The Lincoln Rule: 5 steps to becoming a smarter investor

On July 14, 1863, a frustrated – even furious – President Abraham Lincoln sat down at his desk to write a letter.

He had just learned about Gettysburg, where his Union forces defeated General Robert E. Lee's Confederate army. As we know today, it would prove to be one of the Civil War’s most consequential battles.

Yet Lincoln believed it could have been outright decisive if General George Meade had only pursued Lee instead of letting his army retreat back toward Virginia.

With that in mind, he began a letter to his commander, writing, “Your golden opportunity is gone, and I am distressed immeasurably because of it.”

Yet Lincoln never actually sent the rebuke. He never even signed it.

And no, that wasn’t a mistake. It was a remarkable act of restraint on the part of someone under an enormous amount of pressure.

He even added a note to it: "To Gen. Meade, never sent, or signed."

I can only imagine that he realized how little he’d accomplish by acting on his emotions. It could have even been detrimental, demoralizing his military command right after an enormously costly fight.

Now, I’m not trying to compare Lincoln’s act of restraint or the pressure he was under with the average investor’s life today. That would be ridiculous.

However, we can and should model our mentality after him while we pick and choose stocks. Otherwise, we can easily turn into our worst enemy.

I’ve seen it happen too many times over my 16 years of writing about stocks – not to mention the decades I spent as a commercial real estate (CRE) developer.

A stock drops 20%, and investors sell out of fear. Or an investment doubles, and they buy out of greed.

Yet so often, those businesses’ underlying fundamentals didn’t really change. What shifted was shareholders’ emotions.

Benjamin Graham, the father of value investing and author of The Intelligent Investor, famously described the stock market as an emotional business partner named Mr. Market.

Sometimes, Mr. Market is euphoric. Other times, he’s running around saying the sky is falling.

Your job is to not only rise above that excitable perspective, but to actually take advantage of it.

Admittedly, that’s easier said than done considering how we have emotions ourselves. And while there’s a healthy side to that array, it’s all too easy to let them take over.

So here’s what I suggest: Put on Abraham Lincoln’s famous hat and walk a mile in his shoes.

Not to the theater, mind you, but definitely to his desk. Then sit down and follow these five simple steps whenever you have a buy or sell decision to make.

Feel free to hold onto your emotions for this part. Your goal is to be honest, so write down exactly why you want to make the purchase or cut your losses.

Maybe it’s something like, “I’m thinking about buying Stardust Power (SDST) because it surged over 75% the other day, and I want a piece of that action.” Or perhaps, “I'm thinking about selling Realty Income (O) because its share price dropped and I'm worried about rising interest rates.”

Those are understandable positions to take. But we’re not looking for understandable.

We’re looking for successful. And over the long-term, too.

Look into the company's underlying fundamentals such as its balance sheet strength, debt maturities, and credit ratings. Check out its current valuation and normalized cash flow, then where the resulting multiple has been in the last five years, decade, or more.

For the real estate investment trusts (REITs) I like to cover, I would also examine aspects like adjusted funds from operations (AFFO). The same goes for tenant quality and contractual rent growth.

In the case of Realty Income, its stock falling 20% might not mean much if its cash flow, dividend coverage, and balance sheet quality remain strong. If anything, it might be a buying opportunity.

Otherwise, yeah, you might want to sell.

Either way, keep in mind that a falling stock isn't an automatic apocalypse. And a rising stock isn't an automatic winner.

Even then, you’re not done yet. You still need to ask how your current position – which might very well have changed over the first two steps – could be proven wrong.

That means identifying the risks of a buy and the rewards of maintaining your position if you’re thinking about selling.

Either way, choose the humble position that you’re not the knower of everything.

Believe it or not, that’s a competitive advantage.