Managing Personal Money
Managing Personal Finance
10 TIME MANAGEMENT MYTHS
1. We can manage time. We cannot manage time. Nor can we save it. Time ticks away relentlessly in spite of our efforts to control it. We are provided with 24 hours of time each day to use as we like. The key is in how we use that time. We can use it wisely, or we can waste it, but we can never save it. At the end of the day, it's gone.
2. Time management involves getting more done in less time. Some people may believe that, but effective time management refers to getting done fewer things of greater importance. We cannot possibly do everything we want to do, or all the things there are to do. But if we prioritize what there is to do, and focus on completing the priorities to the exclusion of everything else, we will be more effective.
3. "To do" lists help get things done. "To do" lists do nothing to further a project or task. They simply remind us that they are not done yet. Scheduling time in your planner, as appointments with yourself, to work on the tasks helps get them done. "To do" lists are intentions; scheduled blocks of time are commitments.
4. People need a "Personal Organizer" or other time management system to get organized. People are not organized because they use a time management system, they use a time management system because they are organized. Personal organization involves breaking old habits and forming new, effective ones. It is a state of mind as opposed to a state of the office. Some people are more organized using a 65-cent steno pad than others are using a 65-dollar organizer.
5. A "Quiet Hour" is a great time management tool. A "quiet hour" is a figment of time management writers' imaginations. There is no such thing as a "quiet hour". We can reduce interruptions, but never eliminate them. To be effective we must learn to work in spite of the interruptions. Frequently, interruptions are not time wasters, but opportunities arriving at inopportune times.
6. Keeping a time log to determine where your time is going, is the place to start. A time log should be done last, not first. All we need is more paperwork and interruptions when we're already inundated with them! We should get organized first, adopt effective habits, schedule time properly, put into practice time-reducing techniques and procedures, and once we have the time, keep a time log to effect further refinements.
7. The biggest time wasters include telephone interruptions, visitors, meetings and rush jobs. These are not time wasters, they are time obligations -- they come with the job. The biggest time wasters are self-imposed, such as procrastination, making mental notes, interrupting ourselves, searching for things, perfectionism, and spending time on trivial tasks. We are our own worst enemies. Being effective involves managing ourselves, not placing the blame on others.
8. It's more efficient to stick to one task until it's completed. It may be more efficient, but it's not more effective, for seldom will you have time to finish it. It's more effective to break large projects into small one or two-hour chunks and work at them for a brief period each day. Working on priorities involves frequent brief sprints, not occasional marathons.
9. We should have one planner for the office, and a separate planner for the home. We should have one planner, period. We are only one person, sharing our lives with people and activities at work, at home, at school, etc. Since we only have one life, we should only have one planner. Both business and personal activities should be scheduled in the same planner so business activities don't take precedence over personal and family activities.
10. Time is money. Time is more than money, it's life. You can always get more money, but you can never get more time. It's an irreplaceable resource. When time's gone, you're gone.
What are the virtues of long-term investing?
THE first lesson in value investing is to stay invested for a longterm. This is based on the premise that in the long run, the intrinsicvalue of the security will be recognised by the market, thus enablingthe value investor to reap the rewards of his patience. A long timeframe also smoothes out the effect of fluctuations.
If you were unlucky to have bought a stock at the peak of trade cycle,and though your investment is fundamentally sound, you will still findthe price of your investment heading south.
If you are convinced about the fundamental value of your shares, andare confident that the value has not deteriorated in between, you mayhave to wait for the market to recognise the potential of your script.
This process may take quite some time. The fall in the prices offundamentally sound shares should give you an opportunity to buyrather than sell, provided, of course, you have done your homeworkwell, and know that the market price is deviating from the true valuecreating a Margin of Safety for you, a concept central to thediscipline of value investing.
If your answer to any of the following two questions is in theaffirmative, you are probably not a long-term investor.
Do you believe you can time the market-buy when prices are low andsell when prices are high?
When the market starts to decline, do you sell your investments to tryto lock in gains?
If tickers drive you crazy, with every price rise causing a sense ofecstasy, and every red quotation, heartburn, then value investing isnot your cup of tea. Staying invested for long has other benefits too.Many short-term traders make more money for their brokers than theymake for themselves. While the brokerage may look like a small figureto you, constant buying and selling can add up to a whopping sum. Addto this the cost of the many hours spent in keeping track of the livemarket quote, and it does not look like a worthwhile proposition.
You pay zero tax when you sell your investment after one year from thedate of purchase. This is the greatest reward the Income TaxDepartment gives you for staying invested for long.
Now the million-dollar question, how long is the long term? You askten investors and you are likely to get ten different answers.Strangely, barring the day traders and pure speculators, most playersin the market are likely to say that they are long-term investors,without even giving a thought to what time horizon they are talkingabout.For many investors the long term is one year, the statutory minimumthe Income Tax Act specifies for the purpose of calculating the tax onlong-term capital gains.This period was three years earlier, and this class of investorsperhaps think that the Government also thought three years too long,and has decided to curtail the period to one year. For disciplinedvalue investors, the long term is an entirely different concept.It is time sufficient for the market to recognise the true value of aparticular stock, and this may sometimes take many years and at times",
If your answer to any of the following two questions is in theaffirmative, you are probably not a long-term investor.Do you believe you can time the market-buy when prices are low andsell when prices are high?When the market starts to decline, do you sell your investments to tryto lock in gains?If tickers drive you crazy, with every price rise causing a sense ofecstasy, and every red quotation, heartburn, then value investing isnot your cup of tea. Staying invested for long has other benefits too.Many short-term traders make more money for their brokers than theymake for themselves. While the brokerage may look like a small figureto you, constant buying and selling can add up to a whopping sum. Addto this the cost of the many hours spent in keeping track of the livemarket quote, and it does not look like a worthwhile proposition.You pay zero tax when you sell your investment after one year from thedate of purchase. This is the greatest reward the Income TaxDepartment gives you for staying invested for long.Now the million-dollar question, how long is the long term? You askten investors and you are likely to get ten different answers.Strangely, barring the day traders and pure speculators, most playersin the market are likely to say that they are long-term investors,without even giving a thought to what time horizon they are talkingabout.For many investors the long term is one year, the statutory minimumthe Income Tax Act specifies for the purpose of calculating the tax onlong-term capital gains.This period was three years earlier, and this class of investorsperhaps think that the Government also thought three years too long,and has decided to curtail the period to one year. For disciplinedvalue investors, the long term is an entirely different concept.It is time sufficient for the market to recognise the true value of aparticular stock, and this may sometimes take many years and at times
It is said that more money is made in being static rather than bybeing hyperactive in the market. Daily fluctuations should not bothera long-term investor. The average holding period of investors such asWarren Buffett has been 10-12 years. Remember, this is the average,some of the investments they would hold on to for 20-25 years or evenmore.Focusing on the short-term aspects of a company including bothbusiness and price fluctuation is contradictory to the valueinvestment philosophy, and Buffett rightly says: "Most of our largestock positions are going to be held for many years, and the scorecardon our investment decisions will be provided by business results overthat period, not by prices on any given day."It is like being wedded to your stock- for life. Unless there is achange in company\'s economics for worse, you would continue to holdthe share for eternity.It follows that when you are evaluating a company, you must give dueweight to the quality of management as well.Warren Buffett explained this factor by observing that you shouldchoose the President of the company (that is, evaluate the quality ofthe management) the way you would choose your son-in-law.If you have chosen your company properly, and the share grows at arate substantially higher than the cost of money it would be wiser tostay invested in the company for a fairly long period of time.A company which you bought in a depressed condition, and which keepsgrowing at a CAGR of 20 per cent is likely to outperform the marketfor as long as the company maintains the growth rate.If the rate of growth is accelerating, you would do well to stayinvested in that company for life, though not many companies wouldqualify through this filter perpetually.Compound interest is one of the most powerful forces in the financialworld, and if you stay invested for the long term, you are bound to
encompass a couple of major crashes and booms!It is said that more money is made in being static rather than bybeing hyperactive in the market. Daily fluctuations should not bothera long-term investor. The average holding period of investors such asWarren Buffett has been 10-12 years. Remember, this is the average,some of the investments they would hold on to for 20-25 years or evenmore.Focusing on the short-term aspects of a company including bothbusiness and price fluctuation is contradictory to the valueinvestment philosophy, and Buffett rightly says: "Most of our largestock positions are going to be held for many years, and the scorecardon our investment decisions will be provided by business results overthat period, not by prices on any given day."It is like being wedded to your stock- for life. Unless there is achange in company's economics for worse, you would continue to holdthe share for eternity.
It follows that when you are evaluating a company, you must give dueweight to the quality of management as well.Warren Buffett explained this factor by observing that you shouldchoose the President of the company (that is, evaluate the quality ofthe management) the way you would choose your son-in-law.If you have chosen your company properly, and the share grows at arate substantially higher than the cost of money it would be wiser tostay invested in the company for a fairly long period of time.A company which you bought in a depressed condition, and which keepsgrowing at a CAGR of 20 per cent is likely to outperform the marketfor as long as the company maintains the growth rate.If the rate of growth is accelerating, you would do well to stayinvested in that company for life, though not many companies wouldqualify through this filter perpetually.Compound interest is one of the most powerful forces in the financialworld, and if you stay invested for the long term, you are bound to
When John Maynard Keynes said, "In the long run we're all dead", hewas certainly not referring to the stock market. He was referring tothe counter-cyclical demand management policies that governments oughtto be following in the short run. The bottomline is that since it isimpossible to predict whether you are now at the top of a bull run, orat the beginning of a long period of depressed market, it always makesmore sense to stay invested for a sufficiently long period of time.Historically, the longer the period of investment in equity, thehigher is the return and the lower the risk of losing your capital. Ifyou are likely to need money within five years, stay away from thestock market.
Like the fabled tortoise that beat the hare in the race, the investorwho stays on for the long term is more likely to achieve his goalsthan the investor who chases "hot tips" for quick profits in the stockmarket.
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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. "Old Rules...but Very Good Rules" If I've learned anything in my 17 years 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.
1. 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.
2. 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.
3. 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.
4. 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.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. 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.
8. 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.
9. 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 guerrilla 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.
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10 TIME MANAGEMENT MYTHS What are the virtues of long-term investing? ► November (66)
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10 TIME MANAGEMENT MYTHS
1. We can manage time. We cannot manage time. Nor can we save it. Time ticks away relentlessly in spite of our efforts to control it. We are provided with 24 hours of time each day to use as we like. The key is in how we use that time. We can use it wisely, or we can waste it, but we can never save it. At the end of the day, it's gone.
2. Time management involves getting more done in less time. Some people may believe that, but effective time management refers to getting done fewer things of greater importance. We cannot possibly do everything we want to do, or all the things there are to do. But if we prioritize what there is to do, and focus on completing the priorities to the exclusion of everything else, we will be more effective.
3. "To do" lists help get things done. "To do" lists do nothing to further a project or task. They simply remind us that they are not done yet. Scheduling time in your planner, as appointments with yourself, to work on the tasks helps get them done. "To do" lists are intentions; scheduled blocks of time are commitments.
4. People need a "Personal Organizer" or other time management system to get organized. People are not organized because they use a time management system, they use a time management system because they are organized. Personal organization involves breaking old habits and forming new, effective ones. It is a state of mind as opposed to a state of the office. Some people are more organized using a 65-cent steno pad than others are using a 65-dollar organizer.
5. A "Quiet Hour" is a great time management tool. A "quiet hour" is a figment of time management writers' imaginations. There is no such thing as a "quiet hour". We can reduce interruptions, but never eliminate them. To be effective we must learn to work in spite of the interruptions. Frequently, interruptions are not time wasters, but opportunities arriving at inopportune times.
6. Keeping a time log to determine where your time is going, is the place to start. A time log should be done last, not first. All we need is more paperwork and interruptions when we're already inundated with them! We should get organized first, adopt effective habits, schedule time properly, put into practice time-reducing techniques and procedures, and once we have the time, keep a time log to effect further refinements.
7. The biggest time wasters include telephone interruptions, visitors, meetings and rush jobs. These are not time wasters, they are time obligations -- they come with the job. The biggest time wasters are self-imposed, such as procrastination, making mental notes, interrupting ourselves, searching for things, perfectionism, and spending time on trivial tasks. We are our own worst enemies. Being effective involves managing ourselves, not placing the blame on others.
8. It's more efficient to stick to one task until it's completed. It may be more efficient, but it's not more effective, for seldom will you have time to finish it. It's more effective to break large projects into small one or two-hour chunks and work at them for a brief period each day. Working on priorities involves frequent brief sprints, not occasional marathons.
9. We should have one planner for the office, and a separate planner for the home. We should have one planner, period. We are only one person, sharing our lives with people and activities at work, at home, at school, etc. Since we only have one life, we should only have one planner. Both business and personal activities should be scheduled in the same planner so business activities don't take precedence over personal and family activities.
10. Time is money. Time is more than money, it's life. You can always get more money, but you can never get more time. It's an irreplaceable resource. When time's gone, you're gone.
What are the virtues of long-term investing?
THE first lesson in value investing is to stay invested for a longterm. This is based on the premise that in the long run, the intrinsicvalue of the security will be recognised by the market, thus enablingthe value investor to reap the rewards of his patience. A long timeframe also smoothes out the effect of fluctuations.
If you were unlucky to have bought a stock at the peak of trade cycle,and though your investment is fundamentally sound, you will still findthe price of your investment heading south.
If you are convinced about the fundamental value of your shares, andare confident that the value has not deteriorated in between, you mayhave to wait for the market to recognise the potential of your script.
This process may take quite some time. The fall in the prices offundamentally sound shares should give you an opportunity to buyrather than sell, provided, of course, you have done your homeworkwell, and know that the market price is deviating from the true valuecreating a Margin of Safety for you, a concept central to thediscipline of value investing.
If your answer to any of the following two questions is in theaffirmative, you are probably not a long-term investor.
Do you believe you can time the market-buy when prices are low andsell when prices are high?
When the market starts to decline, do you sell your investments to tryto lock in gains?
If tickers drive you crazy, with every price rise causing a sense ofecstasy, and every red quotation, heartburn, then value investing isnot your cup of tea. Staying invested for long has other benefits too.Many short-term traders make more money for their brokers than theymake for themselves. While the brokerage may look like a small figureto you, constant buying and selling can add up to a whopping sum. Addto this the cost of the many hours spent in keeping track of the livemarket quote, and it does not look like a worthwhile proposition.
You pay zero tax when you sell your investment after one year from thedate of purchase. This is the greatest reward the Income TaxDepartment gives you for staying invested for long.
Now the million-dollar question, how long is the long term? You askten investors and you are likely to get ten different answers.Strangely, barring the day traders and pure speculators, most playersin the market are likely to say that they are long-term investors,without even giving a thought to what time horizon they are talkingabout.For many investors the long term is one year, the statutory minimumthe Income Tax Act specifies for the purpose of calculating the tax onlong-term capital gains.This period was three years earlier, and this class of investorsperhaps think that the Government also thought three years too long,and has decided to curtail the period to one year. For disciplinedvalue investors, the long term is an entirely different concept.It is time sufficient for the market to recognise the true value of aparticular stock, and this may sometimes take many years and at times",
If your answer to any of the following two questions is in theaffirmative, you are probably not a long-term investor.Do you believe you can time the market-buy when prices are low andsell when prices are high?When the market starts to decline, do you sell your investments to tryto lock in gains?If tickers drive you crazy, with every price rise causing a sense ofecstasy, and every red quotation, heartburn, then value investing isnot your cup of tea. Staying invested for long has other benefits too.Many short-term traders make more money for their brokers than theymake for themselves. While the brokerage may look like a small figureto you, constant buying and selling can add up to a whopping sum. Addto this the cost of the many hours spent in keeping track of the livemarket quote, and it does not look like a worthwhile proposition.You pay zero tax when you sell your investment after one year from thedate of purchase. This is the greatest reward the Income TaxDepartment gives you for staying invested for long.Now the million-dollar question, how long is the long term? You askten investors and you are likely to get ten different answers.Strangely, barring the day traders and pure speculators, most playersin the market are likely to say that they are long-term investors,without even giving a thought to what time horizon they are talkingabout.For many investors the long term is one year, the statutory minimumthe Income Tax Act specifies for the purpose of calculating the tax onlong-term capital gains.This period was three years earlier, and this class of investorsperhaps think that the Government also thought three years too long,and has decided to curtail the period to one year. For disciplinedvalue investors, the long term is an entirely different concept.It is time sufficient for the market to recognise the true value of aparticular stock, and this may sometimes take many years and at times
It is said that more money is made in being static rather than bybeing hyperactive in the market. Daily fluctuations should not bothera long-term investor. The average holding period of investors such asWarren Buffett has been 10-12 years. Remember, this is the average,some of the investments they would hold on to for 20-25 years or evenmore.Focusing on the short-term aspects of a company including bothbusiness and price fluctuation is contradictory to the valueinvestment philosophy, and Buffett rightly says: "Most of our largestock positions are going to be held for many years, and the scorecardon our investment decisions will be provided by business results overthat period, not by prices on any given day."It is like being wedded to your stock- for life. Unless there is achange in company\'s economics for worse, you would continue to holdthe share for eternity.It follows that when you are evaluating a company, you must give dueweight to the quality of management as well.Warren Buffett explained this factor by observing that you shouldchoose the President of the company (that is, evaluate the quality ofthe management) the way you would choose your son-in-law.If you have chosen your company properly, and the share grows at arate substantially higher than the cost of money it would be wiser tostay invested in the company for a fairly long period of time.A company which you bought in a depressed condition, and which keepsgrowing at a CAGR of 20 per cent is likely to outperform the marketfor as long as the company maintains the growth rate.If the rate of growth is accelerating, you would do well to stayinvested in that company for life, though not many companies wouldqualify through this filter perpetually.Compound interest is one of the most powerful forces in the financialworld, and if you stay invested for the long term, you are bound to
encompass a couple of major crashes and booms!It is said that more money is made in being static rather than bybeing hyperactive in the market. Daily fluctuations should not bothera long-term investor. The average holding period of investors such asWarren Buffett has been 10-12 years. Remember, this is the average,some of the investments they would hold on to for 20-25 years or evenmore.Focusing on the short-term aspects of a company including bothbusiness and price fluctuation is contradictory to the valueinvestment philosophy, and Buffett rightly says: "Most of our largestock positions are going to be held for many years, and the scorecardon our investment decisions will be provided by business results overthat period, not by prices on any given day."It is like being wedded to your stock- for life. Unless there is achange in company's economics for worse, you would continue to holdthe share for eternity.
It follows that when you are evaluating a company, you must give dueweight to the quality of management as well.Warren Buffett explained this factor by observing that you shouldchoose the President of the company (that is, evaluate the quality ofthe management) the way you would choose your son-in-law.If you have chosen your company properly, and the share grows at arate substantially higher than the cost of money it would be wiser tostay invested in the company for a fairly long period of time.A company which you bought in a depressed condition, and which keepsgrowing at a CAGR of 20 per cent is likely to outperform the marketfor as long as the company maintains the growth rate.If the rate of growth is accelerating, you would do well to stayinvested in that company for life, though not many companies wouldqualify through this filter perpetually.Compound interest is one of the most powerful forces in the financialworld, and if you stay invested for the long term, you are bound to
When John Maynard Keynes said, "In the long run we're all dead", hewas certainly not referring to the stock market. He was referring tothe counter-cyclical demand management policies that governments oughtto be following in the short run. The bottomline is that since it isimpossible to predict whether you are now at the top of a bull run, orat the beginning of a long period of depressed market, it always makesmore sense to stay invested for a sufficiently long period of time.Historically, the longer the period of investment in equity, thehigher is the return and the lower the risk of losing your capital. Ifyou are likely to need money within five years, stay away from thestock market.
Like the fabled tortoise that beat the hare in the race, the investorwho stays on for the long term is more likely to achieve his goalsthan the investor who chases "hot tips" for quick profits in the stockmarket.
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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. "Old Rules...but Very Good Rules" If I've learned anything in my 17 years 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.
1. 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.
2. 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.
3. 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.
4. 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.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. 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.
8. 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.
9. 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 guerrilla 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.
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