1. Capital comes in two varieties: Mental and that which is in your pocket or account.
Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
2. “Markets can remain illogical longer than you or I can remain solvent”, according to our good friend, Dr. A. Gary Shilling.
Illogic often reigns and markets are enormously inefficient despite what the academics believe.
3. An understanding of mass psychology is often more important than an understanding of economics.
Markets are driven by human beings making human errors and also making super-human insights.
4. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom.
If we learn nothing more than this we’ve learned much indeed.
5. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t.
Do the trade that is hard to do and that which the crowd finds objectionable.
Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.
6. There is never one cockroach: Bad news begets bad news, which begets even worse news.
7. Never, under any circumstance add to a losing position…. ever!
Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
8. Trade like a mercenary guerrilla.
We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
9. The objective is not to buy low and sell high, but to buy high and to sell higher.
We can never know what price is “low.” Nor can we know what price is “high.”
Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.
10. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral.
That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
11. Sell markets that show the greatest weakness, and buy those that show the greatest strength.
Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily.
In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.
12. Do more of that which is working and less of that which is not.
If a market is strong, buy more; if a market is weak, sell more.
New highs are to be bought; new lows sold.
13. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly.
In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.
14. Be patient with winning trades; be enormously impatient with losing trades.
Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.
15. To trade successfully, think like a fundamentalist; trade like a technician.
It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.