The 10 commandments

When The Globe's investment columnist Rob Carrick wants clarity in confusing times, he turns to the investment lessons he's learned from legends in the field

Globe Investor Magazine, Nov. 21, 2007

THE MARK OF TRULY great investing wisdom is that you can understand it. You can profit from it too, but the clarity is what really grabs you. Finance professionals often speak a macho jargon that's Sanskrit to civilians, and they never miss an opportunity for freelance phrase-making. A recently heard example: "high-grade your portfolio" instead of "buy quality blue chips." But the real investment geniuses talk in simple-not simplistic-terms, and that means everyday investors can benefit from what they say.

One of the appealing things about the best nuggets of investing insight is that they don't hold out the false promise of a quick payday. No genuine investment guru ever advised anyone to time the market, to day-trade or to buy penny resource stocks. In fact, most of the deep thinkers tilt toward value investing-uncovering overlooked quality-and stocks that pay dividends. They also understand the ruthless way the markets can vaporize wealth, and they aren't afraid to remind people of this risk.

We've gathered 10 of our favourite bits of investing advice, on topics ranging from stock-market risk to which mutual funds to buy. What they all have in common is lucidity of thought and language, and an earthy wisdom you won't find in -any mutual-fund brochure.

IT TURNS OUT THAT the misuse of short-term performance numbers results in bad decisions to sell investments as well as buy them. You can see this in the outflow of capital from once-popular mutual funds that have slipped. Investors notice these funds are lagging and sell in the hope of jumping into the next big thing.

Dreman's point is that by the time an investor starts selling, it's quite possible that the rejected fund will have regained its equilibrium. Top mutual-fund managers are like star athletes-although they perform at a high level on a long-term, aggregate basis, they do fall into slumps. Experienced investors either ignore the slumps or use them as a buy-low opportunity.

The key here is to judge whether your fund manager has what Dreman calls a good strategy. One or two outstanding years suggest a lucky streak, not an effective method of choosing stocks. A quick way to assess a well-run fund, is to compare the 10-year results to the average fund in the same category and to the benchmark index.

RUSSELL IS BEST KNOWN as a market-timer, which is someone who identifies market peaks and valleys. He's had notable success with this strategy, but he abhors the idea of small investors trying to time their leaps in and out of the market. Russell is included on this list of investing masterminds because he has offered a near-perfect summary of the benefits of dividend investing.

Let's go a step further than Russell in hailing the advantages of dividends. If you're looking for a core strategy for choosing stocks, you could do a lot worse than insisting as a starting point that they pay a dividend. A history of paying dividends is evidence that a company is profitably run and built on a proven franchise. There's also the perk of receiving income that remains with you no matter what a firm's share price does.

Dividend investing works best when it's refined to focus on stocks that boost their quarterly cash payouts every year or so. Dividend growth means an ever-increasing yield on the money you invested at the outset, and it acts like a motor that quietly propels the share price higher over time.

INVESTORS WANT INSTANT VALIDATION when they choose a place to put their money. The easiest way to get it is to invest in a mutual fund or stock that is already having a great year and thus seems to promise more gains to come. In reality, short-term results are trivial at best and a trap at worst. It's the long-term numbers that matter.

A perfect example is one of O'Shaughnessy's own funds, RBC O'Shaughnessy Canadian Equity. It had a below-average year in 2006, underperforming the S&P/TSX composite index by a couple of percentage points. Judging the fund on this basis would have been an error, because its long-term performance is tremendous. If you had invested $10,000 at its inception in November, 1997, your return at the end of August, 2007, would have been $30,491, about $10,400 more than if you bought something that tracked the S&P/TSX composite.

STOCK-MARKET DECLINES OFFER historic buying opportunities. The problem is, you need a bit of steel to buy stocks when other investors are fleeing the market. Or you need the long-term perspective that you get from having been a successful money manager. That's the story of Templeton, a North American mutual-fund pioneer who sold his company 15 years ago and turned his attention to a charitable foundation focused on spiritual matters.

Everyone knows about buying low (and, of course, selling high). What Templeton did was add an extra level of instruction. Buy not just when stock prices are low, but when they're plunging. Investing pros do it all the time. This past summer, the shares of U.S homebuilders were torched by investors worried about a slowdown in the once-booming housing market. Bill Miller, our cover subject (see page 18), and a respected fund manager at Baltimore, Maryland-based Legg Mason Capital Management, saw a buying opportunity. In a note to investors in his mutual fund, Legg Mason Value Trust, Miller wrote that "at LMCM we actually try to buy low and sell high, and you don't buy low when everything is great and the headlines reflect it."