w w w . t i c o n l i n e . c o m

RULES OF THE GAME

In today's world there is a plethora of investment strategies ranging from market timing, risk management, asset allocation and fundamental and technical analysis. Even with all these tools, many people have overlooked a major factor that consistently contributes to investment success - the conditioning of the mind.

I'm not just talking about the analytical abilities of the brain, but the emotional ones as well. More often than not, it is our emotions that end up undermining our investment goals.

As we go through life, we attach specific and sometimes significant meanings to events that occur around (or to) us. These experiences, whether gained from reading a book or engaging in a particular activity firsthand, define what be believe is possible or impossible. This, in turn, allows us to set Rules and Preferences for ourselves.

"First we make our habits, then our habits make us."
- John Dryden

Rules and Preferences

Rules are extremely strong beliefs that a person develops throughout life. These beliefs are so strong that they are convictions - conviction that certain events must happen or must exist before a certain result or conclusion is possible. Contrast this with what I call Preferences, which are far lesser beliefs that consist of breakable rules that hold no real weight.

Anthony Robbins, author of the book Awakening the Giant Within, gives an example of the kinds of Rules people set for themselves.

Mr. Robbins once met a woman that was extremely fit. When he asked her what she felt she absolutely had to do to keep in shape, the woman rattled off a number of Rules such as 'I should work out once a day', 'I should eat vegetables everyday', 'I should avoid red meat', 'I should do aerobics for at least 30-60 minutes a day', 'I should avoid fast food and junk food', and so on and so forth. When asked what more she should be doing, the only response Mr. Robbins received was 'I should workout more'!

Conversely, when Mr. Robbins counseled a severely overweight woman about her Rules for physical fitness, it was unsurprising that she had no answer. Only when pressed did this woman say that she 'must eat' and she 'must sleep' to survive. When asked about what she should be doing to improve her health, the woman was able to mention that she 'should eat better', 'should exercise more' and 'should avoid fatty foods'.

"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."
- Sir Winston Churchill

Mr. Robbins mentions that this abundance (lack) of Rules can be used to explain why individuals excel (or fail to excel) in a particular endeavor. With all the Rules the first woman had to fulfill, it was no mystery why she had a great body. Conversely, the second woman, who didn't have any Rules for getting fit, was overweight and not compelled to do anything about it.

"Whether you think that you can, or that you can't, you are usually right."
- Henry Ford

Often it is confusing for individuals with few Rules to understand a person with many. People with many Rules often make seemingly ridiculous comments such as, 'I have to work out', 'I have to study' or 'I have to party this friday'. What the people with fewer Rules fail to understand is that some people just have different priorities to make them happy.

Rules of Investing

Needless to say, it is also important to set up Rules when stock investing. These Rules will ensure that you are buying a company with excellent economic characteristics and will prevent you from making emotional and costly investment decisions.

Some Rules about the company include:

This company must have:

1. an increase in earnings over the last 5-10 years
2. a return on equity of 15% or greater per year for the last 5 years
3. extremely low debt levels (if there is debt, the debt should not be bank debt; it should be funded debt)
4. a profit margin of 7% or greater, and should be increasing
5. management that has increased shareholder value by buying back shares or increasing the dividend
6. have low amounts of capital expenditures relative to cash generated by operations
7. a disposable product that is necessary and must be replaced frequently

Some Rules about price include:

1. this company's intrinsic value must be trading far above it's current market value
2. this company must have 50% of it's stock price available in cash/land assets

Summary

Making mental Rules for yourself and 'raising the standard' of the businesses you purchase, will significantly improve your chances of investment success.

Cheers,
Jim Chuong