Doom and gloom are filling the air. Some economists and market gurus warn that we may be going into another recession. Indeed, some say we may already be in a recession. And what will happen if we head over the “fiscal cliff”?
At times like this, I think of my marvelous old friend Dan Bunting, a man who successfully managed money on behalf of private individuals and institutions for nearly 40 years.
Along the way, he learned to take most economic prognostications with a grain of salt. If you listened too much to economists, he said, you would never invest a penny. “Just remember,” he used to tell me with a smile, “the economic fundamentals always look terrible.”
Dan died recently, after a short illness. The news has me thinking again about Bunting’s Laws of Investing.
The first time he told me about them was over lunch, a decade ago. This was back in the days when I worked in London, and journalists could still go out for lunch. He had accumulated the rules over the course of his long career. At the time, I thought they were interesting but whimsical. After the past 10, turbulent years, I’m amazed at how useful they are. It’s been like a “Twilight Zone” episode.
What are Bunting’s Laws?
1. Sell stocks of companies that announce huge acquisitions, that overdiversify, or that spend a fortune on a lavish new headquarters, he said. (Hello, New York Times.)
3. Watch out when executives start selling a lot of stock — though they will, he added, always offer a plausible-sounding excuse when doing so. (Top executives in homebuilding companies, mortgage banks and Wall Street firms dumped billions of dollars’ worth of stock before 2008.)
4. “Run a mile” from all stocks in an industry going through a huge investment boom: This will lead to massive overcapacity and a consequent collapse. (Cite any recent bubbles you care to name.) Avoid the fallen stars after the bubble bursts, too.
5. As a rule, steer clear of investing in manufacturing companies. Their industries are usually plagued with extreme cycles of boom and bust, overcapacity and slumps.
6. Pay little attention to economists or market “gurus,” Dan always advised. (Incidentally, the corollary of economists always predicting a recession is that they generally fail to predict one when it actually does happen.)
7. Mistrust all mathematical trading formulas as well. Dan noted, they invariably fail just when you most need them to work.
Not all of Bunting’s Laws are about stocks to avoid.
8. Look for companies where the insiders are buying lots of stock, he said.
9. Look for companies generating a lot of cash, as that is almost always the start of sustained outperformance.
10. Look for companies which have monopolies, or near monopolies, and those which manage to take out their main competitors.
11. Remember you are buying businesses, not just stocks. So pay close attention to the quality of the business, and especially the quality of the management. They make an enormous difference. Over time, Dan would say, “class shows.”
12. Look for companies in the consumer sectors — in particular, companies which have earned the trust of consumers, and which have very strong brand names. “As a rule, the closer you are to the consumer, the more money you will make,” he said. “The ultimate guarantee of profit is to possess the trust of the consumer.” (Hello, Apple.)
These rules may sound very obvious. They are, or ought to be. You’d be amazed how many investors manage to forget them. Especially on Wall Street.
For those willing to take risks, Dan also said, there are great profits to be made by jumping on an investment bandwagon — so long as you jump off again in time. “You always make the biggest profits on the worst stocks,” he used to say. (It sounds ridiculous. It isn’t.)
The last time I saw Dan Bunting was a year ago. He was waiting for me in an old London pub near Leicester Square, wearing a pin-stripe suit and clutching a pint of warm beer. We headed over to London’s Chinatown for lunch. I will miss him. But Bunting’s Laws will live on. I will think of him every time one of these rules is validated, yet again.