Ten Investing Rules To Avoid Losing Money

The winning strategy for Main Street investors playing in Wall Street’s casino against killer pros is being patient, minimizing mistakes. Yes, follow his 10 rules and you can win the “loser’s game:”

1. Never speculate

Yes, the financial press acts like Nascar cheerleaders. One says jump on board now, this market is a “muscle car mired in the mud,” soon to get “unstuck.” Another tells investors to gamble: “For higher returns, you need to get into riskier investments.” No wonder Ellis coined the term, “Loser’s Game,” it’s accurate.

1. Your home is not a stock

You live in it. Today many mistakenly assume that rising equity values mean you don’t have to save for retirement. Or that you can use a home-equity loan to buy stuff. Or worse yet, use that money to buy more properties and start condo-flipping. Warning, when the bubble pops it will be too late for you to exit the loser’s game.

1. Save lots more regularly

“Savings glut” is the latest euphemism invented by happy-face economists and politicians. America’s savings rate has dropped from 10% two decades ago to zero, and has only recently started back up. Out-of-control consumption means importing and running trade deficits,. Meanwhile China recycles our dollars into Treasurys. This game is ending. Not saving now won’t help you later. Most retirees have too little set aside.

1. Brokers aren’t your friends

There is an inherent conflict of interest between you and every broker in the world. Even if they’re your neighbor and best friend. Bottom line: They make their living on fees and commissions, and that reduces your returns. They win and you lose. Think index funds.

1. Never trade commodities

Yes, you may want to add a small allocation of energy, metals or other commodity index funds to your long-term portfolio. But short-term trading is a loser’s game, and a fast one. Commodity traders tell me that all amateurs invariably lose all their risk capital within 12-18 months, then they quit trading.

1. Avoid new and exciting deals

Right now, with all the turmoil and risks domestically and globally, chasing hot stocks and exotic opportunities is an instant replay of the irrational exuberance that got us all in trouble with dot-coms in the 1990s, real estate around 2005-2008.

1. Bonds also ride up and down

Movie buffs used to say Fred Astaire was the greatest dancer of all time. Until a woman reviewer noted: Ginger Rogers was the greatest. She did the same as Fred, only backwards in high heels. Great visual when Charlie Ellis reminds us that in the short term bonds also go up and down like stocks. However, you increase your chances of winning the loser’s game remembering that as soon as the Fed increases rates, bond values will crash.

1. Never invest for tax benefits

Every year my accountant reminds me of this rule. Every decision should first make sense as an investment. Same applies if you’re making a business purchase like an SUV. Tax benefits are secondary.

1. Write your goals … and stick to them

Especially a well-diversified, long-term asset allocation strategy. A budget. A savings plan with regular money going into a retirement program. Career goals. And start living below your means now, save more now, because later will be too late. Put it in writing.

1. Never trust your emotions

Behavioral economics was launched when Ellis wrote the first edition of “Winning the Losers’ Game.” This new science makes it clear investors are their own worst enemy. We’re not rational. We’re too optimistic in spite of impossible odds.

The pros own the game, insiders own the casino, rig the tables. They have more information, get it faster than you do, got more chips to play with, and they spend all day playing … while you work for a living. You’re an amateur, at the loser’s tables, playing by their rules.

Worse, you can’t win because your emotions trigger too many mistakes, so they will set you up, trip you up and take advantage of your irrational brain.