The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

Four Rules That Count

So—terminal value or cash flow or both? But how do you achieve those goals? And how do you start aiming to be right more often than wrong? Just as you don’t need advanced scholarship or apprenticeship to learn to use the Questions, building a strategy can be as easy as following four rules my firm employs every day in managing money:

Rule Number One: Select an appropriate benchmark.

Rule Number Two: Analyze the benchmark’s components and assign expected risk and return.

Rule Number Three: Blend non-correlated or negatively correlated securities to moderate risk relative to expected return.

Rule Number Four: Always remember you can be wrong, so don’t stray from the first three rules.

Let’s examine these four rules more closely.

Rule Number One: Select an Appropriate Benchmark

You know the benchmark is vital to success. You know what a benchmark should be (well constructed) and what it shouldn’t be (price-weighted like the Dow). As important, your benchmark should be appropriate for you. It will dictate how much volatility you’re likely to experience, your return expectation, even to some extent what ends up in your portfolio. It’s your road map, your measuring stick. You shouldn’t change it, not soon, unless something really radical happens to you, changing the primary purpose of your money. Something materially impacting your time horizon one way or another—like your spouse passing away, which could shorten your expected time horizon, or you remarry a younger ...