That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair, are all in strict accord with age-old tradition.
A trading philosophy is something that cannot just be transferred from one person to another; it’s something that you have to acquire yourself through time and effort.
The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs.
Opportunities change, strategies change, but people and psychology do not change. If trend-following systems don’t work well, something else will. There’s always money being lost, so someone out there has to win.
Gil Blake, New Market Wizards
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|The market is not a weighing machine, on which the value of each issue is recorded by an exact impersonal mechanism, in accordance with its specific qualities. Rather, should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.|
Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.” ~ Jesse Livermore
“Wealth and rank are what people desire, but unless they are obtained in the right way they may not be possessed.” ~ Confucius
“Man has the power to act as his own destroyer—and that is the way he has acted through most of his history.” ~ Ayn Rand
“It is no measure of health to be well adjusted to a profoundly sick society.” ~ Jiddu Krishnamurti
“Men in the game are blind to what men looking on see clearly.” ~ Chinese Proverb
“The most exquisite paradox… as soon as you give it all up, you can have it all. As long as you want power, you can’t have it. The minute you don’t want power, you’ll have more than you ever dreamed possible.” ~ Ram Dass
“If thou wilt make a man happy, add not unto his riches but take away from his desires.” ~ Epicurus
“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.” ~ Benjamin Graham
“The investor’s chief problem – and even his worst enemy – is likely to be himself.” ~ Benjamin Graham
“The ignorant mind, with its infinite afflictions, passions, and evils, is rooted in the three poisons. Greed, anger, and delusion.” Bodhidharma
“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” ~ Ayn Rand
“Money often costs too much.” Ralph Waldo Emerson
Personally, I believe it to be futile to fight greed — something that is ingrained in human nature. We can only acknowledge greed’s existence, choose our own behaviors as individuals, and react to its occurrence — it can not be prevented. Greed will simply manifest into a different form.
Benjamin Graham doesn’t need an introduction. His sober look at the stock market has built an enormous following and for a good reason.
1. “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” – It is true that perfumes come and go out of popularity, but no trend lasts forever. There are trends that last 3 months; there are trends that last 3 years.
2. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” – it depends on to what level has the expected growth been already discounted. The truth is that it is really hard to forecast growth in quickly developing businesses. The market always overdiscounts at some point, but in the meantime trend followers could make a killing. You never know how long or how fast a trend could go.
3. The only constants in the markets are change and uncertainty. Not only business environment changes, but also people’s perceptions of stocks change.
Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.
4. Different catalysts matter for the different time frames:
Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
5. The difference between a trader and investor
The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
6. How to think about risk (more…)
Warren Buffett says that one of the luckiest days of his life was when he was 19-years-old and happened to have picked up Benjamin Graham’s book, The Intelligent Investor.
That book changed his investment philosophy and his whole life.
He says that had it not been for the book, he would’ve been a different person at a different place.
Consider this excerpt:
Benjamin Graham, who believed in buying wonderful companies at a fair price rather than a fair company at a wonderful price, defines an investor as “an individual whose investment provides two quantitative qualities – safety of principal and an adequate rate of return.” There are many intricacies within business ownership investments, but does everyone in the stock market consider these particulars when investing in business ownership? Of course not, because not everybody in the stock market is an investor. Individuals who desire to become investors must enter the arena with goals that have a long-term investment horizon. Warren Buffett, a global financial market guru and head of Berkshire-Hathaway, puts it best when he says: “It’s bad to go to bed at night thinking about the price of a stock. We think about the value of a company and the company results; the stock market is there to serve you, not instruct you.”Hence, an investor does not buy a price and will not be affected by the ups and downs of the market. A sound investor buys well-managed businesses, with strong earnings growth and significant barriers to entry that will provide long-term security. A ‘purchaser of price’ is a speculator; a ‘purchaser of solid businesses’ with sound fundamentals is an investor.Mark Croskery
Warren Buffett (Net Worth $39 Billion) – “‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
George Soros (Net Worth $22 Billion) – ”I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
David Rubenstein (Net Worth $2.8 Billion) – “Persist – don’t take no for an answer. If you’re happy to sit at your desk and not take any risk, you’ll be sitting at your desk for the next 20 years.”
Ray Dalio (Net Worth $6.5 Billion) – “More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”
Eddie Lampert (Net Worth $3 Billion) – “This idea of anticipation is key to investing and to business generally. You can’t wait for an opportunity to become obvious. You have to think, “Here’s what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?”
T. Boone Pickens (Net Worth $1.4 Billion) – “The older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.”
Charlie Munger (Net Worth $1 Billion) – “If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.”
David Tepper (Net Worth $5 Billion) – “This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”
Benjamin Graham – “The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”
Louis Bacon (Net Worth $1.4 Billion) – “As a speculator you must embrace disorder and chaos.”
Paul Tudor Jones (Net Worth $3.2 Billion) – “Were you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt. After a while size means nothing. It gets back to whether you’re making 100% rate of return on $10,000 or $100 million dollars. It doesn’t make any difference.”
Bruce Kovner (Net Worth $4.3 Billion) – ” My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks. The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.”
Rene Rivkin (Net Worth $346 Million) – “When buying shares, ask yourself, would you buy the whole company?”
Peter Lynch (Net Worth $352 Million) – “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”
John Templeton (Net Worth $20 Billion)– “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”
John (Jack) Bogle (Net Worth $4 Billion) – “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
Benjamin Graham: It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can.
The Oracle of Omaha warns investors against an incredibly common mistake: You shouldn’t try to time the market. He says it’s a mistake to predict or listen to others who predict the short-term movement of stocks. By the same token, he says you shouldn’t try to flip stocks like high-frequency traders do.
Instead, Buffett says the best thing the average investor can do is buy an index fund over time. That’s it. From USA Today: (more…)
- “Time is your friend; impulse is your enemy.” John (Jack) Bogle
- “When reward is at its pinnacle, risk is near at hand.” John (Jack) Bogle
- “Rule no. 1 is never loose money. Rule no. 2 is never forget rule number one.” Warren Buffett
- “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.” Warren Buffett
- “I paraphrase Lord Rothschild: The time to buy is when there is blood on the streets.” David Dreman
- “It is absurd to think that the general public can ever make money out of market forecasts.” Benjamin Graham
- “The whole secret to winning and losing in the stock market is to lose the least amount possible when you are not right.” William J. O Neil
- “It is not whether you are right or wrong that is important, but how much money you make when you are right and how much you lose when you are wrong.” George Soros
- “If you want to have a better performance than the crowd, you must do things differently from the crowd.” John Templeton
- “My first rule is not to lose money. Losing an opportunity is minor in comparison, because there are always new opportunities around the corner.” Burt Dohmen
- “Experienced traders control risk, inexperienced traders chase gains.” Alan Farley
- “Most traders take a good system and destroy it by trying to make it into a perfect system.”
- “Trade what you see, Not what you think”
- “A Technician is an Artist and Technical Analysis is the Super Skill of discovering sharp and compact Charts and Patterns depicting Trends and Targets with Precision and Perfection.”
- “Identifying the “Rhythmic Flow” of Financial Instruments for skimming the crème, quietly and consistently is the fascinating nature of the Technician’s profession.”
- “Like any craft, such as piano playing, perfection may be elusive – I’ll never play a piece perfectly, and I’ll never buy the low and sell the high – but consistency is achievable if you practice day in and day out.”
- “You never need to chase a trade. The market has plenty of opportunities. The money runs out before the opportunities do.”
- “Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake.”
- “Always understand the risk/reward of the trade as it now stands, not as it existed when you put the position on.”
- “At all levels of play the secret of success lies not so much in playing well as in not playing badly.”