"You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else." - Warren Buffett
Tuesday, 30 June 2020
Monday, 29 June 2020
Quote for the day
"Money is not everything. Make sure you earn a lot before speaking such nonsense." - Warren Buffett
Richard Rhodes' Trading Rules
I must admit, I am not smart enough to have devised these ridiculously simple trading rules. A great trader gave them to me some 15 years ago. However, I will tell you, they work. If you follow these rules, breaking them as infrequently as possible, you will make money year in and year out, some years better than others, some years worse - but you will make money. The rules are simple. Adherence to the rules is difficult.
01. The first and most important rule is - in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I'll do it again at some point in the future. Thus, we've not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
03. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don't enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
04. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
05. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
06. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
07. Be patient. The old adage that "you never go broke taking a profit" is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
09. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or "average" into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what's not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, "let your profits run."
12. Don't trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don't care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge "to get the money back" is extreme, and should not be given in to.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting
alongside the winning forces. If neither side is winning, then we don't need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.
There is no "genius" in these rules. They are common sense and nothing else, but as Voltaire said, "Common sense is uncommon." Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.
"Old Rules...but Very Good Rules"
If I've learned anything in my decades of trading, I've learned that the simple methods work best. Those who need to rely upon complex stochastics, linear weighted moving averages, smoothing techniques, Fibonacci numbers etc., usually find that they have so many things rolling around in their heads that they cannot make a rational decision. One technique says buy; another says sell. Another says sit tight while another says add to the trade. It sounds like a cliche, but simple methods work best.
If I've learned anything in my decades of trading, I've learned that the simple methods work best. Those who need to rely upon complex stochastics, linear weighted moving averages, smoothing techniques, Fibonacci numbers etc., usually find that they have so many things rolling around in their heads that they cannot make a rational decision. One technique says buy; another says sell. Another says sit tight while another says add to the trade. It sounds like a cliche, but simple methods work best.
01. The first and most important rule is - in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I'll do it again at some point in the future. Thus, we've not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
02. Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
03. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don't enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
04. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
05. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
06. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
07. Be patient. The old adage that "you never go broke taking a profit" is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
08. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
09. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or "average" into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what's not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, "let your profits run."
12. Don't trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don't care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge "to get the money back" is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial "hay" when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting
alongside the winning forces. If neither side is winning, then we don't need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.
There is no "genius" in these rules. They are common sense and nothing else, but as Voltaire said, "Common sense is uncommon." Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.
Source: http://stockcharts.com/
Sunday, 28 June 2020
Quote for the day
"People who look for easy money invariable pay for the privilege of proving conclusively that it cannot be found on this earth." - Jesse Lauriston Livermore
6 Rules For Disciplined Investing
By Rick Ferri
Investment discipline isn't easy. Despite best intentions and claims to the contrary, many investors chase performance, react emotionally to market moods, and generally incur far more trading costs than good discipline would suggest.
Even when there is a long-term plan in place, if it's not followed, the plan is useless. Over the years, I've seen good intentions go by the wayside time and again because discipline was not followed.
These observations aren't limited to individual investors.
‘Adapting' Advisers' Red Flag
I've seen similar conduct from investment advisers who claim to have a disciplined strategy, only to add that they'll “adapt to changing market conditions” when warranted. This loophole leaves an ample opening for ever-shifting adjustments based on what seems to be the right move at the time. It's particularly common in bear markets when clients become anxious and hint that they may be looking to take their business elsewhere.
Loopholes in discipline statements may allow an advisor to retain skittish clients, but lack of discipline is rarely in a client’s best long-term interest.
I've put together six rules to disciplined investing. They will help you (and perhaps your advisor) make better long-term decisions:
Form a prudent asset allocation based on this philosophy: Asset allocation is how a portfolio is diversified among asset classes. A prudent asset allocation should be based on each person’s own long-term financial goals. This gives you a personalized beacon to follow through turbulent market conditions. The allocation should be in fixed percentages that you plan to stick with over time, rather than floating or tactical reactions to the ongoing turbulence.
Select low-cost funds to represent asset classes in the allocation: Implement the asset allocation using an appropriate mix of index funds and exchange-traded funds. These products provide broad diversification within an asset class for a very low cost. Building a select portfolio of index funds and ETFs that tracks the markets will help you receive your fair share of the markets' returns.
Maintain this portfolio through all market conditions: Markets do not remain at their current levels for long, yet a portfolio should be maintained at roughly the same asset allocation through all market conditions. Rebalancing helps control the portfolio allocation. An annual rebalancing can serve as the method to maintain a portfolio. Cash contributions and withdrawals also provide an occasion to rebalance.
Don't change the asset allocation due to recent market activity: Since a portfolio is based on long-term needs, it should be maintained for the long term. If you're not willing to hold an asset class or fund for the next 10 years, then you shouldn't own it now. It doesn't matter what's going on in the markets today; build and hold your portfolio for the long haul, giving it the greatest chance to fulfil its intended purpose.
Don't hold back on new investments while waiting for market clarity: It's not easy to invest new money in a portfolio that has recently lost money, but that's what you have to do. If your plan is to invest every month, then invest every month regardless of recent market activity. Discipline in investing is about forming good habits and then practising them consistently.
Some critics of these methods say these rules are too rigid—they don't offer flexibly for what's happening in the markets today. Well, that's what discipline means! It's discipline that makes a plan work. Create a plan and stick to it.
Part of your plan may be to make an asset allocation change at the appropriate time in the future when your own life's circumstances have changed. These circumstances can be related to your health, career, retirement, a lump-sum windfall or a similar life-changing event.
Life Changes, Discipline Shouldn't
The shift may result in a different allocation, but it remains just as important to maintain discipline.
Investment discipline is easy to read about. It's the same as a doctor telling you to exercise regularly, eat right and get plenty of rest. It sounds so easy when someone else says it! Yet in real life, it's not so easy to do. That's why we have to be reminded to be disciplined.
My advice is to revisit this post whenever you may doubt your discipline.
Remember, a well-balanced portfolio works if you actually follow it—in good times and in bad.
Investment discipline isn't easy. Despite best intentions and claims to the contrary, many investors chase performance, react emotionally to market moods, and generally incur far more trading costs than good discipline would suggest.
Even when there is a long-term plan in place, if it's not followed, the plan is useless. Over the years, I've seen good intentions go by the wayside time and again because discipline was not followed.
These observations aren't limited to individual investors.
‘Adapting' Advisers' Red Flag
I've seen similar conduct from investment advisers who claim to have a disciplined strategy, only to add that they'll “adapt to changing market conditions” when warranted. This loophole leaves an ample opening for ever-shifting adjustments based on what seems to be the right move at the time. It's particularly common in bear markets when clients become anxious and hint that they may be looking to take their business elsewhere.
Loopholes in discipline statements may allow an advisor to retain skittish clients, but lack of discipline is rarely in a client’s best long-term interest.
I've put together six rules to disciplined investing. They will help you (and perhaps your advisor) make better long-term decisions:
- Have a long-term investment philosophy.
- Form a prudent asset allocation based on this philosophy.
- Select low-cost funds to represent asset classes in the allocation.
- Maintain this portfolio through all market conditions.
- Don't change the asset allocation due to recent market activity.
- Don't hold back on new investments while waiting for market clarity.
Form a prudent asset allocation based on this philosophy: Asset allocation is how a portfolio is diversified among asset classes. A prudent asset allocation should be based on each person’s own long-term financial goals. This gives you a personalized beacon to follow through turbulent market conditions. The allocation should be in fixed percentages that you plan to stick with over time, rather than floating or tactical reactions to the ongoing turbulence.
Select low-cost funds to represent asset classes in the allocation: Implement the asset allocation using an appropriate mix of index funds and exchange-traded funds. These products provide broad diversification within an asset class for a very low cost. Building a select portfolio of index funds and ETFs that tracks the markets will help you receive your fair share of the markets' returns.
Maintain this portfolio through all market conditions: Markets do not remain at their current levels for long, yet a portfolio should be maintained at roughly the same asset allocation through all market conditions. Rebalancing helps control the portfolio allocation. An annual rebalancing can serve as the method to maintain a portfolio. Cash contributions and withdrawals also provide an occasion to rebalance.
Don't change the asset allocation due to recent market activity: Since a portfolio is based on long-term needs, it should be maintained for the long term. If you're not willing to hold an asset class or fund for the next 10 years, then you shouldn't own it now. It doesn't matter what's going on in the markets today; build and hold your portfolio for the long haul, giving it the greatest chance to fulfil its intended purpose.
Don't hold back on new investments while waiting for market clarity: It's not easy to invest new money in a portfolio that has recently lost money, but that's what you have to do. If your plan is to invest every month, then invest every month regardless of recent market activity. Discipline in investing is about forming good habits and then practising them consistently.
Some critics of these methods say these rules are too rigid—they don't offer flexibly for what's happening in the markets today. Well, that's what discipline means! It's discipline that makes a plan work. Create a plan and stick to it.
Part of your plan may be to make an asset allocation change at the appropriate time in the future when your own life's circumstances have changed. These circumstances can be related to your health, career, retirement, a lump-sum windfall or a similar life-changing event.
Life Changes, Discipline Shouldn't
The shift may result in a different allocation, but it remains just as important to maintain discipline.
Investment discipline is easy to read about. It's the same as a doctor telling you to exercise regularly, eat right and get plenty of rest. It sounds so easy when someone else says it! Yet in real life, it's not so easy to do. That's why we have to be reminded to be disciplined.
My advice is to revisit this post whenever you may doubt your discipline.
Remember, a well-balanced portfolio works if you actually follow it—in good times and in bad.
http://www.etf.com/
Saturday, 27 June 2020
Quote for the day
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
Cicero’s 146 (43 B.C) of the Roman empire wrote a philosophy that is still valid?
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