- Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.
- Use stop loss orders. Always protect a trade when you make it with a stop loss order 1 to 3 cents, never more than 5 cents away, cotton 20 to 40, never more than 60 points away. (3 to 5 points away for stocks)
- Never overtrade. This would be violating your capital rules.
- Never let a profit run into a loss. After you once have a profit of 3 cents or more, raise your stop loss order so that you will have no loss of capital. For cotton when the profits are 60 points or more place stop where there will be no loss.
- Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.
- When in doubt, get out, and don’t get in when in doubt.
- Trade only in active markets. Keep out of slow, dead ones.
- Equal distribution of risk. Trade in 2 or 3 different commodities, if possible. (Trade in 4 or 5 stocks, is possible.) Avoid tying up all your capital in any one commodity or stock.
- Never limit your orders or fix a buying or selling price. Trade at the market.
- Don’t close your trades without a good reason. Follow up with a stop loss order to protect your profits.
- Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic.
- Never buy or sell just to get a scalping profit. Never buy just to get a dividend.
- Never average a loss. This is one of the worst mistakes a trader can make.
- Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
- Avoid taking small profits and big losses.
- Never cancel a stop loss order after you have placed it at the time you make a trade.
- Avoid getting in and out of the market too often.
- Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
- Never buy just because the price of a commodity or stock is low or sell short just because the price is high
- Be careful about pyramiding at the wrong time. Wait until the commodity or stock is very active and has crossed Resistance Levels before buying more and until it has broken out of the zone of distribution before
selling more. - Select the commodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short. For stocks, select the stocks with small volume of shares outstanding to pyramid on the buying side and the ones with the largest volume of stock outstanding to sell short.
- Never hedge. If you are long of one commodity or stock and it starts to go down, do not sell another commodity or stock short to hedge it. Get out at the market; take your loss and wait for another opportunity.
- Never change your position in the market without good reason. When you make a trade, let it be for some good reason or according to some definite rule; then do not get out without a definite indication of a
change in trend. - Avoid increasing your trading after a long period of success or a period of profitable trades.
- Don’t guess when the market is top. Let the market prove it is top. Don’t guess when the market is bottom. Let the market prove it is bottom. By following definite rules, you can do this.
- Do not follow another man’s advice unless you know that he knows more than you do.
- Reduce trading after first loss; never increase.
- Avoid getting in wrong and out wrong; getting in right and out wrong; this is making double mistakes.
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rssThere's no perfect way to invest. Find what works for you & ignore everyone else
The first rule of investing is…that there are no rules. Seriously, NO RULES! With all apologies to Mr. Buffett, there are guidelines, suggestions and simple math, but no rules.
It doesn’t always seem that way. There is no shortage of talking heads (journalists, bloggers, analysts, financial advisors, etc.) telling you what to do with your hard-earned savings. But in the end it’s your money. You can invest it (or spend it) however you see fit.
- If you want to hold stocks if they hit Japan-like bubble valuation levels. You can do that.
- If you already moved 20% into cash in anticipation of a correction that never came. You can do that.
- If you are up to your eyeballs in entrepreneurial risk and want to hold other safe assets. You can do that.
- If your career is just getting started and you’re not ready to own stocks. You can do that.
- If you want to put 5% of your portfolio into a basket of cryptocurrencies. You can do that.
As Meb Faber writes: “Remember, when Mr. Market shows up at your door, you don’t have to answer….” That being said there are some simple things you can do to improve your financial life without messing with the stock market.
- If your employer offers a match for 401(k) contributions, get every penny you can.
- If choosing between two similar investment vehicles: choose the cheaper one.
- If someone ever says an investment can’t lose or is guaranteed. Walk the other way.
- If you have have a young family, buy some low cost, term life insurance.
- If you have high rate credit card, work to eliminate that debt ASAP.
Who Really Beats the Market?
Survivorship bias, or survival bias, is the logical error of concentrating on the people or things that “survived” some process and inadvertently overlooking those that did not because of their lack of visibility. This can lead to false conclusions in several different ways. – Wikipedia
There is survivor bias in looking at trading and investing performance and then there are the traders and investors that have an edge. People with an edge end up with the losses of those that rely on luck for profits.
This article is from an edited transcript of a talk given at Columbia University in 1984 by Warren Buffett.
Investors who seem to beat the market year after year are just lucky. “If prices fully reflect available information, this sort of investment adeptness is ruled out,” writes one of today’s textbook authors.
Well, maybe. But I want to present to you a group of investors who have, year in and year out, beaten the Standard & Poor’s 500 stock index. The hypothesis that they do this by pure chance is at least worth examining.
I would like you to imagine a national coin-flipping contest. Let’s assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.
Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping. (more…)