Rule #1 Investing Rituals: Start Investing with RULERS

Note: This post was originally published on RuleOneInvesting.com

The concept of ritual is as old as man:

They are designed to increase success.

There are religious rituals, of course, but there are also other types of rituals –a baseball player might go through a specific series of actions prior to stepping up to the plate, or a Green Beret soldier might go through a specific series of rituals to prepare for a raid.

As a river guide, I conducted specific rituals every morning to prepare myself and my boat for the day. I loaded the boat with gear in a very specific order and tied it down in a very specific way and above the biggest rapids I ritualistically sacrificed something to the river gods — maybe a shot of tequila or a beer.

Rituals also exist as investment strategies…

We get a series of ritualistic exercises from Ben Graham, Warren Buffett, Julian Robertson and many other Rule #1 type investors.

An investing ritual is designed to focus the analysis on the critical things that a good investment must have to be a Rule #1 investment. We know, for example, that we’re looking for a ‘wonderful company’ at an ‘attractive price’ because if we find it we are certain to make money.

We might not know when we’re going to make it but we know we’re going to make it as well as we know that if we buy a $10 bill for $5 we’re going to make money on it someday. But, it helps to define more clearly what a wonderful company is and what an attractive price is and we can do that with a ritual called Story.

How to Create a Story for a Business

A Story ritual was first started by Julian Robertson to require of his analysts a clear explanation for why a specific investment was a good risk:

“Hear a [stock] story, analyze and buy aggressively if it feels right.”

The ritual is very important.

Learn the Rule #1 ritual of how to create a story for the company that you’re investing in from me personally, during my weekly transformational investing webinar.

One has to stand before peers and present the Story.

The Story has to contain all the elements that would convince a rational investor that this is a great investment. It also has to take into account why others don’t see what you see, since others are not stupid.

Use RULERS to Create a Story

We’ve taken the element of Story and applied to it an acronym: R.U.L.E.R.S.

I’ll use the RULERS acronym to develop my Story for a business in a coherent way.

Here is what RULERS stands for:

Radar

How did you find out about this business? Why are you interested in it and how did it get on your radar in the first place?

Understanding

The Story has to develop the 4Ms: Meaning, Moat, Management, and MOS. Learn the 4Ms of successful investing here.

In this part of the Story, we should see that the company is a wonderful company and that it is on sale.

Love

Make sure that the business matches your values. You have to love it.

Event

The Story should include the Event that created the irrational fear. What event put this company on sale. If there is no event, the company is probably not on sale, even if we think it is.

Reduce Basis

Your basis is the amount of money that you have on the table.

We reduce our basis using cash flow strategies from:

  • Dividends
  • Buybacks
  • Derivatives
  • Really safe options trades

This is how you lower your risk of losing money.

Story

The Story is the Story of the company.

The value of the Story Ritual is three-fold:

  1. It forces us to present our idea to others to critique — over-confidence in our own ideas is a nasty thing
  2. It gives us a blueprint for the future so that if the Story changes, our
    investment strategy should change as well
  3. Ritual removes the ego so that we can stand being challenged and we can initiate an
    exit if the story changes.

Apply RULERS for Successful Investing

Apply RULERS to every long-term investment you make. Make it a Ritual to do a Story to your investing partners or to your spouse.

Force yourself into the ritual. The more important it is to succeed, the more Ritual becomes important.

If you need a little more help implementing RULERS for yourself, and want to learn more about the basics of Rule One Investing, join me for my weekly transformational investing webinar and learn it from me personally.