Archives of “January 2, 2019” day

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Discipline & Fear

  
  Education
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emotionaldiscipline-the ability to keep their emotions removed from investment decisions. Dieting provides an apt analogy. Most people have the necessary knowledge to lose weight—that is they know that in order to lose weight you have to exercise and cut your intake of fats. However, despite this widespread knowledge, the vast majority of people who attempt to lose weight are unsuccessful. Why? Because they lack the emotional discipline.

fear

It’s important to distinguish between respect for the market and fear of the market. While it’s essential to respect the market to assure preservation of capital, you can’t win if you’re fearful of losing. Fear will keep you from making correct decisions.

5 irrational beliefs that can lead traders astray.

  
Analysis, Education
  1. What goes up must come down and vice versa.  That’s Newton’s law, not the law of trading. And even if the market does eventually self-correct, you have no idea when it will happen. In short, there’s no point blowing up your account fighting the tape.
  2. You have to be smart to make money.  No, what you have to be is disciplined. If you want to be smart, write a book or teach at a university. If you want to make money, listen to what the market is telling you and trade to make money — not to be “right.”
  3. Making money is hard.  Nope. Sorry. Making money is actually easy. Statistically, you’re going to do it about half the time. Keeping it, now that’s the hard part.
  4. I have to have a high winning percentage to be profitable.  Not true. How often you are right on a trade is only half of the equation. The other half is how much do you make when you’re right and how much you lose when you’re wrong.  You can remember that with this formula: Probability (odds of it going up or down) x Magnitude (how much it goes up or down) = Profitability.
  5. To be successful, I have to trade without emotions. That is both wrong and impossible. You are human so you have emotions. Emotions can be a powerful motivator to your trading.

Bernard Baruch’s 10 Trading Rules

  
  Education
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While pure trend followers and technical analysts will not agree with all of Mr. Baruch’s principles it is interesting to read through them, they are the same as some of the top traders and investors of our age. Some of these all traders can agree on.

Bernard Baruch was a millionaire in his early thirties after a few good runs in the stock market and devoted the remainder of his life serving the public and helping the U.S. win World Was I and World War II. He was a big believer in serving his country and that was the main purpose for the remainder of his life after he made his fortune.

Here is a summary of his 10 rules summarized:

1. Only speculate if you can do it full time.
2. Ignore inside information and tips.
3. Have a complete understanding of a companies fundamentals before you buy the stock.
4. Don’t try to buy bottoms or sell tops.
5. Cut your losses quickly.
6. Focus on and buy only a few stocks.
7. Review and update your investments periodically for changes.
8. Study your tax position to know when to sell at greatest advantage.
9. Never invest all your funds. Keep a reserve.
10. Stick to the field you know best in investments.

His biography is a great read for anyone interested in this great man and master trader who counseled presidents and was a close associate of Winston Churchill. It is interesting that it shows how far ahead of his time Mr. Baruch was in not only stock speculating but also discrimination and economics.  If you are reading it for only his advice on stocks just read Chapter 19: My investment philosophy. It is one of the greatest chapters you will find anywhere on advice for successful market speculation. He will explains to readers that economic conditions do not drive prices, peoples perceptions do. Cut your losses fast. Sell your worst performers and keep your best. Know what you are investing in. You can only truly learn the rules of stock trading by experiencing the losses personally.

It isn’t a Lehman Moment if . . .

  
Analysis, Education
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It isn’t a Lehman Moment . . .

• If people are calling it one.

• Unless somewhere in Germany there is a Landesbank up to its neck in trouble.

• If the endangered firm has a friend in its hour of need.

• if the CEO isn’t issuing denials and reassurances, or blaming speculators.

• if it doesn’t contaminate an entire industry.

He concludes that “So far, Lehman is still in a class of its own” — and I agree.

Go read the entire column here.  

Niccolò Machiavelli – Adapting To Change

  
Analysis, Education
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The market environment has somewhat changed over the past few days. Former leaders are not acting as well as they used to and the jury is still out if we are headed towards a meaningful correction or if we are in the process of further constructive rotation. Further sector rotation would allow for the market to grind even higher and while doing so provide a new set of leading stocks. If you want to thrive as a trader you absolutely have to monitor changes in the market. Then you adapt and adjust your trading approach accordingly.

As I just finished reading Niccolò Machiavelli ‘The Prince’ a few  days ago I was struck by the following passage. The quote is obviously related to trading insofar as this is great insight and also a universal rule for success. You keep doing what you always did when things change – you get crushed. You adapt your approach when the environment you operate in changes – you succeed and prosper. Enjoy the quote.

This must suffice as regards opposition to fortune in general. But limiting myself more to particular cases, I would point out how one sees a certain prince today fortunate and tomorrow ruined, without seeing that he has changed in character or otherwise. I believe this arises in the first place from the causes that we have already discussed at length; that is to say, because the prince who bases himself entirely on fortune is ruined when fortune varies. I also believe that he is happy whose mode of proceeding accords with the needs of the times, and similarly he is unfortunate whose mode of proceeding is opposed to the times. For one sees that men in those things which lead them to the aim that each one has in view, namely, glory and riches, proceed in various ways; one with circumspection, another with impetuosity, one by violence, another by cunning, one with patience, another with the reverse; and each by these diverse ways may arrive at his aim. One sees also two cautious men, one of whom succeeds in his designs, and the other not, and in the same way two men succeed equally by different methods, one being cautious, the other impetuous, which arises only from the nature of the times, which does or does not conform to their method of proceeding. From this results, as I have said, that two men, acting differently, attain the same effect, and of two others acting in the same way, one arrives at his good and not the other. From this depend also the changes in fortune, for if it happens that time and circumstances are favourable to one who acts with caution and prudence he will be successful, but if time and circumstances change he will be ruined, because he does not change his mode of proceeding. No man is found able to adapt himself to this, either because he cannot deviate from that to which his nature disposes him, or else because having always prospered by walking in one path, he cannot persuade himself that it is well to leave it; and therefore the cautious man, when it is time to act suddenly, does not know how to do so and is consequently ruined; for if one could change one’s nature with time and circumstances, fortune would never change.

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