rss

Buffett on Stock Prices

Its early in this potential correction, but let me remind you of Buffett’s interesting (1997) comments:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

–Warren Buffett, chairman’s letter, Berkshire Hathaway annual report, 1997 

 
Its worth thinking about, regardless of whether the recent investor nervousness turns into something more significant . . .

SIMPLICITY IS SUPREME

Trading is a mental game. Successful traders know this.
They spend a large majority of their time creating an environment of emotional calm. One of the many ways they do so is by keeping things simple because as anyone who has traded for any length of time knows the markets are complicated.
Successful traders read books that help them hone their mental skills. One such book I recommend is Jim Afremow‘s The Champion’s Mind. 
For instance, here is his take on simplicity.

Keep everything as basic as possible.  Keep the process simple and straightforward.  Be on a focused mission. Specialize. Get rid of the useless “noise”.
Be a Champion Trader.

FEAR

Fear is the main source of superstition, and oneof the main sources of cruelty. To conquer fear is the beginning of wisdom… Bertrand Russell

Fear is a misunderstood emotion, and one that gets a pretty bad rap these days. We owe our survival as a species to the hard-wired fear that protected and kept us safe from physical threats for hundreds of thousands of years.  But what about the litany of fears that plagues traders every day? Fear of losing, of watching profits disappear, making mistakes, missing out, taking profits too soon…the list goes on.

Perhaps the larger question is this: If there is so much fear and almost every trader feels fear, why do millions of people continue to trade?  The answer lies in the way that fear is perceived. 

For many, fear is a predator that is constantly lurking, sneaking up on them and ready to attack at any moment.  In this brain set, they are always running away from fear, crouching in a corner or looking for a safe place to hide. Fear blinds them to opportunity in much the same way that greed blinds them to danger.

 Fear is that little darkroom where negatives are developed… Ferdinand Pritchard (more…)

10 Secrets of Trading

A ROBUST METHOD: Much like a casino you must have an edge in your trading. Your system must be a robust one with the odds on your side either through many more wins than losses with equal capital at risk or small losses and big wins over a long period of time.

CONFIDENCE: You must have the confidence in your method that it is a winner in the long term through proper research or back testing. You also must have confidence in yourself to execute the plan.

DISCIPLINE: A trader must have the discipline to take their predetermined entries and exits. The trader is the weakest link in trading no method works with out the discipline to execute it in a live market.

TRADING PLAN: A trader has to have a plan on what they will trade, how much they will trade, the time frame they are trading on and rules that they will follow for entries and exits.

EMOTIONAL CONTROL: The winning trader must have the ability to not make decisions based on emotions. Winning traders still feel emotions but have the ability to stay on their trading plan instead of making decisions based on fear or greed in the heat of market action.

RISK/REWARD: The best trades to take have the potential to win $3 for each $1  risked. With this ratio a trader can lose on two trades our of three and still make money. This is a defined edge and keeps the trader looking for only the best instruments to trade and taking the best entry points as part of their system.

EGO CONTROL: The destruction of many traders is when they believe they do not need risk management or rules and that they are smarter than the market and begin taking trades based purely on their opinions instead of principles, price action, and chart action. Good traders are humble traders.

RISK OF RUIN: The best traders understand the best way to ensure their survival in trading is with only putting 1% of their total trading capital at risk in any one trade either through great entries with tight stop losses or trading smaller position sizes. Nothing will determine a trader’s success more than their ability to survive a string of 10-15 losses in a row.

MASTER YOUR OWN METHOD: Trader know thyself, know who you are, the trading method that fits your personality and risk tolerance and become a master of that method. Do not wander around when it gets tough, be faithful to your edge. Be the best that you can be at what you are whether you are a day trader, trend follower, option trader, momentum trader, chart reader, technical analyst, or fundamentalist. I know of traders that got reach with any of these methods but do not know any that got rich trading multiple methods.  Pick one, master one.

PERSEVERANCE: Even with all the elements in place there will be rough months and even rough years for almost all traders. Sometimes right at the beginning of a new traders first plunge into the market the price action can act completely contrary to profits for that traders method. All the traders that ended up rich have one thing in common, they did not quit trading until they became rich.


Five Fatal Flaws

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, ‘How do you stop the Hand?’ Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

The killer flaws? They are:

Fatal Flaw No. 1 – Lack of Methodology
Fatal Flaw No. 2 – Lack of Discipline
Fatal Flaw No. 3 – Unrealistic Expectations
Fatal Flaw No. 4 – Lack of Patience
Fatal Flaw No. 5 – Lack of Money Management