Here are the rules – they are not unique or new. They are time tested and successful investor approved. Like Mom’s chicken soup for a cold – the rules are the rules. If you follow them you succeed – if you don’t, you don’t.
It seems like a simple thing to do but when it comes down to it the average investor sells their winners and keeps their losers hoping they will come back to even.
You haggle, negotiate and shop extensively for the best deals on cars and flat screen televisions. However, you will pay any price for a stock because someone on television told you too. Insist on making investments when you are getting a “good deal” on it. If it isn’t – it isn’t, don’t try and come up with an excuse to justify overpaying for an investment. In the long run – overpaying will end in misery.
As much as our emotions and psychological makeup want to always hope and pray for the best – this time is never different than the past. History may not repeat exactly but it surely rhymes awfully well.
As with item number 2; there is never a rush to make an investment and there is NOTHING WRONG with sitting on cash until a good deal, a real bargain, comes along. Being patient is not only a virtue – it is a good way to keep yourself out of trouble.
Any good investment is NEVER dictated by day to day movements of the market which is merely nothing more than noise. If you have done your homework, made a good investment at a good price and have confirmed your analysis to correct – then the day to day market actions will have little, if any, bearing on the longer-term success of your investment. The only thing you achieve by watching the television from one minute to the next is increasing your blood pressure.
Taking RISK in an investment or strategy is not equivalent to how much money you will make. It only relates to the permanent loss of capital that will be incurred when you are wrong. Invest conservatively and grow your money over time with the LEAST amount of risk possible.
The populous is generally right in the middle of a move up in the markets but they are seldom right at major turning points. When everyone agrees on the direction of the market due to any given set of reasons – generally something else happens. However, this also cedes to points 2) and 4); in order to buy something cheap or sell something at the best price – you are generally buying when everyone is selling and selling when everyone else is buying.
These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them you will succeed in your investment goals in the long run. You most likely WILL NOT outperform the markets on the way up but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing – it is impossible to replace lost capital.
As an investor, it is simply your job to step away from your “emotions” for a moment and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question, but how you manage the inherent risk.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham
Ever wonder what goes on behind the scenes? What kind of thinking and reasoning goes behind creating those sophisticated financial trading forumlas that create billions of dollars every year? Even more, do you wonder what kind of math wizard it takes to create these formulas?
Quants, or quantitative managers, are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall st.
The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behaviour. Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light.
Below is a pretty interesting video that reveals the type of people and thinking that goes into creating these forumlas.
Always the contrarian, Marc Faber’s investing advice for 2010 is this — listen to the experts, and then do the opposite. Faber, the editor of The Gloom Boom & Doom Report, wrote in his most recent January newsletter that he was bullish on U.S. stocks.
Nothing lasts forever, though.
He’s changed his mind after participating in this week’s Barron’s round-table discussion. “Everybody was looking for further gains in stocks,” he tells Henry in this clip. That opinion is also reflected by Bloomberg’s latest investor survey, which registered its highest level of bullish sentiment since the survey began in 2007.
That overwhelming consensus worries Faber. He now thinks a correction in U.S. stocks could come much sooner than most predict. Momentum players who are driving the market could “pull the trigger relatively quickly,” he says. He also observes that the charts of stocks favored by momentum investors, like Google, RIM, Apple and Amazon, look to be flattening out.
Overall, 2010 will not be one for the record books, as 2009 was. He’s looking at a more normal 5%-10% rate of return for global investors.
1) You need an edge
As Peter Lynch once stated:
“Investing without research is like playing stud poker and never looking at the cards.”
He’s absolutely right. There is a clear parallel between how successful poker players operate and those who are generally less sober, more emotional, and less expert. The financial markets are nothing more than a very large poker table where your job is to take advantage of those who allow emotions to drive their decisions and those who “bet recklessly” based on “hope” and “intuition.”
2) Develop an expertise in more than one area
The difference between winning occasionally and winning consistently in the financial markets is to be able to adapt to the changing market environments. There is no one investment style that is in favor every single year – which is why those that chase last years performing mutual funds are generally the least successful investors over a 10 and 20 year period.
Flexibility is the cornerstone of long-term investing success and investors that are unwilling to adapt and change are doomed to extinction – much like the dinosaur. Having a methodology that adapts to changing market environments will separate you from weak players and allow you to capitalize on their mistakes.
As the great Wayne Gretzky once said: Continue reading »