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10 Mental Errors

The weakest link to any trading strategy is the trader that is suppose to be executing it. It is usually the mental and emotional errors of the trader that cause the 90% of unprofitable traders to lose money. Trading success is determined more by the mindset of the trader than their skills with math, economics, or macro knowledge.

  1. The ego takes over the trader and being right becomes the #1 priority. This causes the trader not to take losses becasue they don’t want to be proven wrong.
  2. Greed causes traders to trade too big because they want to make a huge amount of money in one trade.
  3. Fear causes a trader to exit to early with a very small profit because they are afraid it will disappear.
  4. Discouragement causes a trader to quit before they have given themselves or their systems enough time to win.
  5. Coat tailing is when a trader follows a guru’s trades instead of learning to trade correctly themselves.
  6. Style drift is when a trader changes their method instead of sticking to it and letting it play out when the right market environment emerges.
  7. Arrogance leads a trader to trade too big and take on too much risk, this usually happens after a big winning streak or outsized win. (more…)

Favorite Wall Street Movies

Wall Street Movies: After a long day at the desk, what’s more relaxing than kicking back and watching a movie about investing or trading? Here are 4 flicks for your favorite keyboard jockey:

– Eddie Murphy Trading Places ($9) Only tangentially related to trading, but filled with lots of oft quoted lines, this comedy is good for everyone.

– Wall Street ($10) Blue Horseshoe loves Anacott Steel. Dated, but watchable. Skip the 2010 version — its awful.

– Boiler Room ($6) Know a retail stock jockey? This gritty flick will show him what the bad old days were like in the land of penny stocks. A cautionary tale with a great cast.

– Wolf of Wall Street ($14) Director Martin Scorsese uses Leonardo DiCaprio, Jonah Hill, Margot Robbie and Matthew McConaughey to great effect in this tale, based on real life story, of a talented salesman seduced by fast money and penny stocks.

– Margin Call ($7) This 2011 film set during the financial crisis has already been called the greatest Wall Street movie ever made.

– The Big Short The Great FInancial Crisis gets the Michael Lewis treatment . . .

10 -Trend Following Commandments

1.    You shall back test and develop quantify robust trend trading systems that are profitable over the long term.
2.    You shall identify and follow the long term trend in the markets you trade, and have no guru that you bow down to.
3.    You shall not try to predict the future, that is a fool’s game, but follow the current price trend.
4.    You shall remember the stop loss to keep your capital safe from destruction; you shall know your exit level before your entry is taken.
5.    Follow your trend following system all the days that you are trading, so that through discipline you will be profitable.
6.    You shall not give up on your trading system because of a draw down.
7.    You shall not change a winning system because it has had a few losing trades.
8.    You shall trade with the principles that have proven to work for successful traders. Manage risk, go with the trend, and diversify so your days in the market will be long.
9.    You shall keep the faith in your trend following system even in range bound markets; a trend will begin anew eventually.
10.    You shall not covet fundamentalist’s valuations, Blue channels talking heads, newsletter predictions, Holy Grails, or the false claims of any of the black box systems.

Elena Chirkova ,, The Warren Buffett Philosophy of Investment-Book Review

Elena Chirkova, an associate professor of finance in the Higher School for Economics in Moscow, originally published this book in Russia, where it quickly became a bestseller. Although I have no idea how much has been written about Warren Buffett in Russian, I think it’s safe to say that it has to be a lot less than has been written about him in English. Russians may have needed this book. Do Americans and English speakers in general? Perhaps surprisingly, yes. 

The Warren Buffett Philosophy of Investment: How a Combination of Value Investing and Smart Acquisitions Drives Extraordinary Success(McGraw-Hill, 2015) is a carefully constructed analysis of the key elements of Buffett’s investing prowess. The author relies heavily on previously published work, but she uses this material to present one of the most coherent accounts of Buffett’s achievement that I have read.

Take, for instance, her chapter on Berkshire Hathaway’s use of debt. When Berkshire purchases a company, “Buffett recommends that the acquired company reduce and gradually end its relationship with its bank. Berkshire becomes the company’s banker. This enables the company to take advantage of Berkshire’s credit rating.”

Chirkova continues: “A business achieves its best results when both sides of the balance sheet are well managed. Berkshire Hathaway pays considerable attention not only to searching for good investments, but also to optimizing its capital structure. This optimization requires selecting the appropriate level of debt. Although Buffett’s views on borrowing may suggest otherwise, Berkshire’s level of leverage cannot be regarded as very low.” (p. 173) Between 1976 and 2011 it averaged about 37.5%. Nearly all of this leverage came from the capital float of Berkshire’s insurance companies. In more years than not, the cost of this “borrowing” was negative, in some years highly negative, “as payouts were far lower than the premiums collected.” (p. 178)

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