to invest in

My 72 Rules for Investing in Stocks and Winning in the Marketwealth- recipients, like Netflix in this example. ThomasRowe Price, who is called “the father of growth investing”,said that "it is better to be early than too late inrecognizing the passing of one era, the waning of oldinvestment favorites and the advent of a new era affordingnew opportunities for the investor."10.I don’t rely on Return on Equity (ROE)Companies should be earning high rates of return oncapital (ROIC), generally around 15%, (and at a minimumabove their cost of capital) consistently over at least 5years, and preferably over 10 years, e.g. 15%, 16%, 15%,16%, 15%, 16%, 15%, 16%, 15%, 16% ROIC. I don’t rely onReturn on Equity (ROE) as a measure as it can bedistorted with big debt loads. And lots of debt can

My 72 Rules for Investing in Stocks and Winning in the Market11.No negative net income nor EPSWhat happens at the company level needs to also occur atthe per share level. For example, growth in net incometranslating into an increase in earnings per share (EPS). Inaddition, neither net income nor EPS should be negative inthe past ten years. If there exists an outlier, only one yearof negative earnings should be accepted but only if thatearnings period resulted from something extraordinaryand will not repeat based on your judgement.Along those same lines, I want to see an increase in bookvalue per share, and free cash flow per share, over time.Some management dilute their existing shareholdersthrough mass expansion of shares outstanding, in otherwords; using their shares irresponsibly as currency. And Idon’t like

My 72 Rules for Investing in Stocks and Winning in the Market12.I focus on small-cap and mid-capI focus my picks in the more inefficient small-cap and midcap segments. Those are the smaller-market-capitalizationcompanies ( 100 million to 10 billion in size) that candouble, triple, quadruple, and more on the stock market. IfI owned large cap companies ( 10 billion ), I’d just bereplicating the index (e.g. S&P 500) and its performance.13.Invest more when market declinesWhen there’s a systemic market decline; recession ( crisis ’08), bear market (e.g. TSX 2015), or thecommon correction, which happens occasionally, I’ll investmore money into my existing stock holdings. Remember,the world isn’t actually going to end when the stock marketgoes down. I’ll happily buy great growth companies

My 72 Rules for Investing in Stocks and Winning in the Marketcheaper prices. But when an individual stock drops inprice, among a normal-range market, I think long andhard before investing more money (i.e., dollar costaveraging), because.14.Managing a portfolio is like gardeningManaging a portfolio is like gardening. Instead of wateringmy weeds, I water my dandelions, so that they can growbigger. In other words, I reward my existing holdings (the“winners”) by increasing my stake in them when they postgreat earnings results quarter after quarter. I like to see15% EPS growth. And I also like a beautiful

My 72 Rules for Investing in Stocks and Winning in the Market15.I don’t like getting trappedUnderperforming, cheap stocks (those “weeds”), can getcheaper, and cheaper, and cheaper. And they’re probablygetting cheaper for a reason. That’s called a value trap.And I don’t like getting trapped. Not all stocks ‘bounceback’ as some investors hope (and pray!). Take a look atCitigroup; it went from 550/share (2007) to 25/share(2009), as a result of the financial crisis, and is only at 60/share now (2017). That’s a terrible crash, and paltry“rebound”, if you can even call it that as Citigroup isnowhere near its 550 high. For another example, take alook at Crocs from its peak in 2007 (*shudder*). It reallypains me to see investors trying to catch a falling knife,thinking it’s a so-called “value stock”. I am always happy topay a little more to invest in quality growth stocks becauseI’m buying a company’s future cash flows, not just whatit’s worth

My 72 Rules for Investing in Stocks and Winning in the Market16.Preferably, no debt at allThe companies that I invest in don’t have a lot of long termdebt on their balance sheets. Preferably, no debt at all.Overall, tightly controlled and clean balance sheets.Further, I like to calculate a business’ current ratio, bydividing its current assets by its current liabilities. A figurein the range of 1.5 to 2.0 is healthy, whereas 2.0 to 2.5 (ormore) is ideal.17.Free cash flow is kingFree cash flow is king. Companies that generate highamounts of free cash flow, combined with exceptionalcapital allocation, can grow at high rates throughreinvestment in their business, smart acquisitions,and opportune share buybacks, especially if shares arecancelled for a prolonged period of time. Plus, lots of

My 72 Rules for Investing in Stocks and Winning in the Marketmeans companies can self- fund their business, not havingto heavily rely on the debt or equity markets, eventhroughout economic down-cycles when credit dries up.Exceptional free cash flow generators are usually thosecompanies that require less capital expenditure to runtheir business. High cap-ex intense companies (e.g.airlines) are sluggish, requiring too much capital to grow,and even then, deliver low returns, and never really takeflight. I’ll pass.18.Use FCF/EV to identify exceptional stocksThe free cash flow / enterprise value ratio (FCF/EV) mightbe one of the best, but overlooked metrics one can use toidentify exceptional, and inefficiently priced capitalcompounder stocks. The higher the percentage figure thebetter. That combined with high return on capital (ROIC)to demonstrate effective allocation of free cash

My 72 Rules for Investing in Stocks and Winning in the Market19.Buy and hold “forever” doesn’t workBuy and hold “forever” doesn’t work. Sure, Warren Buffettsays that his favourite holding period is “forever”, but whathe says isn’t always what he does. Recent case in point:IBM (2017). I understand that businesses don’t lastforever. As Chuck Palahniuk wrote in the fantastic book/movie Fight Club: “On a long enough time line, thesurvival rate for everyone [including businesses] drops tozero.” It is basic high school business class curriculum,where we learned companies go through various, andlinear stages: Seed, Start-up, Growth, Established,Expansion, Mature, and then Exit. Look at the Dow Jones,S&P 500, and other major indexes over history.Companies are listed and de-listed over time. So, I makemoney when I can, from “Growth” through “Expansion”,and don’t hold onto a dying company past its “maturity”.Because that’s like drinking spoiled

My 72 Rules for Investing in Stocks and Winning in the Market20.Don’t try to be the heroI always strive to maintain around a 15% compoundannual return in my portfolio. If one of my stock holdingsisn’t keeping up with the pace, I’ll sell and allocate thosefunds into a company that can generate higher returns. I’malways thinking about opportunity cost; where money canwork the hardest for me at any given time. Generally, acompany’s compound returns are correlated to its returnon capital (ROIC) over time. That’s why the stock holdingsin my portfolio average 15% return on capital. Because Iwant to achieve a 15% compound annual return. Thoughit’s important to note that I find any compound returnover 15% isn’t sustainable in the long-run. I would betaking on too much risk to achieve that hurdle. Don’t “tryto be the hero”, as one of my friends would say, reflectingon his own attempt to achieve dangerously-high returns inthe stock

My 72 Rules for Investing in Stocks and Winning in the Market21.Don’t favour high dividend yields21. I never invest in stocks just because they have highdividend yields. Most of my holdings have low or nodividend yields, because capital is used in more effectiveways (e.g. re-investment into the business). High dividendyields are indicative of large-caps, mature businesses, andin some cases, businesses in decline. And in the latter case,companies that slash dividends send their stock prices intofurther decline, especially if those stocks were labelled as“high-yielders”.22.Buy growth at a reasonable priceI buy “growth at a reasonable price” or “GARP”, meaningthat I won’t buy a stock with a 25 P/E and 10% EPS growthrate, but will happily buy a stock with a 30 P/E and 30%

My 72 Rules for Investing in Stocks and Winning in the MarketEPS growth rate. It’s all about the growth. But try tellingthat to a value investor.23.I’m not a value investorSpeaking of which, I’m not a value investor. I don’t buyobscure “net-nets” aka deep value stocks that I knownothing about, hoping that the market will see what I seeand then finally bid up the price of the stock in line with itsunderlying net-asset value. That could take months,years never.24.Understand the businessesI need to understand each of the businesses in myportfolio. That means most of my stocks (80% ) fall

My 72 Rules for Investing in Stocks and Winning in the Marketthese 3 industries: consumer franchise, technology, anddiversified industrials. Some people want to look ‘smart’by buying into complex industries like bio-technology, butI like boring, and unglamorous companies that generatehigh return on capital on a consistent basis. Bonus pointsif they’re leaders in their respective industries.Some of my best investments of all time are in companiesthat I spotted in the mall, supermarket, or just out andabout; the products and services that people buy on arecurring basis. You should do the same. I don’t invest inthe stock market to look smart. I do it to make money. AndI buy what I know. Similarly, I don’t shy away from buyinggreat companies in the “female-space”, like Estee Lauder.The investment industry consists mainly of men so I findthat I can have an informational advantage in stocks thatthey might not want to

My 72 Rules for Investing in Stocks and Winning in the Market25.How much money can I lose?Before I initiate a new position, I don’t first think, “Howmuch money can I make?” Instead, I ask myself, “Howmuch money can I lose?” I consider all the ways a stockcan lose money before I even think about the upside.26.Some stocks will not work outI accept that I’ll have losers in my career. Meaning thatsome stocks will decline, and not work out. But it’s my jobto make sure that my winners always outnumber andoutperform my losers. I just have to swallow my pride.Because investing can be a probability game even aftercountless hours of fundamental research into each stock.That said, as I progress in my investing career, my losersaren’t as much a result of investing in companies

My 72 Rules for Investing in Stocks and Winning in the Marketof my circle of competence (e.g. biotech), as they areplacing too much faith in management that doesn’t deliveron its vision, and growth projections.27.Don’t be the foolThe stock market has buyers and sellers. I want to makesure that when it’s time to sell my stocks in the future, thatthere’s buyers who want to purchase from me. That “highlevel”, simplistic thinking has saved me from making badinvestments. Similarly, I don’t want to be the “fool” or“bagholder” getting the bad deal on the other end; forexample, buying a mature/declining business at the peakof its cycle. This can all be summed up by the “greater fooltheory”, which Burton Malkiel alludes to throughout hisbook, A Random Walk Down Wall Street.Greater Fool Theory: “The price of an object isdetermined not by its intrinsic value, but rather

My 72 Rules for Investing in Stocks and Winning in the Marketirrational beliefs and expectations of market participants.A price can be justified by a rational buyer under thebelief that another party is willing to pay an even higherprice. In other words, one may pay a price that seems"foolishly" high because one may rationally have theexpectation that the item can be resold to a ‘greater fool’later”In summary, I want to invest in a company that has justentered its growth phase, where it’s worked out the kinksin its business model, and simply needs to replicate itssuccessful formula, until it can’t anymore; which is whenI’ll sell.28.Plant some seedsThe majority of my bigger, core positions are in mid-capcompanies that continually earn high return on capital(ROIC), generate free cash flow, and grow their

My 72 Rules for Investing in Stocks and Winning in the Marketand book value per share through their expansion phase.But I’ll also plant seeds in smaller companies that have yetto fully prove themselves. And unlike my core holdings,some “seed” companies aren’t even generating a profit (netincome). I’ll invest more money as those companies’ plansdo play out, but quickly trim when they don’t. And tohedge a bet in a very small company, I’ll ask myself, “Isthis company an acquisition target; does it have assets thata much larger company would want?” Sometimes thereturns from those small-caps are mostly a result ofgetting bought-out by a larger company. As a general rule,when I do invest in small-caps, there should be as much‘optionality’ as possible (e.g. takeover potential, and otherfactors, etc.)

My 72 Rules for Investing in Stocks and Winning in the Market29.I know when to cut my lossesI never want to lose 50% on any stock. I know when to cutmy losses before I lose too much capital. A 50% lossrequires a 100% gain to revert back-to-even, and then“getting-back-to-even” is exponentially harder the moremoney one loses. I don’t want to dig myself into a hole andthen struggle to get back out. Life’s too short for that.30.I’m wary of “blue chips”I’m wary of “blue chips”. They’re never a sure-thing in thestock market. I can list lots of once “blue chip” companiesthat don’t exist today or are at least shells of once largecompanies. They’re not as “defensive” as one would think.And mature businesses are ripe for disruption. As an aside,one day after work (this was 2006, and I was 19), I

My 72 Rules for Investing in Stocks and Winning in the Marketriding the go-train home (Lakeshore West), and startedtalking with the “ambassador” – the guy who announcesthe stops on the intercom. After some small-talk, and uponhim learning that I had just started investing in the stockmarket, he told me, “Son (he was around 65 years old), I’vedone really well in Citigroup, Bank of America, and YellowPages. Buy blue chip companies that pay a dividend, andyou’ll do just fine.” I didn’t buy any of those so called “bluechips” in 2006. Thank goodness. Also, another “blue-chip”example – Nortel Networks. On a plane trip from Torontoto Vancouver in 2002, I overheard an Air Canada flightattendant complaining to one of the passengers about hisdreadful investment in Nortel, which during thetechnology boom was THE market darling, at least here inCanada. Interestingly, about half the passengers on theplane turned their heads, indicating to me that they toolost significant money in Nortel. The morale here is thatwhenever a stock is too good to be true, even if it’s labelleda “blue-chip”, and everyone owns the stock, it probablyisn’t that great and you’ll likely lose

My 72 Rules for Investing in Stocks and Winning in the Market31.It can’t only go upI’d get a bit cautious once ‘normal-average-everyday’people, who’ve never bought stocks in their lives, aregetting into the stock market because of a certain hotsector, or hot stock. Especially when they proclaim, “It canonly go up” and “It’s so easy to make money right now”,without conducting any fundamental research. That’llprobably be a good sign that a peak is forming in themarket (actually, reminds me of the Toronto housingmarket now – 2017). But I also realize that markets canstay euphoric for far longer than I think. Regardless, Idon’t cash out. I stick with great companies as long asthey’re great and growing. I don’t just sell when I think mystocks have become overvalued (unless they’ve crossed my10% portfolio size threshold), or when the market isreaching its “peak”. Similarly, some people might neverbuy stocks because they’re always “too expensive”, andthen miss out on every stock market bull rally until

My 72 Rules for Investing in Stocks and Winning in the Marketdie. Now that would be sad. As Martin Zweig said: “One ofthe frustrating things for people who miss the first rally ina bull market is that they wait for the big correction, and itnever comes. The market just keeps climbing andclimbing.”32.I’m not going to get rich quickI know and accept that I’m not going to get rich quick. Icontrol my greed. Because greed can lead to very baddecisions in the market. I don’t feel ‘smart’ when my stockshave gone up in a bull market. Because a rising tide lifts allboats. And that means I definitely don’t speculate in themarket. Conversely, I invest more in the market when Ifeel fearful, because that’s when most people are sellingstocks, and driving down stock prices, so that they’recheaper for more astute and experienced investors. AsJesse Livermore, author of the famous book,

My 72 Rules for Investing in Stocks and Winning in the MarketReminiscences of a Stock Operator, said: “All throughtime, people have basically acted and reacted the same wayin the market as a result of: greed, fear, ignorance, andhope. That is why the numerical formations and patternsrecur on a constant basis.What has happened in the pastwill happen again, and again, and again”. To put this intoperspective, over the past 80 years, an investment inCanadian stocks has grown 1,597-fold despite 13recessions, double-digit interest rates, and several worldcrises. Same goes for the American stock markets. Indeed,following each downturn, stocks have gone on to reachnew highs.33.I research companies as much as I canI research small-cap and mid-cap companies as much as Ican. And I read as much on the markets as possible.Everyday. I can truly have an informational edge in

My 72 Rules for Investing in Stocks and Winning in the Marketoft-overlooked smaller-cap companies, with little-to-noinstitutional or analyst coverage. On the other hand, forthe most part everything is already priced into thoseliquid, well-known large cap companies, like Verizon.There’s no opportunity for me to generate “alpha” there; inother words, beat the market.34.I don’t follow trendsI don’t care about any macro-economic trends. I don’tfollow trends. I just invest in great non-cyclical companiesthat sell products in good and bad

My 72 Rules for Investing in Stocks and Winning in the Market35.Check how it performs though recessionWhen I pull up a company’s metrics on a 10-year table (Iuse, I’ll know if I’ve found somethingspecial when the business is growing at a consistently highrate over time, and especially if it’s posted little-to-nodownside during a recession. That’s important; I alwayscheck to see how a business performs through a recession.36.Cost cutting isn’t a business strategyA company’s stock price performance needs to match itsunderlying fundamentals overtime. My favouritecompanies have stock charts that rise steadily over time, inline with their intrinsic growth, and with very littlevolatility in their stock prices. Just an almost perfectupward trend line. These stocks are difficult to find.

My 72 Rules for Investing in Stocks and Winning in the MarketLassonde Industries comes to mind and is a goodillustration.37.Follow, wait and seeWhen I first learn about a new company, I add it to mywatch list, conduct further research, and follow it for sometime before I decide to initiate a positon. I give myself acool-off period to avoid buying any stocks on emotions.This is especially important when investing in emergingindustries, for example, 3-D printing. One needs to have a“wait and see” approach when investing in emergingindustries. To illustrate, during the 1900’s, hundreds ofautomobile companies were founded in America. If aninvestor were to have invested 1,000 into each of thoseautomobile businesses, he would have destroyed 98% ofhis portfolio, as a result of widespread bankruptcies in theauto sector. Only three companies survived: Ford, GM,

My 72 Rules for Investing in Stocks and Winning in the Marketand Chrysler. So, in an emerging industry, wait until youcan more confidently predict the future market leader(s).For example, I invested in Canopy Growth Fund (formerly“Tweed”) at 1.00/share, after finally building theknowledge- base to more confidently predict that they’dlikely be the first billion- dollar marijuana producer/seller.Understand “survivorship bias”, which is the error ofconcentrating on the stocks that made it past someselection process and overlooking those that did not,typically because of their lack of visibility. Peter Thiel, forexample. He’s the guy who invested around 500,000 inFacebook when Zuckerberg was still super- young, andbefore anyone really knew about the company. Thiel’s abillionaire now. But we only hear about Thiel as a result ofhis investment in Facebook, which could’ve been a failure.We don’t hear about the investors who invested inFriendster, or the companies like Friendster that don’tmake it in this

My 72 Rules for Investing in Stocks and Winning in the MarketThe lesson here is that successful investing is really acombination of foresight, luck, and risk. I just do as muchas possible to increase the odds of winning.38.Only 10% of the Canadian stock marketOnly 10% of the Canadian stock market is investable in myopinion, with 50 truly exceptional business