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Reminiscences of a Stock Operator by Edwin Lefevre -My favorite 15 quotes

  
Analysis, Education
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1/ The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professional.

2/ In this business a man has to think of both theory and practice. A speculator must not be merely a student, he must be both a student and a speculator.

3/ When you know what not to do in order not to lose money, you begin to learn what to do in order to win.

4/ Not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions.

5/ They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.

6/ When you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford.

7/ The big money was not in the individual fluctuations but in the main movements— that is, not in reading the tape but in sizing up the entire market and its trend. It never was my thinking that made the big money for me. It always was my sitting.

8/ One of the most helpful things that anybody can learn is to give up trying to catch the last eighth—or the first. These two are the most expensive eighths in the world.

9/ The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.

10/ I don’t buy long stock on a scale down, I buy on a scale-up. Remember that stocks are never too high for you to begin buying or too low to begin selling.

11/ When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions—or my prepossessions either—to do any thinking for me

12/ The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.

13/ A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him.

14/ A man can excuse his mistakes only by capitalizing them to his subsequent profit.

15/ Of all speculative blunders, there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.

Cognitive Biases That Affect Traders

  
  Education
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cognitive_psychology_irrational
Humans have weaknesses that hamper their trading capabilities. Many were developed in ancient times and were important for survival. I will enumerate the most important:
1) Loss Aversion: the strong tendency for people to prefer avoiding losses over acquiring gains

2) Sunk Cost Effect: The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future

3) Disposition Effect: the tendency for people to lock in gains and ride losses

4) Outcome Bias: The tendency to judge a decision by its outcome rather then by the quality of the decision at the time it was made

5) Recency Bias: the tendency to weigh recent data or experience more than earlier data or experience

6) Anchoring: the tendency to rely too heavily, or anchor, on readily available information (more…)

8 Key cognitive biases to be aware of…

  
  Education
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  1. Loss Aversion… A preference for avoiding losses over acquiring gains
  2. Sunk Cost Effect… Treating money already spent as more valuable than money that may be spent in the future
  3.  Disposition Effect… A tendency to lock in gains and ride losses
  4.  Outcome Bias… A tendency to judge a decision by its outcome rather than the quality of the decision at the time it was made
  5.  Recency Bias… A tendency to weigh recent data or experience more than earlier data or experience
  6.  Anchoring… A tendency to rely too heavily or anchor on readily available information
  7.  Bandwagon effect… A tendency to believe things because other people believe them
  8.  Belief in Law of Small numbers… The tendency to draw unjustified conclusions from too little information

Biases That Cause You To Make Mistakes

  
  Education
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You are your own worst enemy.

Those are the six most important words in investing. Shady financial advisors and incompetent CEOs don’t harm your returns a fraction of the amount your own behavior does.

Here are 15 cognitive biases that cause people to do dumb things with their money.

1. Normalcy bias
Assuming that because something has never happened before, it won’t (or can’t) happen in the future. Everything that has ever happened in history was “unprecedented” at one time. The Great Depression. The crash of 1987. Enron. Wall Street bailouts. All of these events had never happened… until they did. When Warren Buffett announced he was looking for candidates to replace him at Berkshire Hathaway, he said he needed “someone genetically programmed to recognize and avoid serious risks, including those never before encountered.“ Someone who understands normalcy bias, in other words.

2. Dunning-Kruger effect
Being so bad at a task that you lack the capacity to realize how bad you are. Markus Glaser and Martin Weber of the University of Mannheim showed that investors who earn the lowest returns are the worst at judging their own returns. They had literally no idea how bad they were. “The correlation between self-ratings and actual performance is not distinguishable from zero” they wrote.

3. Attentional bias
Falsely thinking two events are correlated when they are random, but you just happen to be paying more attention to them. After stocks plunged 4% in November 1991, Investor’s Business Daily blamed a failed biotech bill in the House of Representatives, while The Financial Times blamed geopolitical tension in Russia. The “cause” of the crash was whatever the editor happened to be paying attention to that day.

4. Bandwagon effect
Believing something is true only because other people think it is. Whether politicians or stocks, people like being associated with things that are winning, so winners build momentum not because they deserve it, but because they’re winning. This is the foundation of all asset bubbles. (more…)

Hank Pruden on "Behavioral Finance" and Technical Analysis

  
  Education
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Hank Pruden’s theory of “Behavioral Finance” proposes that human flaws are consistent, measurable and predictable, and being aware of and utilizing this phenomenon can benefit a trader.

“For the better part of 30 years, the discipline of finance has been under the thrall of the random walk\cum efficient market hypothesis. Yet enough anomalies piled up in recent years to crack the dominance of the random walk. As a consequence, the popular press has been reporting the market behavior,” said Pruden. One of these new methods discussed is “behavioral finance.”

Pruden is a professor in the School of Business at Golden Gate University in San Francisco. He was a featured speaker at the 20th annual Telerate Seminars Technical Analysis Group Conference (TAG 20). (more…)

7 Different common emotional mistakes:

  
  Education
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7emotion

1. Emotional bias: the tendency to believe the things that make you feel good and to disregard things that make you feel bad. In trading terms, this means ignoring the bad news and focusing on the good news. It’s called losing objectivity; you don’t recognise when things go wrong because you don’t want to.

2. Expectation bias: the tendency to believe in things that you expect. In financial terms this means not bothering to analyse, test, measure or doubt the conclusion you expect or hope for. It is also known as the law of small numbers – believing in something with little real evidence.

3. The disposition effect: the tendency to cut your profits and let your losses run – the opposite of what a trader should be doing. Making small profits and big losses is a recipe for disaster.

4. Loss aversion: the tendency to value the avoidance of loss more highly than the making of gain. (more…)

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