Wow! It should be a strong statement. But it is. In the stock market you succeed if you have rules and follow the rules. So it is in life. You need to have rules to live by and follow those. As I blogged before, I am reading the book by John Boik about the Greatest Stock traders of all time. I finished reading the first two – Jesse Livermore and Bernard Baruch. In the early 1910’s and till about the mid-century these two were thinking totally different than most of the so called investors. They succeeded after making mistakes and learning from them. Let me list down all the rules that come by to my mind.
- The market is the king. Don’t try to outsmart it. Just follow what it tells. In other words, when the M is going up, it is good to be long. When it is going down, you don’t want to be long.
- Both these were playing both sides of the market. Both long and short. That is the right thing to do as if you don’t, then you don’t fully understand the fundamentals behind investing.
- Take losses quickly. Set a loss limit and GET OUT when it is hit. You can make profits later on as long as you protect your investment. This is an important rule in life too. Take failures and cut them out quick i.e., don’t dwell on and get into negativity. This rule is so important that all of this should be in BOLD and uppercase.
- You WILL makes mistakes. NO ONE is right all the time. Admit this and be humbled by the market and you will succeed. William O’Neal says being right 1 out of 4 times and Baruch said being right 50% of the time is enough to make money in the long run. The key is to follow (3).
- Don’t invest on tips. Do your research and know the company fundamentals. Earning and Sales growth is critical. The company should be producing a New/novel product. Think Apple (like iPod and iPhone) and Google (Search engine), etc.
- When a office work boy or a shoe-shiner gives you tips on what to buy, then everyone knows everything. It is time to get out.
- Learn from your mistakes. Don’t commit the same mistakes.
- Every successful investors would have losses along the way. In one year, Baruch had a loss of 450K and a profit of 700k. So, you aren’t doing anything wrong if you have had losses. Only, it shouldn’t be just losses.
- Don’t buy when a stock keeps going down. Dollar-cost-averaging is a nice concept for those who don’t money. Pyramiding is what you need to follow.
- Try probing i.e., don’t invest all the money at the same time. Try out some and see if the stock goes in the direction you want. That is a confirmation for more money to be put into that stock. I have made more money pyramiding than buying at the same time.
- Buy or short on break-outs. HUGE volume changes indicate something. You don’t have to bother what the reason is. The entire market has made a decision and is buying or selling. Just trust that.
- You don’t have to be invested all the time. There are times you make money and there are times you are on the sidelines.
- Keep resistance and support in mind. I find that typically, huge breakouts are out of these levels. Hence, this rule goes with 11 a lot.
- Check your losses often and determine the reason. I have found that my losses have been from investments that didn’t follow rules.
- You will never sell at the highest point. Take profits on the way up. Buy high and sell higher has been profitable for me.
- Buying close to a breakout (called pivot point by WON) reduces risk. But if you follow rule 3 and probing, you will get ahead. As I have seen, stock breaking out go higher and higher and I don’t want to miss on the ride. Apple for example. It broke out around 95 and had sold it. Then I bought into it at 109, 121, 132 for some nice gains.
- Keep your emotions in check. Hope, greed and fear all influence your decisions. It is better to be mechanical than go by the emotions. Also, when you are buying and selling all the time, emotions influence more. Take breaks and vacations and reflect on your success and failures.
- A lot of time is necessary for being ahead. Baruch recommends full devotion to the trade. Hard work is essential. Read a lot and make your own observations. If anyone thinks it is easy to make money in the stock market, they are fooling themselves with their hard-earned money.
More later. Thank you for reading.