It’s been a while since I’ve posted material because of the importance I’ve placed on completing this article, which is an outline of my rule-based approach to consistently execute on a successful long-term value investing strategy.


As you will read below, the rules or guidelines, which flow from my strategy, are a way to stack the deck in my favor, maximizing my portfolio’s overall upside potential, with the best risk-adjusted returns. Importantly, measures of success are quantifiable.


I thought it would be worthwhile to describe the catalyst behind the rules so my intro is a bit long, but I hope you will enjoy the entire post. I’m interested to hear from other value investors about their own strategy and how it’s carried out. Your feedback is very much appreciated.


Who Needs Rules Anyway

I don’t know about you, but I’ve always had a fear of losing everything. So, a long time ago, that attitude instilled in me a mindset where I felt compelled to safeguard my capital to the greatest extent possible, while taking measured risks to promote capital growth.


There is no pathway to long-term investing success through chance and ad-hoc decision making. As the billionaire banker, Baron Rothschild, said:

It requires a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.


Success has come to me by having a clear strategy and a resilient set of rules which defines how it’s carried out. I believe it’s essential to have and follow well defined investing rules that guide investment decisions. My rules impose discipline and allow me to be consistent and persistent in executing a successful investment strategy. Adhering to the guidelines also ensure that exposure to investment risk is properly monitored and controlled within my portfolio. In fact, all my investing missteps in the last decade have occurred whenever I’ve overlooked one of my investment rules.


Embedding my Long-Term Investment Strategy Within Investing Rules

10 Rules for Successful Long-Term Stock Investing_Value Investing. is an Online Value Investor Discussion Forum Where Investors Present their Experiences with Value Investing and Share their Best Investment Strategies.My strategy can best be defined as using opportunistic or tactical situations to strategically advance my portfolio. I have a “be patient-and-steady” approach to accumulating wealth. While, at the core, I am a long-term value investor, I also believe it’s important in life not to be dogmatic. As a result, the basic precepts of value investing, using absolute valuations, are fused with elements of investing using a relative value approach.


Consequently, my investing rules have been refined and adjusted over time. Modifications to guidelines have been brought about as my portfolio’s profile has evolved. Long-term market trends becoming apparent and, importantly, new, more effective, investment products becoming available, have been a key driver of changes to the rules. To quote the most important economist of the 20th century, John Maynard Keynes, “when things change, I change my mind”.


What has never changed is my single-minded obsession with identifying, minimizing and managing investment risk, while generating a good return. Built into the guidelines is my intent to take on less risk than the benchmark S&P 500, but over time to have equal or better returns.


Before presenting my 10 rules let me give you a bit of background about myself. I’ve been investing in the stock market since the 90’s. My portfolio has been equity heavy since 2002, becoming even “heavier” after the 2008 financial crisis. Notwithstanding luck, investing in stocks has been quite lucrative for me. My portfolio is not complex. So, for example, I am not directly invested in derivatives, since I make it a point to fully understand the investment vehicle and risks I’m getting into. In terms of asset allocation, we’re looking at a dynamic mix of  straight up equity, pooled funds, mutual funds, ETPs, and cash for the most part.


As a caution, I’ve said on numerous occasions that investing is a very personal endeavor and as such, investment rules or strategies which are perfectly suited for one person may not work as well for another. For example, the perception of risk varies from person to person. That being said, I have always urged fellow investors who may be unsure of their own investment strategy to consult a professional.


Now onto the meat and potatoes; the rules which frame all the transactions in my portfolio.


10 Rules for Successful Long-Term Stock Investing


1. I Invest in Out of Favour and High-Quality Companies

Watchlist companies in sectors and industries where stock prices are experiencing dramatic and transient macroeconomic stresses get my immediate attention. Stresses like those found during a market correction, where investors are indiscriminately fleeing riskier assets. Following another timeless piece of advice from Baron Rothschild:

The time to buy is when there’s blood in the streets, even if the blood is your own.

Read: How I Learned to Stop Worrying and Love the Markets


During that part of the market cycle, stock prices for companies in the sectors or industries I’m interested in can be irrationally depressed. Creating a situation where the upside potential is much greater than the downside risks. The situation assists in deepening Ben Graham’s value investor margin of safety,  providing an opportunity to deploy cash.


Previous to the volatility, I would have examined the companies on my watchlist for strong financials, the current managements’ long-term history of success, and the managements’ unrelenting attention to increasing long-term shareholder value.


A little bit more tricky is identifying and investing in companies that are relatively inexpensive compared to similar companies. These companies of interest deliver the same potential ROI, but may, for example, be viewed as less “sexy” as their industry peers. Investment risk is higher if only for the reason that the company in question’s stock is probably trading well above its book value. The higher the differential between the book value and the market price, the higher the risk.


When all is said and done, I would have identified my entry point and looked at possible exits, to close the position and realize gains.


2. I am Always Diversified

10 Rules for Successful Long-Term Stock Investing_Investment Risk. is an Online Value Investor Discussion Forum Where Investors Present their Experiences with Value Investing and Share their Best Investment Strategies.

As the saying goes diversification is the only free lunch in investing. I ensure that I hold investments across asset classes, regions, industries even currencies, though I never hold more than 2-3 different currencies.


I continuously verify what the risks are to my holdings and ensure that my exposure to any one particular risk factor is as low as possible.

Read: Clear and Present Danger – Investment Risk


3. I Never Hold More than 5% of Holdings in a Single Position

If my investment decisions are correct, it means that I’ll never have windfall profits from any one holding in a single shot. The rule also ensures that if I’m wrong, then I’ll avoid catastrophic losses.


Typically, I invest between 2.5% to a maximum of 5% of my overall portfolio in any one position, even when I have a high degree of conviction in the investment.


The only exception to this limit are ETPs, pooled funds, and mutual funds where initial positions may go as high as 10%.


As a practical consequence, this guideline also places limits on how many positions I can hold at any one time. In the best case scenario, I would be able to hold between 20 to 40 individual positions, the midpoint of which, most experts say, is around the optimum amount of holding any one person can expect to manage at a given moment and be properly diversified.


4. I Only Invest in Stocks Within Developed Markets10 Rules for Successful Long-Term Stock Investing-Investment Strategies. is an Online Value Investor Discussion Forum Where Investors Present their Experiences with Value Investing and Share their Best Investment Strategies.

This rule is a means to minimize risk, political and otherwise. It ensures that I have the maximum legal protection and regulatory oversight of my investments and have maximum and standardized disclosure of the companies’ financials. Though the companies, that I invest in, may have interests in less developed markets, I will verify that their disclosure requirements are those of the countries in which they are headquartered.




5. I am Not Directly Invested in Nano, Micro or Small Cap Stocks

There is a heightened level of business risk with companies within these market cap categories. The risks are difficult if not impossible to mitigate. Issuing companies generally have little or no business history to work with, which can make this type of investment little more than a roll of the dice. My investment strategy is dependent on knowing and having confidence in the management of the issuing companies and therefore trust in their estimates and forward earnings projections.


Investments within micro, nano, and small caps, when I make them, happen within an actively managed fund. I’ll ensure that the fund managers have a solid and transparent investment strategy compatible with mine and a history of success.


Noteworthy is that mid-cap stocks, over the medium to long term, generally provide a better risk-adjusted return than small caps, generating approximately the same or better return for less risk. Mid caps also provide a more robust growth profile and higher earnings potential than large and mega cap.  So, I can’t say that there is anything particularly attractive about investing below the mid-cap range.

Read: Does Size Matter? Value Investing in Mid Caps


6. I Look for Low Transaction Costs, Low Management Fees and for Low Potential Tax Liabilities

Pretty much a no-brainer. When several similar investments of interest have the same risk-adjusted returns, then why would I pay more in commissions, fees, and expenses? Trading fees also may differ depending on the country and exchange. I also keep an eye on possible withholding tax on foreign holdings, which will hit dividends and capital gains.


Trading fees, etc. can be viewed as decreasing eventual returns, or can be seen as increasing the overall “cost” of the investment, over and above the market value. Again, the spread between the book value of the investment and the price I paid is a measure of how risky the investment is.


7. I Use my Margin Account Only When it Will Achieve a Strategic Objective

An explanation requires a full post on its own. It all boils down to the fact that I don’t simply use my margin account because it’s there. I use borrowed money to achieve strategic objectives which are planned for well in advance. Typically, I identify investment targets requiring the use of margin at least 6 to 18 months earlier. Protection of the margin’s principal, the earning potential of the target investment, and my account’s sensitivity to increasing interest rates are all taken into consideration.

Read: Margin Strategy: When Do I Use it?


8. My Long Positions are Held for a Minimum of 6 Months and Look Out Between 3 to 5 Years

Looking out 3 to 5 years forces me to do an in-depth assessment of the investment. The assessment must be enough for me to be really comfortable knowing that the investment will be in my portfolio for at least half a year, even through high levels of volatility. These are, after all, long-term investments. As a corollary, I never take investment decisions in haste. Decisions are taken after following the investment vehicle over a period of time to establish a good baseline.


Holding a position over many years should not be confused with a “buy-and-hold” strategy, where an investor typically will hold onto the initial position, on a cost basis, for years, irrespective of market volatility. In fact, I often use market volatility to buy in or trim back positions.


9. I Rebalance my Stock Portfolio

10 Rules for Successful Long-Term Stock Investing_Investing in Stocks. is an Online Value Investor Discussion Forum Where Investors Present their Experiences with Value Investing and Share their Best Investment Strategies.I’ll make changes to my holdings between 2 to 4 times per year. Rebalancing ensures that, all other things being the same, the portfolio risk level remains more or less constant. Trimming occurs under several conditions, notably:

1. Whenever any position exceeds 5% of holdings.

2. Whenever a mutual fund or ETP exceeds 13% of holdings.

3. Whenever I can capture 2.5-5% of total portfolio holdings from capital gains.


10. I Review and Adjust These Rules With Extreme Caution

When I feel the practical need to deviate from my investing rules it almost seems to require an act of Congress. The process to make changes is thorough and structured. For example, when ETPs were heavily incorporated into my portfolio in 2010, a great deal of analysis had to be performed. Many people, much more experienced than I am, were asked for advice. People like my investment advisor.


A necessary consequence of this thinking is that I surround myself with knowledgeable people, follow thought leaders, and seek out views that are contrary to my own.

It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.

Warren Buffett

What do You Think?

Exposure to risk is present and necessary in all investments. My guidelines do not ensure the profitability of any one particular holding, but they certainly help manage risk, while maximizing the probability of overall portfolio growth. The rules, having been tested through various parts of the market cycle since 2002, have been profitable to follow. However, I recognize that my rules must be responsive to present-day challenges, changes in long term trends that will pose risks to portfolio growth.


I am interested to hear how you execute your own value investment strategy and I look forward to your feedback. You can write in with your comments and share this post: Facebook.    Google+.    LinkedIn.    Twitter.

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While investment strategies are personal, and this investor discussion forum doesn’t give investment or financial advice, there are some common tenets of value investing that can be better understood by structured and focused discussions with other like-minded investors.