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NUGGETS OF WISDOM

  
  Education
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1.) It’s not valuation that matters.  It’s risk and reward in the growth cycle of each company.   – Leigh Drogen “The Coming Tech Crash”
2.)  Most importantly for the upside of the market, no one owns stocks.
There are millions of traders flipping stock with institutions in high growth names, but there are no rational conversations about the growth opportunities.
3.)  The media latches on to Steve Jobs not distributing the cash and thank god he laughs in their faces. Why should he trust the public with that cash. The public has proven to be imbeciles.
4.) Err on side of caution, hit the gas when deemed apropos, and don’t paradiddle. – A comment to Chessnwine’s post , “You call yourself a trader, you sonofabitch”
5.) Nietzsche was right- what doesn’t kill you makes you stronger.  – Pension Pulse, “Put Yourself First“
6.) “You’ve got to have the passion to do your time. If you haven’t done the time, you just can’t get there.” He goes on to argue that only by paying one’s dues through time, effort, devotion, and experience can we, “develop the rich experiences that make life meaningful.” – Top 10 Things That Determine Happiness
7.)Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories. – Robert Schiller, via Stone Street Advisors ” Driven by Stupidity“
8.) No company gets to be worth twice as much in 60 days as it was before to any intelligent person, so when that happens, we take advantage of it. – Steve Wynn , via Stone Street Advisors “ Driven by Stupidity“
9.) Keep in mind that you dont have to be sending orders to be working.  Avoid nurturing the belief that nonparticipation is not working.  This leads to overtrading or compulsion which is the practice of poor risk management.
10.) A series of loses first eats into your account balance, and then begins to eat into what is most important of all: your confidence.  Trade with confidence or don’t trade at all.  If you cant take the heat, stay out of the kitchen.

Should You Trust Your Trading Intuition?

  
Analysis, Education
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I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.

Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent.
This is an essential aspect of decision-making. If we can’t incorporate the lessons of the past into our future decisions, then we’re destined to endlessly repeat our mistakes.

Nothing can replace personal experience: (more…)

Trading Madness

  
  Education
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Psychological BiasEffect on Investment BehaviorConsequence
OverconfidenceTrade too much.  Take too much risk and fail to diversifyPay too much in commissions and taxes.  Susceptible to big losses
AttachmentBecome emotionally attached to a security and see it through rose-colored glassesSusceptible to big losses
EndowmentWant to keep the securities receivedNot achieving a match between your investment goals and your investments
Status QuoHold back on changing your portfolioFailure to adjust asset allocation and begin contributing to retirement plan
Seeking PrideSell winners too soonLower return and higher taxes
Avoiding RegretHold losers too longLower return and higher taxes
House MoneyTake too much risk after winningSusceptible to big losses
Snake BitTake too little risk after losingLose chance for higher return in the long term
Get EvenTake too much risk trying to get break evenSusceptible to big losses
Social ValidationFeel that it must be good if others are investing in the securityParticipate in price bubble which ultimately causes you to buy high and sell low
Mental AccountingFail to diversifyNot receiving the highest return possible for the level of risk taken
Cognitive DissonanceIgnore information that conflicts with prior beliefs and decisionsReduces your ability to evaluate and monitor your investment choices
RepresentativenessThink things that seem similar must be alike.  So a good company must be a good investmentPurchase overpriced stocks
FamiliarityThink companies that you know seem better and saferFailure to diversify and put too much faith in the company in which you work
   
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