Sunday, 20 December 2020
Quote for the day
"The secret of success is to do the common thing uncommonly well." -John D. Rockefeller Jr.
Saturday, 19 December 2020
Todd Mitchell’s 20 Rules for Trading Success
01. Always use stops. Risk control is the true measure of a good consistent trader. If you lose all your capital on the lemons, you can’t play when the great trades set up. Consider cash as having an option value.
02. Don’t over trade. This is the number one reason why individual traders and investors lose money. Look at your trades of the past year and apply the 90/10 rule. Dump the least profitable 90% and watch your performance skyrocket. Then aim for that 10%. Over trading is a great early retirement plan for your broker, not you.
04. Don’t chase the market. If you do, it will turn back and bite you. Wait for it to come to you. If your miss the train, there will be another one along in hours, days, weeks, or months. Patience is truly a virtue in this business.
05. When I put on a position, I calculate how much I am willing to lose to keep it.
07. You don’t have to be a genius to play this game. If that was required, Wall Street would have run out of players a long time ago. If you employ risk control and stops, then you can be wrong 40% of the time, and still make a living. That’s little better than a coin toss. If you’re wrong only 30% of the time, you can make millions. If you’re wrong only 20% of the time, you are heading a trading desk at Goldman Sachs. If you’re wrong a mere 10% of the time, you’re running a $20 billion hedge fund that the public only hears about when you pay/invest $100 million. And if someone tells you they’re never wrong, as is often claimed on the Internet, run a mile, because it’s simply impossible!
09. Don’t confuse a bull market with brilliance. When the market goes straight up (i.e. 1995 to 2000) anybody and their grandmother can make money.
10. John Maynard Keynes, the great economist and early hedge fund trader of the thirties, once said: “Markets can remain illogical longer than you can remain solvent.” Hang around long enough, and you will see this proven time and time again.
11. Don’t believe the media. Look for the hard data, the numbers, and you’ll see that often the talking heads, the paid industry apologists, and politicians don’t know what they’re talking about.
12. Sometimes the conventional wisdom is right.
13. INVEST like a fundamentalist, execute like a technical analyst. (Swing) TRADE using technical analysis…then by understanding basic fundamentals will make you even better.
14. Technical analysis…knowing how to read charts like a daily newspaper is key to successful trading. That said, learn what an “outside vertical bar” is, and who the hell is Leonardo Fibonacci.
15. The simpler a market approach, the better it works (the ‘KISS’ method). Everyone talks about “buy low and sell high”, but few actually do it. All black boxes eventually blow up, if they were ever there in the first place.
16. Markets are made up of people. Understand and anticipate how traders think, and you will make a lot of money. The market is made up of peoples fear and greed…it’s all psychological…learn how to read people and you’ll certainly be ahead of everybody else.
17. Understand what information is in the market and what isn't and you will make more money.
18. Do the hard trade, the one that everyone tells you that you are “Crazy” to do. If you add a position and then throw up or feel sick afterwards, then you know you've done the right thing.
19. If you are trying to get out of a hole, the first thing to do is quit digging and throw away the shovel – exit your trade asap. A blank/neutral/flat position can be invigorating.
20. Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training.
02. Don’t over trade. This is the number one reason why individual traders and investors lose money. Look at your trades of the past year and apply the 90/10 rule. Dump the least profitable 90% and watch your performance skyrocket. Then aim for that 10%. Over trading is a great early retirement plan for your broker, not you.
03. Don’t forget to sell. Date, don’t marry your positions. Remember, pigs get slaughtered. Always leave the last 10%-15% of a move for the next guy.
04. Don’t chase the market. If you do, it will turn back and bite you. Wait for it to come to you. If your miss the train, there will be another one along in hours, days, weeks, or months. Patience is truly a virtue in this business.
05. When I put on a position, I calculate how much I am willing to lose to keep it.
I then put a stop just below there. If I get triggered, I just walk away. Only enter a trade when the risk/ reward is in your favour. You can start at 2:1. That means only risk a dollar to potentially make two.
06. Always be willing to go Long (Buy) and Short (Sell). You have to be flexible and dynamic in your trading…one minute I could be long the market and the very next minute I may be short the market. You need to be able to flip flop and be quick and nimble in your trading.
07. You don’t have to be a genius to play this game. If that was required, Wall Street would have run out of players a long time ago. If you employ risk control and stops, then you can be wrong 40% of the time, and still make a living. That’s little better than a coin toss. If you’re wrong only 30% of the time, you can make millions. If you’re wrong only 20% of the time, you are heading a trading desk at Goldman Sachs. If you’re wrong a mere 10% of the time, you’re running a $20 billion hedge fund that the public only hears about when you pay/invest $100 million. And if someone tells you they’re never wrong, as is often claimed on the Internet, run a mile, because it’s simply impossible!
08. Trading is hard work. Trading attracts a lot of wide eyed, naïve, but lazy people because it appears so easy from the outside. You buy a stock (futures contract,forex, option, etf, etc.), watch it go up, and make money. How hard is that? The reality is that successful trading and or investing requires twice as much work as a normal job. The more research you put into a trade, the more comfortable you will become, and the more profitable it will be.
09. Don’t confuse a bull market with brilliance. When the market goes straight up (i.e. 1995 to 2000) anybody and their grandmother can make money.
10. John Maynard Keynes, the great economist and early hedge fund trader of the thirties, once said: “Markets can remain illogical longer than you can remain solvent.” Hang around long enough, and you will see this proven time and time again.
11. Don’t believe the media. Look for the hard data, the numbers, and you’ll see that often the talking heads, the paid industry apologists, and politicians don’t know what they’re talking about.
12. Sometimes the conventional wisdom is right.
13. INVEST like a fundamentalist, execute like a technical analyst. (Swing) TRADE using technical analysis…then by understanding basic fundamentals will make you even better.
14. Technical analysis…knowing how to read charts like a daily newspaper is key to successful trading. That said, learn what an “outside vertical bar” is, and who the hell is Leonardo Fibonacci.
15. The simpler a market approach, the better it works (the ‘KISS’ method). Everyone talks about “buy low and sell high”, but few actually do it. All black boxes eventually blow up, if they were ever there in the first place.
16. Markets are made up of people. Understand and anticipate how traders think, and you will make a lot of money. The market is made up of peoples fear and greed…it’s all psychological…learn how to read people and you’ll certainly be ahead of everybody else.
17. Understand what information is in the market and what isn't and you will make more money.
18. Do the hard trade, the one that everyone tells you that you are “Crazy” to do. If you add a position and then throw up or feel sick afterwards, then you know you've done the right thing.
19. If you are trying to get out of a hole, the first thing to do is quit digging and throw away the shovel – exit your trade asap. A blank/neutral/flat position can be invigorating.
20. Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training.
Quote for the day
"True leadership strengthens the followers. It is a process of teaching, setting an example, and empowering others. If you seek to lead, your ability will ultimately be measured in the successes of those around you." - David Niven
Friday, 18 December 2020
10 golden rules of investing in stock markets
1. Avoid the herd mentality
The typical buyer’s decision is usually heavily influenced by the actions of his acquaintances, neighbours or relatives. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy is bound to backfire in the long run.
No need to say that you should always avoid having the herd mentality if you don’t want to lose your hard-earned money in stock markets. The world’s greatest investor Warren Buffett was surely not wrong when he said, ‘Be fearful when others are greedy, and be greedy when others are fearful!’
8. Have realistic expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years.
However, it doesn't mean that you should always expect the same kind of return from the stock markets. Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely inviting trouble for yourself.
The typical buyer’s decision is usually heavily influenced by the actions of his acquaintances, neighbours or relatives. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy is bound to backfire in the long run.
No need to say that you should always avoid having the herd mentality if you don’t want to lose your hard-earned money in stock markets. The world’s greatest investor Warren Buffett was surely not wrong when he said, ‘Be fearful when others are greedy, and be greedy when others are fearful!’
2. Take informed decision
Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. This is, however, not the right way of putting one’s money into the stock market.
If you don’t have time or temperament for studying the markets, you may even take the help of a suitable financial advisor. ‘Shares sooner or later reach their fair market value.
So, if you are able to identify shares quoting at a significant discount to their realistic value, you can go ahead and invest in them. Conversely, if some shares in your portfolio have moved significantly higher than their true value, it may a good time to book profits,’ says Ashish Kapur, CEO, Invest Shoppe India Ltd
Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. This is, however, not the right way of putting one’s money into the stock market.
If you don’t have time or temperament for studying the markets, you may even take the help of a suitable financial advisor. ‘Shares sooner or later reach their fair market value.
So, if you are able to identify shares quoting at a significant discount to their realistic value, you can go ahead and invest in them. Conversely, if some shares in your portfolio have moved significantly higher than their true value, it may a good time to book profits,’ says Ashish Kapur, CEO, Invest Shoppe India Ltd
3. Invest in business you understand
Never invest in a stock. Invest in a business instead. And invest in a business you understand. In other words, before investing in a company, you should know what business the company is in.
Understand, for instance, what they buy and sell, and how they make money. Thus, the more you understand the business of the company, the better you will be able to monitor your investment.
Also keep in mind the past performance of a company. That is because if a company has performed well in the past, it has a better chance of performing well in the future too.
Never invest in a stock. Invest in a business instead. And invest in a business you understand. In other words, before investing in a company, you should know what business the company is in.
Understand, for instance, what they buy and sell, and how they make money. Thus, the more you understand the business of the company, the better you will be able to monitor your investment.
Also keep in mind the past performance of a company. That is because if a company has performed well in the past, it has a better chance of performing well in the future too.
4. Don’t try to time the market
One thing that even Warren Buffett doesn't do is to try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares. A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process.
‘So, you should never try to time the market. In fact, nobody has ever done this successfully and consistently over multiple business or stock market cycles. Catching the tops and bottoms is a myth. It is so till today and will remain so in the future. In fact, in doing so, more people have lost far more money than people who have made money,’ says Anil Chopra, group CEO and director, Bajaj Capital.
One thing that even Warren Buffett doesn't do is to try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares. A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process.
‘So, you should never try to time the market. In fact, nobody has ever done this successfully and consistently over multiple business or stock market cycles. Catching the tops and bottoms is a myth. It is so till today and will remain so in the future. In fact, in doing so, more people have lost far more money than people who have made money,’ says Anil Chopra, group CEO and director, Bajaj Capital.
5. Follow a disciplined investment approach
Historically it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull runs.
However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.
Historically it has been witnessed that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull runs.
However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.
6. Do not let emotions cloud your judgement
Many investors have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to resist. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time. ‘This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,’ says Kapur.
Instead of creating wealth, these investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
Many investors have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to resist. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time. ‘This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,’ says Kapur.
Instead of creating wealth, these investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
7. Create a broad portfolio
Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. The reason for the relatively poor performance of portfolios of individual investors even in greatest of bull runs has been lots of variation in market breadth. Different industries have participated at different points of time in taking the markets up.
There have been periods running into several months when the entire rally has been led by a handful of large, front-line stocks. On other occasions, mid caps have generated remarkable returns and made large caps look pale in comparison. So, it becomes imperative to diversify your portfolio across sectors and market capitalization.
Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. The reason for the relatively poor performance of portfolios of individual investors even in greatest of bull runs has been lots of variation in market breadth. Different industries have participated at different points of time in taking the markets up.
There have been periods running into several months when the entire rally has been led by a handful of large, front-line stocks. On other occasions, mid caps have generated remarkable returns and made large caps look pale in comparison. So, it becomes imperative to diversify your portfolio across sectors and market capitalization.
8. Have realistic expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years.
However, it doesn't mean that you should always expect the same kind of return from the stock markets. Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely inviting trouble for yourself.
9. Invest only your surplus funds
If you want to take risk in a volatile market like this, then see whether you have surplus funds which you can afford to lose. It is not necessary that you will lose money in the present scenario. You investments can give you huge gains too in the months to come.
But no one can be hundred percent sure. That is why you will have to take risk. No need to say that invest only if you are flush with surplus funds.
If you want to take risk in a volatile market like this, then see whether you have surplus funds which you can afford to lose. It is not necessary that you will lose money in the present scenario. You investments can give you huge gains too in the months to come.
But no one can be hundred percent sure. That is why you will have to take risk. No need to say that invest only if you are flush with surplus funds.
10. Monitor rigorously
We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence we need to constantly monitor our portfolio and keep affecting the desired changes in it.
If you can’t review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that. ‘If you can’t even do that, then stock investing is not for you. Better put your money in safe or less-risky instruments,’ advises Kapur.
We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence we need to constantly monitor our portfolio and keep affecting the desired changes in it.
If you can’t review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that. ‘If you can’t even do that, then stock investing is not for you. Better put your money in safe or less-risky instruments,’ advises Kapur.
Source: http://economictimes.indiatimes.com/
Quote for the day
“Success is nothing more than a few simple disciplines, practiced every day.” - Jim Rohn
Thursday, 17 December 2020
Speculation Defined
Graham and Dodd's Definition of Speculation
In their 1934 classic text, Security Analysis, Benjamin Graham and David Dodd provided a general definition of speculation: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
By this definition, most people who buy stocks are speculators. We can attempt to sharpen Graham and Dodd's definition by including time-scale. Speculators are not interested in putting their money into a stock or commodity for a long time. They want to see a good profit quickly - on a time scale of minutes to months. If their money does not quickly perform well in a situation, they move it into another situation.
In pursuit of greater gain, speculators take greater risks with their capital than people who put their money into Savings & CD Accounts.
Jesse Livermore's Definition of Speculation
Jesse Livermore, the 20th century's most (in)famous speculator provided his own definition of speculation - preceding Graham and Dodd's by several years. In Reminiscences of a Stock Operator, under his pseudonym of Lawrence Livingston, he said: "The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in."
Intelligent Speculation
Benjamin Graham and Jesse Livermore both had more to say about speculation: Benjamin Graham continued - this time in The Intelligent Investor:
Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss and the risks therein must be assumed by someone.
There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
* The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.
In their 1934 classic text, Security Analysis, Benjamin Graham and David Dodd provided a general definition of speculation: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
By this definition, most people who buy stocks are speculators. We can attempt to sharpen Graham and Dodd's definition by including time-scale. Speculators are not interested in putting their money into a stock or commodity for a long time. They want to see a good profit quickly - on a time scale of minutes to months. If their money does not quickly perform well in a situation, they move it into another situation.
In pursuit of greater gain, speculators take greater risks with their capital than people who put their money into Savings & CD Accounts.
Jesse Livermore's Definition of Speculation
Jesse Livermore, the 20th century's most (in)famous speculator provided his own definition of speculation - preceding Graham and Dodd's by several years. In Reminiscences of a Stock Operator, under his pseudonym of Lawrence Livingston, he said: "The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in."
Intelligent Speculation
Benjamin Graham and Jesse Livermore both had more to say about speculation: Benjamin Graham continued - this time in The Intelligent Investor:
Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss and the risks therein must be assumed by someone.
There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
* speculating when you think you are investing
* speculating seriously when you lack proper knowledge and skill for it
* risking more money in speculation than you can afford to lose
Livermore said:
Livermore said:
* The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.
* Speculation is a hard and trying business, and a speculator must be on the job all the time or he'll soon have no job to be on.
Source: http://www.jesse-livermore.com/
Quote for the day
"Vision without integrity is not mission - it's manipulation." - Howard G. Hendricks
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