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G. C. Selden Trading Psychology – Hunches And Gut Feelings

Recently most traders probably have spent a great deal of time managing risk and emotions. I know I have. When it comes to correctly gauging and dealing with emotions it is paramount to analyze your reactions in a detached way. The best way to get objective insight is to imagine taking a step back and then ‘watching yourself.’ It’s as if you were your own mentor or trading coach. This is not an easy task. Good results require emotional detachment, a lot of experience and the ability to honestly assess the degree of trading proficiency you have attained. Ultimately it will tell you what those gut feelings you are occasionally experiencing really are worth. That’s exactly what G.C. Selden addresses at the end of his classic trading book : ‘Psychology of the Stock Market’ which was first published in 1912. Here’s an excerpt dealing with ‘hunches and gut feelings.’ Lots of additional and valuable insight for traders is provided. Enjoy! 

An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.

Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind. (more…)

Warren Buffett's Letter to Shareholders

warren_buffett

An excerpt:

Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.*

Berkshire’s recent acquisition of Burlington Northern Santa Fe has added at least 65,000 shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them. Berkshire has adhered to these principles for decades and will continue to do so long after I’m gone.

In this letter we will also review some of the basics of our business, hoping to provide both a freshman orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.

Read Buffett’s full letter to shareholders here.


Wall Street Its Mysteries Revealed Its Secrets Exposed By William C Moore 1921 – Greed

It’s been a while since I last posted an excerpt or quoted from one of the trading books I own. Tonight’s small excerpt is from the book: ‘Wall Street. Its Mysteries Revealed: Its Secrets Exposed’ published in New York, 1921 by William C. Moore. The book contains short and to the point chapters like: ‘The crowd mind’, ‘How the public speculates’, ‘Mental suggestion’ and ‘Market advice’ to name but a few. I chose the one on ‘Greed’ as I consider it great advice and timeless wisdom. Enjoy.

Greed p. 123-124

An avaricious or keen desire for profits is one of the most prevalent causes of failure in speculation. This weakness is general among traders. They desire “just a little more ” profit. If the stock or commodity bought advances, then that’s proof to them that it will advance further and so they hang on. They usually overstay and thus miss their market. If they fail to obtain the top price and it reacts, then they assure or console themselves by the expression: “Oh, it will come back.” It may “come back” but often it does not, and instead, declines to below the purchase price and frequently results in a loss. The same observations apply to a short sale for a further anticipated decline. It is a good policy to be satisfied with a reasonable profit and be willing to leave some for the other fellow. The market is always there and other opportunities for making profits will present themselves while the greedy trader is waiting to get the last eighth.

Greed leads to disaster in another way. A speculator has started in to buy at the inception of a bull movement. He makes money. The more he makes, the more avaricious he becomes as the market moves forward. His confidence in himself increases until he develops a mental state known in the vernacular as “big head” or “swelled head”. He now has unbounded confidence in himself and “plays the limit”. Soon thereafter the market culminates at the top and the trend reverses, but Mr. Swelled Head is ignorant of this, so continues to buy on set-backs instead of selling on rallies. A drastic slump follows and Mr. B.H. goes to the scrap pile – BUSTED.

Greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction. – Erich Fromm

Intuition Discipline Confidence Risk

Going back to the roots of what ‘risk’ is all about. As I suggested rereading Justin Mamis’ passage of ‘When to Sell’ yesterday, I did reread passages of ‘The Nature of Risk’ probably my all time favourite book which was also written by Justin Mamis. Here is a small excerpt. Enjoy!

Justin Mamis: ‘The Nature of Risk’ page 80:

Intuition although seemingly spontaneous, apparently emotional, stems from a form of “information” that has become built-in from past experience. Discipline means choosing what to do unencumbered by the fear of making a mistake. Confidence means trusting our intuition that what we “see” is what we “know.” There’s no escaping to the external, to the objective, and no standing on the shaky ground of emotions. So the question becomes, How do we create within ourselves the heroic condition of confidence wherein risk is not danger but life?

Wall Street Its Mysteries Revealed Its Secrets Exposed By William C Moore 1921 – Greed

Small excerpt is from the book: ‘Wall Street. Its Mysteries Revealed: Its Secrets Exposed’ published in New York, 1921 by William C. Moore. The book contains short and to the point chapters like: ‘The crowd mind’‘How the public speculates’‘Mental suggestion’ and ‘Market advice’ to name but a few. I chose the one on ‘Greed’ as I consider it great advice and timeless wisdom. Enjoy.

Greed p. 123-124

An avaricious or keen desire for profits is one of the most prevalent causes of failure in speculation. This weakness is general among traders. They desire “just a little more ” profit. If the stock or commodity bought advances, then that’s proof to them that it will advance further and so they hang on. They usually overstay and thus miss their market. If they fail to obtain the top price and it reacts, then they assure or console themselves by the expression: “Oh, it will come back.” It may “come back” but often it does not, and instead, declines to below the purchase price and frequently results in a loss. The same observations apply to a short sale for a further anticipated decline. It is a good policy to be satisfied with a reasonable profit and be willing to leave some for the other fellow. The market is always there and other opportunities for making profits will present themselves while the greedy trader is waiting to get the last eighth. (more…)

Justin Mamis: ‚When to Sell’ – Inside Strategies For Stock market Profits

Time for another excerpt post taken from “When to sell” from Justin Mamis. Probably my favourite author. Do yourself a favour. Buy all his books and read them. Repeat the process. The best education you can get. This will make you a better trader and will provide you with tremendous insight into how markets work and how to deal with all the psychological aspects of trading.

Justin Mamis: ‚When to Sell’ – Inside Strategies For Stock market Profits

Chapter 2: ‘Right is wrong’ pages 23-24

With experience, and with some grasp of what has consistently affected your judgment in the past, you should be able to determine at which times and under what conditions you function best…and when you should be extra-careful, or even stay away entirely. One important thing every professional knows, or ought to know since it is his business to know, is that he doesn’t have to play the game every single minute of every day. The advent of desktop machines and their ability to present right in your face what is actually happening every single minute of every day – and some with bells and whistles to call your attention to some petty and momentary thing that has just happened – has had its effect, though: the less experienced, the less disciplined, have become increasingly short-term oriented and excitable, more, in fact, akin to what we believed in the past that the public could be criticized for, of playing a game, of having a predilection for continually being in the market in one way or another. “Isn’t there one stock worth buying?” was a common question during the massive 1973-74 bear market, and still is. There is no rule that says you always have to have action; yet that is perhaps the most disastrous of all the common errors we’ve noticed. Rather than continually confronting the market on its own inscrutable terms, stop and ask yourself what you know, whether what you know is enough to act upon, and how you are relating to it. Maybe it is a period when the market’s personality conflicts with yours, or something in your extra-market life is hampering your ability to view stock action objectively, or, simply, perhaps it’s a time when the market’s course isn’t clear to anyone. Then it is best to step aside. You owe it to yourself to find out exactly how ready and able you are to play, because it’s yourself you end up playing against.

Greed

 Small excerpt is from the book: ‘Wall Street. Its Mysteries Revealed: Its Secrets Exposed’ published in New York, 1921 by William C. Moore. The book contains short and to the point chapters like: ‘The crowd mind’‘How the public speculates’‘Mental suggestion’ and‘Market advice’ to name but a few. I chose the one on ‘Greed’ as I consider it great advice and timeless wisdom. Enjoy.

Greed p. 123-124

An avaricious or keen desire for profits is one of the most prevalent causes of failure inspeculation. This weakness is general among traders. They desire “just a little more ” profit. If the stock or commodity bought advances, then that’s proof to them that it will advance further and so they hang on. They usually overstay and thus miss their market. If they fail to obtain the top price and it reacts, then they assure or console themselves by the expression: “Oh, it will come back.” It may “come back” but often it does not, and instead, declines to below the purchase price and frequently results in a loss. The same observations apply to a short sale for a further anticipated decline. It is a good policy to be satisfied with a reasonable profit and be willing to leave some for the other fellow. The market is always there and other opportunities for making profits will present themselves while the greedy trader is waiting to get the last eighth.

Greed leads to disaster in another way. A speculator has started in to buy at the inception of a bull movement. He makes money. The more he makes, the more avaricious he becomes as the market moves forward. His confidence in himself increases until he develops a mental state known in the vernacular as “big head” or “swelled head”. He now has unbounded confidence in himself and “plays the limit”. Soon thereafter the market culminates at the top and the trend reverses, but Mr. Swelled Head is ignorant of this, so continues to buy on set-backs instead of selling on rallies. A drastic slump follows and Mr. B.H. goes to the scrap pile – BUSTED.

A Simple Logic Question That Most Harvard Students Get Wrong

Havard students get near-perfect SAT scores. These are smart, smart kids. So they shouldn’t have trouble with a simple logic question, right?
Try the following puzzle:
A bat and ball cost $1.10.
The bat costs one dollar more than the ball.
How much does the ball cost?
Scroll down for the answer … (more…)

Street Smarts

Street Smarts is a new book out by the South Alabama bowtie man. There is an interesting video discussion here on being humbled by the market.STREET SMARTS

1. “Jim Rogers on When He Lost Everything

2. A bit about his new book follows: Street Smarts by Jim Rogers

and an excerpt:

‘Today, I wish I knew how to instill this characteristic in my children. I wish I could call my father or mother and say, “What pill did you give us?” Call it discipline, call it diligence, call it work ethic—­we all have it, my brothers and I. I do not know where it comes from. I wish I could find the gene. I am certainly not alone in recognizing the value of persistence—we all know smart people who are not successful; we all know talented people who are not successful. Persistence is what makes the difference.’

What Predictions Say About Us

An excerpt:

…predictions are a way of demonstrating knowledge. Of course, in most things, a successful demonstration involves being right. In golf, a good argument will suffice. Most compellingly, human beings are wired to predict. In ancient times predictions served as psychological counterweight to the extreme uncertainty of life. As we’ve gained more control over daily existence, predictions help encourage the illusion that we are in charge of our own destiny. The more that is unknown, the greater the urge to predict. As the recently departed futurist author Ray Bradbury once said, “Mysteries abound where most we seek for answers.”

If you can find yourself comfortable not trying to predict daily life (and trading) there is a nice reward for you.