The Lone Wolf of Wall Street

Share markets are up. Gold down. The Aussie dollar under pressure. Interest rates on hold. Property on fire in Sydney and Melbourne. Iron ore down.

Who do you listen to make sense of what is happening out there and how can you carve out your big or small fortune from what’s on offer?

Many will think the title of this article has to do with Jordan Belfort.

No, it’s not a story about the convicted ‘pump and dump’ scammer. Belfort was an absolute disgrace to the investment industry…and that’s saying something.

Belfort’s debauchery and blatant disregard for the financial welfare of his clients (victims) is the antithesis of the original ‘Lone Wolf of Wall Street’.

Over a century ago, a successful American financier named Bernard Baruch (1870–1965) became known as The Lone Wolf of Wall Street. Baruch made a fortune from speculating in railroad and mining stocks. The fortune he amassed qualified him at the time as one of the five wealthiest men in America.

The reason he was dubbed The Lone Wolf of Wall Street was his refusal to join any financial house. Baruch remained his own man.

Today, the word ‘speculation’ is associated with punting or having a go. But Baruch viewed his profession differently. He said, ‘I am a speculator, and I make no apologies for it. The word comes from the Latin speculari — to observe. I observe.

Following his highly successful career on Wall Street, Baruch became an adviser to a succession of US presidents — from Woodrow Wilson right through to JFK.

By all accounts, Baruch was regarded as articulate and insightful — a gentleman.

Baruch died at the age of 94. Fortunately, he left behind the rules of investing that helped him build and retain his fortune.

Most people have heard of Warren Buffett’s succinct investing philosophy: ‘Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One.

In theory, this is correct. In practice, however, it is impossible to live by Buffett’s two rules. The truth is investors do lose money. It’s part of the game. The losses teach us far more than the wins. We need losses (not life destroying ones) to appreciate the value of money and sound advice.

Had Belfort’s victims followed Baruch’s time honoured rules of investing, they would be in a far better financial position today.

Baruch’s rules are straightforward and eternal. My personal investment philosophy has been shaped by Baruch’s investing rules.

Bernard Baruch’s 10 Investing Rules

  1. Don’t speculate unless you can make it a full-time job. Those who think they can buy a computer program to trade the market should take heed of this advice. I know a number of serious full-time investors. They work extremely hard at trying to understand markets and trends. Those that have done the hard yards (10, 20 or more years) do OK. Experience has taught them valuable lessons. They wisely put their losses down to ‘school fees’. If you cannot commit hours every day to research and comprehend the data, then stick with your chosen profession and invest for the long term in index funds.

  2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of ‘inside’ information or ‘tips’. Too true. I’ve lost count of the ‘hot tips’ I’ve received in my life. Far too many people place more than they can afford to lose on the ‘sure thing’. Why do they do this? Greed. Dollar signs in their eyes cloud objective assessment. There’s no such thing as a ‘sure thing’. If you’re compelled to invest in a ‘hot tip’, do so on the premise you could lose all your money, and any gain is a bonus.

  3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth. I guarantee you 99.5% of investors have never read a Product Disclosure Statement (PDS) cover to cover. Most don’t do even the basics and never look at balance sheets, profit and loss statements, or disclosures. When you consider the vast majority of professional fund managers (the ones being paid to find out everything about a security) struggle to outperform their relevant index, you can only conclude the amateur’s chances of continued success are greatly diminished. It is for this very reason I recommend the majority of investors would be far better off (long term) investing in an index ETF (exchange traded fund).

  4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars. The key to successful investing is to buy low and sell high. Simple in theory. Difficult in practice. Trying to pick turning points is an impossible game, so don’t even try. There are a number of established valuation metrics — sourced from over 130-years of market data — that indicate when a market is over-, under- or fairly valued. In my opinion, these indicators can greatly assist in your decision making process, whether it be buy, hold or sell. One strategy I find useful for buying and selling is dollar cost average — gradually buying in or selling out over a set period of time.

  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. Most people sell their winners and retain their losers. It’s the psychology of realising a loss that seems to prevent people from acting the other way around. If you had a garden, would you pull out the roses and keep the weeds? Of course not. The same goes with your portfolio. Don’t be afraid to cut your losses.

  6. Don’t buy too many different securities. Better have only a few investments which can be watched. Keeping track of a large portfolio is difficult and time consuming. Research. Paperwork. Accounting. Company reports. It is for this reason I prefer index ETFs. Simple. All I have to do is watch the market the ETF is invested in and keep a track on values.

  7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects. The world is a dynamic place. What was cheap or expensive last year may or may not be the same today. In the past 12 months, we have seen the price of gold, oil, iron ore and the Aussie dollar all fall. This creates a domino effect in the marketplace and impacts other asset classes. Understanding these changes and how they might impact your investment strategy is critical to your investment success. You must continually ‘tend the garden’; otherwise, the roses could be overrun by weeds.

  8. Study your tax position to know when you can sell to greatest advantage. Taxes, brokerage costs, management fees all create ‘friction’ within your portfolio. The more you can do to minimise this friction, the greater the compounding effect on your capital. This is why I prefer Self Managed Superannuation Funds (SMSFs) as a tax effective investment vehicle. The tax rates within a SMSF range from zero to 15%. You get to keep between 85 and 100% of your income and capital gains — not a bad deal. Good professional accounting advice to legitimately minimise your tax position is worth its weight in gold.

  9. Always keep a good part of your capital in a cash reserve. Never invest all your funds. The investment industry disagrees with this rule. And that is precisely the reason you should follow this rule. The investment industry doesn’t like cash because it can’t charge any fees on it. In the good old days, a balanced portfolio was 1/3 shares, 1/3 property and 1/3 cash and fixed interest. These days, the industry recommends barely a 5% cash position. Having a cash reserve is empowering. In my opinion, current market valuations (based on a number of metrics) are excessive. This is the environment when prudent investors should be selling into a rising market and building cash reserves. Again, this is counter to what the investment industry is recommending. I’ll let you decide which one of us is offering impartial and independent advice.

  10. Don’t try to be a jack of all investments. Stick to the field you know best. This rule is further confirmation of the simple and transparent investment strategy I follow for our family portfolio. Hold cash, term deposits and invest (when appropriate) in a handful of quality low cost index funds. Far too many people buy this and that on a whim or broker recommendation. After a while, they have a portfolio that resembles a dog’s breakfast — messy and all over the shop. KISS (keep it simple, stupid) is a great philosophy, but one that is rarely practiced. Adopting the KISS approach to investing requires tremendous discipline. There is always going to be something that comes along that will be sexy, exciting and a potential adrenalin rush. Suppressing the animal instincts (especially in males) takes an awful lot of willpower. Be patient; investing for the long term in boring vanilla investments is the furthest thing from sexy and exhilarating, but it works.

Baruch’s rules are timeless, vintage wisdom.

To avoid becoming a victim of The Wolf of Wall Street, follow The Lone Wolf of Wall Street.

Vern Gowdie+
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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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