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10 Insights from Benjamin Graham

  
  Education
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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…)

A Trade or a Gamble?

  
  Education
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I love to trade a lot – which is of course a euphemistic way of saying I love to gamble. Although I have been to Vegas more than a dozen times I never laid down so much as a dollar bet in any casino. I have absolutely no interest in backjack, craps, slot machines or any other games of chance and I look down with disdain at the excited masses crowding the cavernous Vegas gambling halls. But deep down, if I am honest with myself, I have to admit that whenever I trade a lot I am just as much of a sucker as every hopeless loser that gives up his hard earned money to Steve Wynn or Sheldon Adelson

If you are constantly trading just for the sake of trading, just for the rush of being “in the game”, just for the momentarily thrill of being right you are gambling. You are trading without an edge, without any solid information and are therefore completely vulnerable to the random vagaries of price. (more…)

Trading vs gambling

  
  Education
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The difference between a trader and a gambler is frequency.  A gambler does it once.  A trader is committed to take the natural fluctuations in their bottom line.  A gambler gives up control and takes little responsibility for the outcome.  A trader sees the outcome as a learning experience.  A chance to take that knowledge and let it pay over time.  A gambler sees a success as a pay day.  A trader see it is an opportunity.  A gambler focuses on luck, a trader focus on repeatable actions.  A traders can tell the difference between an aberration, for a gambler there is no distinction.

Typical Symptoms of Egotizing Trading

  
  Education
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 . Not putting in stops. The ego doesn’t want to be proven wrong. 
· Hesitating before putting on a trade. The ego wants reassurance before it begins. 
· Overtrading. The ego wants to prove itself big time. 
· Getting stuck in a trade. The ego has intertwined itself with a trade and is holding on for dear life. It cannot cut out. The ego doesn’t want to be wrong. 
· Adding to a losing trade. The ego digs its hole deeper in a massive effort to crawl out. 
· Grabbing a profit too soon. The ego wants a pat on the back.

How do we separate our ego from our trading? How do we keep from personalizing a trade? How do we avoid personalizing all of our trading?

One way to separate your ego from your trading is to build healthy boundaries between yourself and your trading. Not only do good fences make good neighbors, good boundaries make good traders. 

A boundary sets limits, makes distinctions, informs you as to what is you and what is not you, makes clear the distinction between you and others, tells you where one thing ends and another begins. It distinguishes between past, present, and future. It lets you know that another’s ideas, values, and feelings are not necessarily yours. A boundary is flexible and permeable. It lets information flow back and forth. It allows you to listen actively without having to take on someone else’s opinions and without having to force your opinions on another person. In trading it draws a distinction between yourself and your trading, between one trade and another, between one trade and all of your trading.

One trader would see the signal to take a trade and before she could put the trade on, she’d hear a voice saying, “What if I’m wrong?” Immediately she’d feel small and diminished. The next step was simply to let the trade go by as she sat there stalled by her vulnerable ego. She needed a boundary between her self-esteem and the outcome of a trade. She needed a boundary between self worth and being wrong. With such a boundary she could give herself permission to not always have to be right. (more…)

Expectation vs Acceptance

  
  Education
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Take a second and think about those two words?  What do they mean to you?  To me there is a distinction.  I do not expect to lose, I accept a loss.  By accepting a loss I can focus forward.  I cannot worry about what I cannot control.  I cannot control if I lose, I can only control how much I lose (except in the rare case as stated above).

Many people stumble on the difference between expectations and acceptance, I know that I did.  Acceptance means I will take whatever my trading plan and ability allows me to take from the market.  Doing the work and following the plan, I expect to get the most of that acceptance.

For me, the worst thing that can happen is that I do not follow my plan because that is what I control.

Please note I am saying to just go crazy and not think about the consequences of trading. I cannot speak for every traders situation, the trader does.  I always hesitate in writing a post like this because it has the potential of being taken the wrong way. Once the work is done you should want to perform. The purpose of all the hard work is to find a way to be successful.

The Optimal Mental State For Trading

  
  Education
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One of the most important skills a professional trader needs to develop is being able to manage his or her psychological state. Effective psychological maintenance can make all the difference between trading success and failure.

In my own trading, I have found the essential state of mind I must be in to trade at an optimal level. I call it the “zero-state.”
For me, the zero-state represents an emotionally neutral condition that is neither happy nor sad, neither overconfident nor fearful. The adjective “calm” starts to come close to what I mean but the term lacks an important distinction. “Calm” is part of an adjective pair, whose partner has precisely the opposite meaning. “Stormy” is usually given as the antonym to “calm.”

The term “serenity” describes a state that comes even closer to describing the zero-state than calm. Serenity suggests a timeless eternity of “no-emotion,” where I am not connected to the outcome in a personal, meaningful way.

No conventional adjective, however, can fully describe the zero-state. An adjective describes a particular condition. I associate one adjective or condition as one half of a pair of opposites. Both words of the pair form poles on a continuum where I think of the exact center as “zero,” just as on a number line. Conceptually, the Japanese term “mu” comes fairly close to this concept of center. “Mu” has been variously described as neither yes or no, a state in-between that does not acknowledge the question being asked as one that may be answered by either yes or no, with the answer existing in a different plane of reality.

Other Useful Mental States

Other traders I know have found different mental states useful. After all, trading from an emotion-free state (like the zero-state) may not be the best mental state for you. Consider the following options for your optimal mental state in your journey of self discovery and trading mastery.

I know traders who find it necessary and useful to achieve a state of emotional alpha male competitiveness in order to enter the “ring of combat.” These traders perceive the trading environment as combative and they interpret their role accordingly. They anticipate combat, they mentally prepare for it, and they experience trading in combative terms. (more…)

The Psychology of Trading

  
  Education
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There is an old saying that the market is driven by fear and greed. Anyone that has placed more than a couple of trades will surely have experienced these two emotions. All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let’s look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios.

You go long and the market immediately goes down – you go short and the market immediately goes up. That’s 2 consecutive losses, and you are getting a little ‘anxious’ so you don’t take the ‘next’ trade. Of course, this trade is a winner. Now to make the situation worse, you then ‘chase’ the move, and as soon as you enter the trade it immediately reverses, thus giving you another loss – this is now 3 in a row. Ok, one more ‘try’ – this can’t happen on every trade can it? (more…)

Four Possible Basic Outcomes To Any Trade

  
  Education
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1) Wins initially, and keeps winning.

2) Wins initially, but then reverses to become a loss.

3) Loses initially, and keeps losing.

4) Loses initially, but then reverses to become a win.

If you average down, you only get the chance to add to trade types 2, 3 and 4.

If you average up, you only get the chance to add to trade types 1, 2 and 4.

Averaging down tends to be attractive to people, since it allows the possibility of trade type 4 i.e. a trade that goes against you, but then reverses to recover your losses and more. However, that comes at the material risk of trade type 3 i.e. the trade that never recovers.

Averaging down virtually guarantees that your biggest positions will be in trade type 3 i.e. the trades that never win. Pyramiding up avoids this risk, and also allows you to add to trade type 1 i.e. the trades that start off winning and keep winning.

To be clear, there is a legitimate strategy of picking a range of entry into a trade. Rather than picking a particular price point, you may choose to scale into a position over a range of entries. The distinction here is that you must decide this plan before the first entry is made, rather than in response to a trade going against you.

Trading Rules – For A Survival Of The Trader

  
  Education
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1. Plan your trade. Trade under the plan.

2. Write down your results.

3. Keep positive mood irrespective of your losses.

4. Do not bring the market from work to home.

5. Constantly raise level of your purposes.

6. Buy during bad news and sell during good.

7. Do not be afraid to buy at high position and to sell at low.

8. Always have well planned time for market studying.

9. Isolate yourself from opinions of others.

10. Always be quiet, persevering and consecutive; operate rationally.

11. Never enter into the market because you are bored to be out of the market. To be out of a position is also a position.

12. It is not necessary to enter and leave from the market too frequent.

13. Traders usually study not at profits, but at losses. Study every loss for improvement of the knowledge about the market.

14. Successful trading is combined and often accompanied by negative emotions. The most important element of successful trade is you are.

15. Always discipline yourself to follow certain rules in advance.

16. Do not allow big profits to turn in big losses

17. You should have the plan, you should know the plan – and you should follow it.

18. Perceive losses with advantage.

19. Halve your profit and never risk more than 50 % of profit operating against the market.

20. A key to successful trade – self-studying.

21. There is no so much distinction between getting in the market and losing there in natural abilities, that in ability to study the errors correctly. (more…)

Jack Schwager’s “Hedge Fund Market Wizards” in Two Paragraphs

  
  Education
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READANDLEARNNearly every professional Trader will agree that Jack Schwager’s “Market Wizards” series is required reading. And his latest in the series, Hedge Fund Market Wizards, continues the same tradition of excellence. I’ve nearly finished my first read-through. If you are time constrained (and who isn’t) and/or you haven’t yet picked up the book, I may be able to save you some time by offering this brief mock introduction to each Trader that nearly describes every interview in the book:

Over the past 10-15 years, Trader X has achieved an [insert mid-teens to mid-twenties]average annual return. While this return may not sound that impressive, consider that Trader X has never had a drawdown larger than [insert impressive sounding single-digit number]percent! However, Trader X’s Sharpe Ratio is extremely high. How could this be? Well, a shortcoming of the Sharpe Ratio is that it makes no distinction between upside and downside volatility and therefore understates the Trader’s true performance because volatility has been heavily skewed to the upside (which, presumably, most investors wouldn’t have a problem with).

How has Trader X achieved such an impressive Return/Risk track record? He lazer beams extreme focus to risk controls and never risks more than [insert some minuscule number]percent of his total portfolio on any individual trade.  Combining these risk controls with his attention to seeking out asymmetric trading opportunities that have the potential to yield trading gains far in excess of the maximum risked to enter the trade is what separates Trader X from his pedestrian competitors.

There ya go, you’ve basically read all 15 chapters of Hedge Fund Wizards.

Now what do you think you need to focus on?

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