Morgan Stanley: Behold The 10 Commandments Of Long Term Investing

10 commandments

Morgan Stanley’s guide to their STEP or Strategic Equity Portfolios landed in our inbox and it details just how the company plans its stock purchases.

For investors, this is a guide into the mind’s eye of one of Wall Street’s most powerful players. For those working in the industry, this is your brief on the competition.

Strategies are focused on the long run, rather than the short, due to the nature of STEP.

See The 10 Commandments Of Long Term Investment >

Commandment I: Outperforming Bad Years Is More Important Than Under-performing Good Years

Long term portfolios should be selected on the basis of doing better in bad years for the overall market, rather than ramping up returns in great years.

If you run a little short in a big year for the market, that's ok. Avoiding big losses in bear years is more important.

Source: Morgan Stanley STEP

Commandment II: Risk Is Only Relevant In Relation To Its Rewards

Understanding risk is about understanding uncertainty and volatility is a good judge of that. But it is important not to craft this assessment in a way that benefits you, like tracking error assessments that point to limited losses when your losses have actually been much greater.

Instead, understanding the risk reward balance, via how much you are willing to lose of what you have for potential gains, is a more reasonable path to achieving long term goals.

Source: Morgan Stanley STEP

Commandment III: Holding More Than 30 Stocks Is Pointless

Holding more than 30 equities isn't going to achieve further diversification, its only a tool used by managers to protect themselves.

Source: Morgan Stanley STEP

Commandment IV: Avoid Blow-Up Equities Like The Plague

When investing in equities, ensure that your stock picking seeks to exclude the possibility that a single company could explode. Avoid companies that don't have clear corporate profiles, which can be vouched for.

This is particularly important if you have a small, focused portfolio as one outlier can wreck your entire return.

Source: Morgan Stanley STEP

Commandment V: Stocks Will Be Your High Yield Bread And Butter, But Diversify

Equities are going to pay out big if you make wise choices, beating inflation and pushing your portfolio beyond expected gains. But diversifying among stocks is not enough to build your portfolio. Bonds provide bear market protection, and ETFs can add further diversification faster than buying individual equity positions can.

Source: Morgan Stanley STEP

Commandment VI: Pay Attention To The Three E's: Economy, Earnings, and Emotion

These are the three vital tools of the equity investor. Watch for economic direction, gauge the multiple perspectives, and judge a sane median. Pay attention to the broader earnings landscape as it provides a guide to where growth is headed. Emotion, always difficult to discern, means judging the appetite for risk present in the market place.

Source: Morgan Stanley STEP

Commandment VII: Be Mindful Of The Trend

Following the traditional investment trend, example China today, may leave you flattened if tail risk is to surface.

In the case of China, a bubble is thoroughly possible, in fact, somewhat certain in some cities.

Source: Morgan Stanley STEP

Commandment VIII: Growth Versus Value Should Adjust To The Market

Investment decisions in equities should be made on this paradigm, depending on whether stocks have recently been incorrectly devalued or whether those devaluations have declined and the pursuit of growth is now the objective.

Morgan Stanley STEP now sees their market portfolio as 54% growth over 46% value.

Source: Morgan Stanley STEP

Commandment IX: Forget Trading, High Turnover Will Not Benefit You In The Long Run

Holding equities short term and trying to make profits via high turnover can be done, but it is extremely difficult and risky. While most of the market has moved in that direction, long-term investing, with a minimum of one year in a stock, is the preferred path to sustained growth.

The losses on frequent trading due to taxes on every sale have the potential to crush short-term gains. Holding on, and positioning yourself in a company because you have faith in its underlying potential, is a much more certain course.

Source: Morgan Stanley STEP

Commandment X: Always Pay Less Tax

Avoiding losses due to taxes is a vital part of investing. It often means making decisions to part with more money for more growth, or less money for less growth, but in reality often mixes somewhere in between.

Investing in individual stocks, rather than a money market portfolio, allows individual losses to be used as tax shelters for other gains. Equities should not be selected, however, for the sole purpose of tax efficiency, but to meet performance goals.

Source: Morgan Stanley STEP

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