Investing Rules and Missed Opportunities, Too Bad

“Man’s gotta live by a set of rules.  Gotta have a code.  Can’t just be out there doing anything and everything all the time.”

That’s not like a real quote or whatever, that’s more of an amalgamation of the things I might tell a younger gunfigher if I was like a leathery old veteran out on the Santa Fe Trail.  And I’d probably be running a blade back and forth across a leather strap while I said it, maybe spitting also, I’m not sure.

Warren Buffett was just asked for his thoughts on Apple ($AAPL) on his trip out to South Korea.  He basically said something like, yeah Apple’s future’s great but nowhere near as predictable as Coca-Cola’s ($KO) future.

Buffett has a rule: He don’t buy tech stocks.  He says he doesn’t understand them and that’s that.  He doesn’t break his rule.

Now Buffett will buy technology, make no mistake.  These industrial businesses he’s visiting in Asia and that electro-mechanical company out in Israel are cutting edge, boy-o.  He just won’t buy tech stocks.

His rule may have cost him some serious opportunities.  Imagine if instead of GE ($GE) and Goldman ($GS) he had bought a basket of web and optical stocks in the jaws of the crisis?  he could be up hundreds of percentage points, thousands in some cases!

But his rule has also kept him out of trouble too.  He was buying housing-related businesses like paint and aluminum siding while we were gorging on B2B and telecom names during the dot com frenzy of the last decade.  Guess who won that decade when the Nasdaq plunged 80% and the housing business experienced a once-in-a-lifetime boom?

This rule also probably kept Warren out of Microsoft ($MSFT); a perennial loser of a stock but a company founded and chaired by his dear friend Bill Gates.

I have some rules.  They do more than just keep me out of trouble, they keep me sane.  They allow me to focus and not get distracted by every shiny object along the Yellow Brick Road.

I don’t buy individual Chinese stocks.

I don’t buy stocks with market caps under $500 million (and usually not under $1 billion).

I don’t invest in one-drug biotech companies.

I don’t do private placements.

I don’t buy closed-end fund IPOs.

I don’t trade naked options.

None of these items is inherently wrong or bad or stupid, I just don’t do them.  I have my reasons, just like Warren has his.  And if I break one of my rules and it costs me or a client money, I get pissed.  Like Braveheart-returning-to-the-village pissed.

I’m sure I miss out on amazing trades and investments all the time.  I really don’t care, too bad.

Man’s gotta have rules.

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