The Financial Engineer: 14 Rules for keeping your Head in a Troubled Market

It's days like these, when the market is showing so much weakness, that I like to revisit some sage investing advice. The following rules are based on the writings of Robert Menschel, a 50+ year veteran of Wall Street and author of Markets, Mobs & Mayhem: How to Profit From the Madness of Crowds These rules can help you keep your head when everyone else is losing theirs.

I especially like to re-read #2 – the stock market always comes back. I have seen it rebound several times in the last 20 years and am expecting it to do that again. I also have been taking note of some very interesting potential buys. It's for times like these that I have stashed cash on the side to take advantge of the sale price of stocks like BRKB and AAPL.

Remember that at the time of extreme fear in the marketplace, when all the excess has been wrung out, great buys are all over the place.

Remember, too, that the stock market always comes back, no matter how shocking the events that drive it down. Within three years of the December 7, 1941, attack on Pearl Harbor, of John Kennedy's assassination, and of the 1993 World Trade Center bombing, the market was up anywhere from 21 percent to 81 percent.

Define the sandbox you want to play in. Invest in growth-value companies that have records of consistent sales and earnings performance, management committed to a defined strategy, and with strong franchises that are highly focused. Only buy these stocks at sensible multiples and don’t add new companies unless you are willing to sell the weakest.

Have a buy strategy and stick with that. Buy in to a stock in steps, instead of at one price. Once the stock price is within range, begin with an initial buy in of 25% of the total desired holding. Then add increments of 25% to reach 100% of your total buy.

Stick with what you know. Invest in companies that create products and services that you can personally field-test day in and day out.

Stick with who you are. Be aware of your own risk tolerance. Understand that what is considered too risky by one might be too cautious for another. When your risk tolerance and portfolio are not aligned, bad decisions can follow.

And stick with companies that know what they are, too. Invest only in companies that stay focused on their core competency and have a strong franchise. Menschel also recommends avoiding technology companies because industry changes are so rapid that most of them turn into commodity businesses with no lasting franchise.

Always do due diligence. Invest your money only after thorough study. It's the mistakes that kill your investment performance. Evaluate the downside risk as much as the reward side, and you'll never have to be brilliant.

Never make a buy or a sell decision in your broker's office. Brokers are too close to the roar and the feeding frenzy of the crowd. Take time to make your decisions.

Buy for the long term. If you were to die tomorrow, would this be a stock you would want your heirs to hold? It sounds morbid, but it is not a bad test to apply. Stocks should be for the ages, even if we won't survive them.

Accept a little boredom in your life. Greedy management bent on making overpriced acquisitions gets the headlines, but good companies with superior management teams and a culture of teamwork, turning out good, usable, affordable products, make money. Look for companies selling at a reasonable multiple, generally no more than 50 or 60 percent greater than the rate of growth in earnings.

The faster a stock has a run up in value, the faster it is likely to run down. Almost no company can safely grow earnings faster than 15 to 20 percent a year without attracting fierce competition.

It's the small things, not the big ones, that count. In baseball, homerun hitters get all the attention. Investing is simpler: Hit for average, swing for singles, not the fences. This race is ultimately to the sure, not the swift; the tortoises, not the hares.

And finally, Never forget the miracle of compounding. A modest 8% rate of return will double your initial investment in 9 years and nearly triple in 14 years.