The Math-less Rules of Finance

Happy New Year! I hope you were an investor in 2023 and that you owned one of more of the Magnificent Seven (the band names change, but many of the members don’t): Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla. Averaged, these massive wealthy businesses more than doubled in 2023 and their stellar performance was responsible for the value increase of nearly the entire US stock market. For those of you keeping score, I was fortunate to own 5 of the 7, so I managed a pretty wonderful return in 2023.

So, on to 2024. Today I want to tell you about some mathematics-free rules of finance. Lots of people think that to do well in the market, you need to love the numbers. Spreadsheets, charts, formulas… Nonsense. Of course it helps to be able to know basic arithmetic, but in fairness you need that for cooking, laundry, even golf. That is not the key to financial success. I will give you a handful of concepts you can easily grasp without an MBA or even a calculator. 

1.  Always pay your full credit card balance

We’ve all heard this before. Yet most Americans carry a debt balance on at least one credit card, and often two or more. Many pay only the ‘Minimum Due’ every month, which only compounds the problem (sorry, couldn’t help myself). Just so we’re clear: this is a sucker’s game. Paying only Minimum Due will put you deeper into the hole over time. Credit cards charge you nothing at all if you pay them off every month. But if you carry a card balance— one card I use demands up to 30% annual interest if I’m foolish enough not to pay it down. That’s absolutely bananas, nearly 5x the going lending rate in any other context. Pay that card off, and do it now. You should be living below your means— see “Do Without,” below. If you come even quickly, get a proper loan from a bank or a credit union or even a parent, and use that to pay off your cards. You’ll be charged a fair interest rate and you’ll have an easier time working down the balance.

 

2.  Play only your own game
We all get distracted and outright enraged when a celebrity or a sports star or even someone we know starts touting some amazing business they bought into and now they’re up 1,000%. How much they’ve made, how it’s only the beginning, how you can get in too. Or we read about a company like Amazon which is up nearly 80% in 2023 alone and we shoulda-woulda-coulda. But in reality we all have different financial goals, different timelines till retirement, different risk tolerances. Trying to match someone else’s investments assumes we are the same. That person might be more way knowledgeable about bio-tech or the banking sector, or be half your age and so can afford to take more big swings. Your portfolio will develop and diversify naturally over time to reflect your interests, your experience, your ability to handle risk and volatility and so on. Get comfortable with that.

Entire stock market, 1775-2014

3.  Always be a buyer
I get asked all the time what I think the market will do next month, or next year. When do you think the Fed will cut interest rates? Are we heading into a recession? I respond with the truth (I have absolutely no idea) and then by asking why they want to know. It’s nearly always because they want to buy shares of something and don’t know if it’s the right time. But here’s the trick: it’s always the right time. Sure, don’t buy shares of a business that the financial news says is in dire straits— such as Boeing, AMC Theaters, Rivian at the time I write this. But in general, if you don’t need the cash for a few years, be a buyer. Whatever happens next quarter or next year, the long term trend in the markets is always upward.
 
4.  Do without

In order to invest successfully over the long haul, you need first to have the capital with which to buy those investments. You need to cut up that third credit card, stay away from the outlet mall or the electronics sale. Focus on what you want your life to be like in the future. Don’t fret too much about that daily cappuccino habit, but no, you really don’t need a BMW or a Rolex when you’re 25. What you invest thoughtfully today instead of spending on yourself will grow and compound over the years and the decades and be worth 10x, 100x, 1000x in your middle age. Those investments made when you’re young could one day enable you to fund a college education for your niece or to retire and travel in your 50s. Admittedly, this is blue-square intermediate difficulty.

5.  Be patient
Corollary to the above: this all takes time. A tiny percentage of people get rich quick— tech entrepreneurs, basketball phenoms, pop stars (harder to stay rich). The rest of us have to take the slow train. But the slow train is available to anyone, requires only a little understanding and preparation, doesn’t require Lebron’s jump shot or Van Halen’s guitar skills. It’s just slow. So be patient. Make investing a habit— if your work offers automatic paycheck-subtracted IRA investing or better yet, matching deposits, grab that with both hands at least until you can do it without prompting. This is a long process that will absolutely pay off decades from now. Difficulty: black-diamond.
 
6.  Manage panic

What happens often is someone has developed a strong investing habit, starts putting the money to work early and continues to build the portfolio as their income grows. But then there’s a recession and the accompanying market pullback. Stocks do fall, and sometimes they fall hard. Your job is to not cave to fear. The reason stocks grow faster than most other asset classes is because they are more volatile. A successful investor has to absorb those inevitable drops and not sell out. Look at Netflix in late 2021 when we were still in the throes of the pandemic and many of us were watching too much TV. The stock hit $690 on October 25. But exactly six months later, on April 25 2022, the stock was trading at $190, a nearly 75% drop. It wasn’t just Netflix, it was most of the tech sector. Millions of investors were bailing out as it got worse and worse. Now, a little over a year and a half later, Netflix hasn’t recovered those delirious highs but it’s back up to $474 a share— 2.5x from the 2022 bottom. Investors who refused to sell didn’t have to do anything to get out of that hole except hang on! Difficulty: double black-diamond/experts only, at times even for the most seasoned of us. You have to have ice in your veins but this is a skill worth learning.
 

7.  Don’t be stupid

So much of successful investing comes down to just not making dumb mistakes. Many of these you already know: Don’t wait to start putting money away. Don’t put all your eggs in one basket. Don’t lend to friends and family (Give money, if you want to help. Better for your relationships not to expect if back). Don’t buy a lot of stuff which depreciates— cars, TVs, furniture, clothing. Don’t be in a big hurry, and don’t fall for the pressure tactics. Don’t sell into a market panic. And if it sounds too good to be true ... 
 

8.  Buy what you know

This is the same advice they give to aspiring writers. Start with your own experience, your own interests. Computer nerd? Look at software companies and network security and hardware manufacturers. Sports fan? Look at the betting businesses, makers of fan apparel, broadcasters. It is much easier to know and understand what matters in the news about your investment if you fully understand that business. You’ll know what it means to the company if they can’t find enough good new hires, or if there’s a competitor with a new technology or they’re facing regulation overseas. With enough exposure to reports about the business and the ups and downs of that business, you’ll grasp what should constitute real concern for you and what shouldn’t.
 
9.  Separate news from noise

When you own shares of a company, the overwhelming majority of what’s happening in the market, or on TV, or in the newspaper, or with quarterly earnings reports … does not matter.

You don’t care that the Wall Street Journal is predicting a market decline. You don’t care that Barclay’s just ‘downgraded’ the stock. You don’t care that Mad Money’s Jim Cramer says to sell. You don’t care that a big, wealthy business is expanding into the same industry. You don’t care that earnings came in a little under analyst expectations. All you care about is that your business is healthy and well-run. That it offers great products and has a deep competitive moat. 98% or more of the stuff you read or hear about every day is just noise and will not affect your shares in the long run. Maybe a piece of news creates a little bump your company will have to endure, but it will likely pass. The media makes money by getting and holding your attention. They do that with shock, danger, fear, hand-wringing, and warnings. Stay focused on your invested businesses. Forget what that yo-yo said, and think for yourself: will it affect the success of the company a year or two from now? Probably not. 

10. Sell only for one of the Four Reasons

I’ve covered this at length in a recent post, so I won’t belabor it here. Just know that when you’re a buy-and-hold investor, there’s no such thing as ‘the top.’ Who imagined 20 years ago that Apple, in 2003 a maker of unpopular computers and a clever new MP3 player, would be the most valuable company on the planet? How many people sold after a few years of stellar growth thinking, How much higher can it go? How many sold in 2011 when Apple founder and tech icon Steve Jobs died, thinking, That’s the end of an era, it can only drop from here. (Since 2011 by the way, Apple is up over 1,200%). If you’re going to sell, have a very very good reason. Read more about my Four Reasons here.