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THE FIVE IMMUTABLE LAWS OF INVESTING

  
  Education
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Be Patient And Wait For your Trade.  Many investors suffer from “action bias” or a desire to do something.  However, when there is nothing to do the best thing to do is nothing.

 Be Contrarian.  The herd is usually wrong.  The punch bowl of speculation is usually spiked with denial.  Be careful getting in when the getting is at the end.  Risk Is Permanent Loss of Capital, Never A Number.  Pay attention to valuation, fundamental, and financial risks and thus avoid permanent impairment of your capital.

Be Leery of Leverage.  Leverage is a dangerous beast.  It can’t turn a bad investment good, but it can turn a good investment bad.  Whenever you see a financial product with leverage as its foundation you should be skeptical, not delighted.

 Never Invest In Something You Don’t Understand.  If something sounds too good to be true it probably is.  If you do not understand where your money is going then don’t press the pedal ’cause the vehicle may be in reverse. 

Invest when the law is on your side; otherwise you may find yourself on the other side of the barbed wire fence at BROKE prison. 

Still Want to Invest With George Soros?

  
Analysis, Education
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Bummed that George Soros has closed his fund to outside investors and will no longer use his 2 and 20 from your cash to destroy America? The SEC has been thinking about your problem, and have come up with something that could be good both for your PA and for your love life.
Solution: marry George, or one of his children or nephews. If that doesn’t sound very appealing, you could also keep your eye out for any “lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) of a common ancestor (who is no more than 10 generations removed from the youngest generation of family members).”

Under new SEC rules, that will let you invest with George without subjecting him to irksome regulations. On the downside, your shiftless relatives can’t co-invest, and you’re out in the cold again if you get divorced.

[T]he new rules are causing a commotion with family offices, who used to be able to serve in-laws, distant cousins and even ex-wives of the family but now can’t. …

For instance in-laws no longer count as family — which may be happy news

Investing vs Gambling

  
  Education
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“Investors are the big gamblers. They make a bet, stay with it, and if it goes the wrong way, they lose it all.”

Jesse Livermore

Not having an exit strategy before initiating a trading position is worse than gambling, where you realize that the chance to lose is too big, therefore you risk only money you can afford to lose. Not having a stop loss means that you are most likely risking more than you could afford to lose. As they say amateurs go out of business because of taking big losses. Professionals go out of business by taking small profits. Cut your losses short when your stop level is hit. Even more, make sure to put your stop loss order immediately after you initiate a trade. Put your stop loss at a place where the trend you are following will be over. Let your profits run by gradually lifting you  profit protection stop order. In order to maximize your profits you have to be willing to give some of them back.

I” don’t believe anyone ever gets wiped out in the market because of bad luck; there is always some other reason for it. Either you were off when you did the trade, or you didn’t have the experience. There is always a mistake involved.”

Trading Wisdom

  
  Education
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Often I think we overcomplicate trading.  All this talk of risk management, money management, entries, exits etc ad nauseum can leave us not being able to see the wood for the trees.

It’s obvious that you need to cut your losses.  If you let them run or get out of control your aren’t going to be in the business for long. 

But there is another very good and often forgotten reason why you should not let your losses run that William O’Neill highlights:

O’Neill “letting your losses run is the most serious mistake made by almost all investors” simply because “if you don’t sell to cut your losses when you get into trouble, you can easily lose the confidence you’ll need to make buy and sell decisions in the future.”

But if you learn to do this then you stand some chance of doing this:

“Take your losses quickly and your profits slowly” because “your objective is not just to be right but to make big money when you are right.”

The first quote is another great one to heed.  If we do and combine it with the second well…… we might just be able to make the big money once in a while.

10 characteristics found in Best Traders

  
  Education
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  1. They all have a tested, positive expectancy system that’s proved to make money for the market type for which it was designed.
  2. They all have systems that fit them and their beliefs. They understand that they make money with their systems because their systems fit them.
  3. They totally understand the concepts they are trading and how those concepts generate low-risk ideas.
  4. They all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out.
  5. They all evaluate the ratio of reward to risk in each trade they take. For mechanical traders, this is part of their system. For discretionary traders, this is part of their evaluation before they take the trade.
  6. They all have a business plan to guide their trading. You must treat your trading like any other business.
  7. They all use position sizing. They have clear objectives written out, something that most traders/investors do not have. They also understand that position sizing is the key to meeting those objectives and have worked out a position sizing algorithm to meet those objectives.
  8. They all understand that performance is a function of personal psychology and spend a lot of time working on themselves. You must become an efficient rather than inefficient decision maker.
  9. They take total responsibility for the results they get. They don’t blame someone else or something else. They don’t justify their results. They don’t feel guilty or ashamed about their results. They simply assume that they created them and that they can create better results by eliminating mistakes.
  10. They understand that not following their system and business plan rules is a mistake.

Irrational Exuberance

  
  Education
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k6779Robert J. Shiller

Shiller’s book presents yet another correct view of the issues that so many people refuse to confront. These are the very issues that cause people to lose. Perhaps, one day investors will begin to appreciate uncertainty as something that can be managed. If people refrained from being overconfident or indulging in their magical thinking and then started to manage uncertainty as Trend Followers do — there might actually be the risk of no more trends!

Is it likely? No. For trends to stop investors would need to realize that news, personal opinions, tips, etc. have no relevance to properly making a decision. Trend Following trading takes advantage of the psychological weaknesses that most people possess. Trend Followers disarm the magical thinkers by winning their losses in the great zero sum game.

Ponder the wisdom:

Everyone wants to be rich, but few want to work for it.

9 Trading Wisdom for Traders

  
  Education
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NEVER THROW MORE MONEY AFTER A LOSING POSITION

Never add to a losing position under any circumstances. Throwing more money at a losing trade will burn your capital faster than you can imagine. This is the main contributor that eliminates losing investors from the trading game. The only thing that happens when you buy more of a losing position is that your net worth declines. You hope that it may turn around eventually and your decision to buy will prove fortuitous. For every example of a fortune from an unexpected turnaround, there are ten examples of bleak outcomes.  

 

ALWAYS INVEST ON THE WINNING SIDE

Do not worry about trading on the bullish or bearish side, but always trade on the winning side. This is a brilliant piece of wisdom. Learn to master the art and science of investing on the winning side. You should be willing to change sides immediately when one side has gained the upper hand. You cannot stay rigid in your positions because the market is dynamic. Keep a close eye to see if the facts have changed regarding the company. If the facts have changed, you must change.

 

DO NOT HANG ONTO A LOSING POSITION

Failure to admit you were wrong and holding onto losing positions will cost you money. Watching your capital deplete in front of your eyes is de-motivating and mentally exhausting. However, your mind will be even more exhausted if you hold onto a losing trade. You will get more and more fearful with each passing minute, day and week.

In the meantime, you are missing out on a treasure chest of potentially profitable stocks that are waiting to make you money. Bad decisions are valuable sources of learning to master your trading technique. Cut your losses, adapt your trading strategy to include your new knowledge, and search for stocks that will make you money. In the stock market, time is money; there is no time to watch your stock fall all the way to the bottom. (more…)

Bull Markets Roll, Bear Markets Spike

  
  Education
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bullbear-ASRThere is an old trader’s saying that “bull markets roll, but bear markets spike.” This comes from the characteristic nature of the price action.

When a market is in bull mode, the majority of participants are happy and content (as the vast majority of investors are “long only”). The bull market thus “rolls” along, like undulating waves of grain, as more bullish investment capital flows into the market and positions are added to.

When a market is in bear mode, however, the majority of participants are annoyed or upset (because, again, those willing to go short are relatively few, while all the world is comfortable being long). The result is much more of a rough, jagged, against-the-grain type profile, in which extended declines are interspersed with surprisingly vicious rallies of short duration.

These mini-rallies are made even more vicious by the forced activity of “short covering,” in which bearish traders caught napping get “squeezed” out of their positions by the fighting spirit of the bulls.

Lying in wait at the top of a salmon-rich waterfall, then, is akin to waiting for that “spike” to occur before putting out a new bearish line. How do you identify such an occurrence? Simple:

  • Wait for your intended market to confirm a new downtrend (or break key support).
  • Wait for a countertrend rally – one that takes prices higher, but does not “clear” the bearish trend.
  • Enter upon reasonable evidence that the countertrend rally (or spike) has run its course.

Mistakes

  
  Education
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Another mistake many investors make is that they allow themselves to be influenced by what other people think. I made this mistake myself when I was still learning how to trade. I became friends with a broker and opened an account with him. We played this game called “bust the other guy’s chops when his stock is down.” When I had a losing stock position, 1 was embarrassed to call him to sell the stock because I knew he would he would ride me about it. If a stock I bought was down 5 or 10 percent, and I thought I should get out of it, I found myself hoping it would recover so 1 wouldn’t have to call him to sell it while it was down. Before I knew it, the stock would be down 15 or 20 percent, and the more it fell, the harder it became for me to call. Eventually, I learned that you have to ignore what anybody else thinks.Many people approach investing too casually. They treat investing as a hobby instead of like a business; hobbies cost money. They also don’t take the time to do a post-trade analysis on their trades, eliminating the best teacher: their results. Most people prefer to forget about their failures instead of learning from them, which is a big mistake.

They let their egos get in the way. An investor may put in hours of careful research building a case for a company. He scours the company’s financial reports, checks Value Line, and may even try the company’s products. Then, soon after he buys the stock, his proud pick takes a price dive. He can’t believe it! He makes excuses for the stock’s decline. He calls his broker and searches the Internet, looking for any favorable opinions to justify his position. Meanwhile, he ignores the only opinion that counts: the verdict of the market. The stock keeps sliding, and his loss keeps mounting. Finally, he throws in the towel and feels completely demoralized – all because he didn’t want to admit he had made a mistake in timing.

 

Wall Street Makes It Hard to Earn Legal Living

  
Analysis, Education
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Schroeder_lg_lgAlice Schroeder is the author of “The Snowball: Warren Buffett and the Business of Life”, a former managing director at Morgan Stanley, and is a Bloomberg News columnist. Below is a great opinion piece she wrote for Bloomberg.
Read more here:
A group of university students I spoke to recently asked if it was possible to make a living on Wall Street without compromising your values. I had to tell them no.
Wall Street has many decent, honorable people, but they work in a system that fundamentally compromises people’s ethics. The high pay is like an anesthetic that numbs you from feeling how you are being corrupted. Not only that, many honest people who work there would agree with an even more extreme statement: It’s hard to make a living legally on Wall Street. (more…)

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