This post contains my notes and reflections from the book: The Busy Doctor’s Investment Guide by David Yeh.
Family, friends, work, health and community are important in our lives. But money is also equally important. What you do with the money that comes into your life is important. The main thing is to save and invest so that one can become financially free. There are many mechanical formulas of investing out there and many of them will work if we are disciplined and not get swayed by how much more the other person is making…which means, we have to ultimately have our own personal goals which are well-defined and work towards them.
Money is not an evil. It is necessary. Paying yourself first. The impact of dollar cost averaging and compound interest over long periods of time. These are very important to integrate into our life. How early you start is important because with time even small amounts can grow very big. Position sizing-how much you put into an investment is another important concept. Risk management- how you will deal with losses, when you will get out, when you will get in are also important concepts. These depend on what you are doing; but it is important to learn about them.
In investing, it is important to keep your losses small. Because if you lose 50%, you need a 100% gain to break even. Hence you need to have a strategy to cut your losses short- your exit strategy. You also need to understand the risks involved in your investments. To do all of these, it is easier if you have a system of doing things. Price is the most important factor- whether it is momentum or value investing. But the key thing is that you have to follow your system. Otherwise, you will fail.
One simple system of investing is dollar cost averaging. Buy a set amount a set period of time( say, every month) and keep doing this for decades, with no intention to exit, unless you need money for some urgent purpose. You will do very well, as even Warren Buffett says. You buy more shares when prices are low and less when prices are high and that is good over the long-term because most broad-based equity markets rise over time.
A second system is the 20 month moving average system. Buy when the stock fund/ETF is above the 20 month moving average. Sell when the stock fund is below the 20 month moving average and invest in a bond fund/ETF. Repeat. The most important thing with this system is that you need to be disciplined and follow it exactly without making your own guesses.
The third system is the monthly rotation investment system, called MRI for short. This is momentum based system using three funds/ETFS:
- S&P 500 Index
- MSCI Emerging Markets Index
- Inverse S&P 500 Index
- At the beginning invest 1/3rd in each of the three funds.
- Once a month rank each fund by the return that month.
- Then sell the bottom 25% of the portfolio and use the proceeds to buy the top fund.
Historically, this system has given a 13.76% return from 1994 to 2014. The problems with this system are the whipsaws, transaction costs, slippage and taxes.
The fourth system is to be used when you buy individual stocks. When you buy stocks follow 2 rules. Never lose more than 1% of your networth on any one stock. Use a 25% trailing stop loss order. This means you can use 4% of your networth to buy a stock and if you sell at a 25% trailing stop-loss, the most you can lose is 1% of your networth. Once a stock you bought has a 33.33% gain, the stop-loss is now at your cost point. So you can invest another 4% of your portfolio with a 25% trailing stop-loss. Such a system is important because if we do not use a system, we are likely to lose a lot of money.
You need to have a system for investing. You need to follow that system. There will be losses and gains and you should take it as part of following the system. You should never override the system and allow the system to make your decisions. The system should be such that it prevents great losses. Then the gains will take care of itself.