The Investors Bible

[excalibur]

Here is a nice thought that I hope will start a big discussion:


A stock should be sold no matter if one is loosing or wining.
A stock should never be bought for the lonely reason because it is falling or rising

One must maintain an absolute objective standpoint.

 

[tech/a]

The gospel according to Tech/a Chapter One Psalms (1)--(21).

(1) Most traders are undercapitalised.
(2) Know your risk.
(3) Keep TOTAL risk on any one trade to 1-2% of total capital.
(4) Set a stop--- both price and time stop--wether you trade fundamentally or technically.
(5) Never become emotionally attached to a purchase.
(6) Never put yourself in a position where taking a loss will hurt you financially.
(7) Know your Return to Risk.
(8) Know your Positive Expectancy.
(9) Know your expected highest run of consecutive losses
(10) Know your Maximum Drawdown---on initial starting capital.
(11) Dont know (7-10)--You MUST keep records---you MUST backtest--You MUST KNOW!
(12) If you lose 25% of your trading capital base--STOP TRADING--whatever you are doing is NOT profitable---Refer to (11).
(13) Understand there are times to be in the market and times to stand aside---define these for YOUR trading.
(14) If your not returning 20% P/A trading you should be looking at other investment vehicals.
(15) Understand the power of Compounding.
(16) Understand the power of Leverage.
(17) Build your fortune PATIENTLY----dont try to turn $10k into $250k this year!!
(18) Get into the habit of admitting your wrong---the quicker you admit it the less expensive it will be.
(19) Be quick to activate stops and slow to exit.
(20) Picking Bottoms will lead to dirty fingers.
(21) Take the time to become an EXPERT at SOMETHING it doesnt matter much what you choose---but become an expert in something! Youll note successful people are experts in something.


Finally ENJOY life and the people in it----if you fail here you fail everywhere.

 

[ob1kenobi]

Tech/A, what a great, well thought out list. The only things I think I would add, would be to do your research, don't trust hints from friends, hot tips from questionable sources or shonks that charge a fortune to tell you something you could have gone to a library or website to find out.

I'd also add, know why you trade? I explain to my students that the primary reason as to why we work is not to pay bills. That is a secondary reason. The primary reason is that we work so that one day we won't have to work! They find this hard to get there minds around. I would say the same thing about trading, especially for people who have a day job and do this as a business on the side. I don't think it is sufficient for someone to say "I just want to make heaps of money!" Why do you want to make money trading, when you could put it into Debentures or into a Term Deposit where it would be safer? I think that once that question is answered, you can then work out a plan that will allow you to work towards that. I guess in business we call it the Prime Function.

 

[DTM]

The gospel according to Tech/a Chapter One Psalms (1)--(21).

(18) Get into the habit of admitting your wrong---the quicker you admit it the less expensive it will be.

(21) Take the time to become an EXPERT at SOMETHING it doesnt matter much what you choose---but become an expert in something! Youll note successful people are experts in something.


Finally ENJOY life and the people in it----if you fail here you fail everywhere.

(18) is normally a stumbling block for me but now when I'm really sure of something, I tell myself that I really don't know whats going to happen thereby readying myself to cut my losses. You end up sticking to the plan and if you need to get out, you do so with no emotional attachements. Sometimes you're right, other times you're wrong, but better to have smaller wins and losses when it moves against you than have one or two big losses.

Totally agree with (21)

and enjoying life and people in it are more important than making money. Better poor and happy than rich and unhappy. Actually happy and rich is best.

 

[tech/a]

DTM in relation to 18 once you understand 22-----18 comes easily.

(22) Profit in trading (in fact anything) is a NUMBERS game.
More steps forward than back (Small losses larger gains).Either more wins more often than losses OR larger wins than multiple small losses.When you look at trading this way,there is no emotion involved,no right or wrong way to trade,no right or wrong analysis----simply positive numbers---without them you can never be profitable.It is possible to make great profits knowing NOTHING about the company/commodity your investing in.

Simply concerntrate on THE NUMBERS. Profit will come.

 

[DTM]

DTM in relation to 18 once you understand 22-----18 comes easily.

(22) Profit in trading (in fact anything) is a NUMBERS game.
More steps forward than back (Small losses larger gains).Either more wins more often than losses OR larger wins than multiple small losses.When you look at trading this way,there is no emotion involved,no right or wrong way to trade,no right or wrong analysis----simply positive numbers---without them you can never be profitable.It is possible to make great profits knowing NOTHING about the company/commodity your investing in.

Simply concerntrate on THE NUMBERS. Profit will come.

Yes..., well..., ahem...., I wish I had learnt it from the forum....

For others out there who are starting out, Tech's advice is worth its weight in gold, especially for beginners who don't want to learn from the school of hard knocks.

 

[It's Snake Pliskin]

The gospel according to Tech/a Chapter One Psalms (1)--(21).

(1) Most traders are undercapitalised.
(2) Know your risk.
(3) Keep TOTAL risk on any one trade to 1-2% of total capital.
(4) Set a stop--- both price and time stop--wether you trade fundamentally or technically.
(5) Never become emotionally attached to a purchase.
(6) Never put yourself in a position where taking a loss will hurt you financially.
(7) Know your Return to Risk.
(8) Know your Positive Expectancy.
(9) Know your expected highest run of consecutive losses
(10) Know your Maximum Drawdown---on initial starting capital.
(11) Dont know (7-10)--You MUST keep records---you MUST backtest--You MUST KNOW!
(12) If you lose 25% of your trading capital base--STOP TRADING--whatever you are doing is NOT profitable---Refer to (11).
(13) Understand there are times to be in the market and times to stand aside---define these for YOUR trading.
(14) If your not returning 20% P/A trading you should be looking at other investment vehicals.
(15) Understand the power of Compounding.
(16) Understand the power of Leverage.
(17) Build your fortune PATIENTLY----dont try to turn $10k into $250k this year!!
(18) Get into the habit of admitting your wrong---the quicker you admit it the less expensive it will be.
(19) Be quick to activate stops and slow to exit.
(20) Picking Bottoms will lead to dirty fingers.
(21) Take the time to become an EXPERT at SOMETHING it doesnt matter much what you choose---but become an expert in something! Youll note successful people are experts in something.


Finally ENJOY life and the people in it----if you fail here you fail everywhere.

Tech,

Is this the new testament?

I totally agree with your message at the bottom. I enjoy meeting new people for their differences and experiences.

 

[excalibur]

The gospel according to Tech/a Chapter One Psalms (1)--(21).

(1) Most traders are undercapitalised.
(2) Know your risk.
(3) Keep TOTAL risk on any one trade to 1-2% of total capital.
(4) Set a stop--- both price and time stop--wether you trade fundamentally or technically.
(5) Never become emotionally attached to a purchase.
(6) Never put yourself in a position where taking a loss will hurt you financially.
(7) Know your Return to Risk.
(8) Know your Positive Expectancy.
(9) Know your expected highest run of consecutive losses
(10) Know your Maximum Drawdown---on initial starting capital.
(11) Dont know (7-10)--You MUST keep records---you MUST backtest--You MUST KNOW!
(12) If you lose 25% of your trading capital base--STOP TRADING--whatever you are doing is NOT profitable---Refer to (11).
(13) Understand there are times to be in the market and times to stand aside---define these for YOUR trading.
(14) If your not returning 20% P/A trading you should be looking at other investment vehicals.
(15) Understand the power of Compounding.
(16) Understand the power of Leverage.
(17) Build your fortune PATIENTLY----dont try to turn $10k into $250k this year!!
(18) Get into the habit of admitting your wrong---the quicker you admit it the less expensive it will be.
(19) Be quick to activate stops and slow to exit.
(20) Picking Bottoms will lead to dirty fingers.
(21) Take the time to become an EXPERT at SOMETHING it doesnt matter much what you choose---but become an expert in something! Youll note successful people are experts in something.


Finally ENJOY life and the people in it----if you fail here you fail everywhere.

Great Gospel tech!

It is fantastic to discover the ideals and principles of other people.
That is the main purpose of this thread.
In points 2-7-8-9 and 10, you mentioned the word know.
KNOWLEDGE
And with this word would I like to add a knew thought.
Each and every one of us should do his homework and make research in as much as he can. There is never enough information to be recieved. Especially when it deals about talking about your own money, your own company or your own home.
Before you buy a house you want to know who the house belonged to before, how it was built or in what material it was made and so on.
So it is with stocks.

INFORMATION:

Wrong information that is misinterpreted could result sometimes to a good result. By accident you would have a great investment.
To receive bad information is not so dangerous than to misunderstand correct information!
Bad informed traders become critical in the consideration of a certain stock.
The wrong interpretation of reliable or correct information leads to a false consideration.
It is the consideration that decides!

 

[Investor]

Australasian Investment Review
30th May 2005
Human Behaviour – The Greatest Barrier To Trading Success

Have you ever held on to a stock too long, in the vain hope it would return to the price at which you bought it, even though you knew in your heart of hearts this was unlikely to happen? Well, you’re not alone.

Human beings are simply not rational creatures. If they were, then no one would have ever made money out of selling pet rocks. Yet someone did, which only emphasises the long held belief that a fool and his money are easily parted.

One of the most visible examples of this adage at work is the stock market. That is not to necessarily say that the market is riddled with fools. But with the benefit of hindsight, any investor would be lying if they purport to have never made one investment decision which they later realised to be foolish. At some point, rational behaviour gave way to irrational behaviour, resulting in either money, or opportunity, being lost.

Whitney Tilson is a highly successful US money manager, and a student of human behaviour. His recent presentation, entitled Applying Behavioural Finance to Value Investing, draws upon several columns he has written for the likes of the Wall Street Journal, in which he identifies and examines those traits of human nature that turn a seemingly rational investor into a luck-be-a-lady irrational gambler.

Be warned, we are all about to enter a hall of mirrors and may not like what we see.

Tilson believes that investment success requires far more than intelligence, good analytical abilities and proprietary sources of information. Equally important is the ability to overcome the natural human tendencies to be extremely irrational when it comes to money. As Warren Buffet puts it, "Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble investing."

One piece of classical research of the 1950s revolved around a group of pigeons who quickly learnt that they could earn a reward of birdseed if they kept pecking on a feeding bar. When the birdseed is cut off, the pigeons will keep pecking the bar until realisation sinks in that no more reward is available. They will then abandon the process in a uniform manner.

However, if random element is introduced, such that reward is forthcoming sometimes but not always, the pigeons encounter a mind-spinning quandary. The rewards are there, but they can’t get their heads around how they can be consistently earned. The result in any number of experiments is that the pigeons keep returning to the bar over and over, even after the rewards have been terminated altogether. Eventually, they drop dead from exhaustion.

Fair enough, you say, but then humans are somewhat smarter than pigeons.

Consider another experiment, by the same Nobel Prize-winning economist, Vernon Smith, in which a group of participants would trade a dividend-paying stock, the value of which was clearly laid out for them.

Invariably, a bubble would form, with the stock later crashing down to its fundamental value. One might expect that the participants, having suffered terrible losses, would have learned not to speculate. Yet when they gathered for a second session, still the stock would exceed its assigned value, though the bubble would form faster and burst sooner.

The conclusion drawn is that the lesson learnt by investors the first time was not: "don’t speculate", but rather: "sell more quickly once the bubble starts to burst". Of course this doesn’t work either, as few people accurately time the top and everyone tends to head for the exit at the same time.

Says Smith, "They always report that they’re surprised by how quickly it turns and how hard it is to get out at anything like a favourable price". It is only when the session is run a third time that the stock trades near its fundamental value, if at all.

So are humans that much smarter than pigeons?

Tilson suggests that one of the biggest problems facing human investors is that they tend to be overconfident in their view of things. Not just "robustly", but "wildly" overconfident. He provides the following statistical examples:

- 82% of people say they are in the top 30% of safe drivers;
- 86% of Harvard Business School students say they are better-looking than their classmate;
- 68% of lawyers in civil cases believe their side will prevail;
- 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business like theirs would be likely to succeed;
- Mutual fund managers, analysts, and business executives at a conference were asked to write down how much money they would have at retirement, and how much the average person in the room would have. The average
figures were $5 million and $2.6 million respectively.

In regards to the last example, apparently it doesn’t matter who the audience is, the ratio is always about 2:1.

It is such irrational overconfidence that Tilson believes gets investors into trouble. Moreover, it turns out that the more difficult the task (such as predicting the price of a stock), the greater the degree of overconfidence. And professional investors – the so-called experts – are generally even more prone to overconfidence as they have theories and models which they tend to overweight.

Tilson explains overconfidence by suggesting that people generally remember failures very differently from successes. Successes were due to one’s own wisdom and ability, while failures were due to forces beyond one’s control. Thus people will tend to believe that with a little better luck or fine-tuning, the outcome will be much better next time.

Overtrading is a fine example of overconfidence, Tilson suggests. In a study of 78,000 individual investors at a large US discount broking house during 1991-96, average annual turnover was around 80%. The least active quintile, with an average annual turnover of 1%, scored a 17.5% annual return. The S&P return was 16.9% over the same period.

The most active 20% of investors, with annual turnover of greater than 100%, scored a 10% annual return.

The authors of this study thus concluded that "trading is hazardous to your wealth". And perhaps more thought-provokingly, another study by the same authors showed that investors who switch to on-line trading, hence cutting out the human broker in between, suffer significantly lower returns.

Detrimental overtrading is also evident in research conducted on the movement of funds between fund managers. Between 1984 and 1995, the average US equity fund returned 12.3% against the S&P’s 15.4%. Yet the average individual equity fund investor earned only 6.3%.

The only conclusion is that individual investors were moving their money around, chasing the best returns. The other conclusion is that this doesn’t work.

Tilson’s conclusion is that investors have an awful, unshakeable habit of piling into the hottest investment fad at precisely the wrong time. If there’s one thing as certain as death or taxes, says Tilson, it’s that investors will chase performance, almost always to their detriment.

Whereas chasing performance irrationally may be one example of detrimental human behaviour, the real problems start when one considers the other side of the equation – selling. Possibly the hardest thing an investor has to do is to make a decision to sell at a loss.

As I suggested at the very beginning of this article, the heart might know when it’s time to get out, but the head is usually on its own trip.

One’s inability to admit that one may have made the wrong decision is part of the problem. As Tilson suggested, we attribute success to ourselves, but failure to outside forces. Nevertheless, in selling situations, the real demon is the tendency to put one’s head in the sand in the irrationally desperate hope that when one pulls it out again, it will all have been just a bad dream, and the stock is back where it was.

How well we know this is misdirected blind faith, and how often we do it again.

Tilson makes the perfectly rational suggestion that an investor should always step away from their portfolio and consider, "would I buy that stock now?" If the answer is no, then why hold on?

Tilson suggests another extremely sensible exercise (he’s kind of annoying like that). Take your portfolio, and pretend you’ve turned it all into cash.

Now, from a totally fresh position, decide upon the portfolio you would really like to have now. Is it different? Yes? Then why the hell is it?

As Tilson so poignantly points out, keep in mind that a stock doesn’t know that you own it. Its feelings won’t be hurt if you sell it, nor does it feel any obligation to rise to the price at which you bought it so that you can exit with your investment – not to mention your dignity – intact.

Humans don’t only turn into irrational reprobates at the thought of selling at a loss either. An equally unjustifiable opposite is the blind hope that a stock may return to a price where you wished to buy it in the first place, having since moved up. If your rational mind can suggest that a stock is worth buying up to a certain price, then go ahead.

The same philosophy can be applied on the downside. Just because a stock you’ve bought falls in price, it doesn’t mean you must be wrong. Some short term influence may be at play, and the reality is that a dip is an opportunity to buy more at an even better price.

Tilson refers to this as "anchoring". That is the tendency to stubbornly stick to your original evaluation without taking time to step back and review any new information, or objectively analyse any specific force acting upon a stock price.

To recap, the lesson so far is: don’t get swept up into chasing a stock, but don’t be too stubborn to increase a buying price. Don’t be foolish enough to hang on to a stock when it’s fallen, but don’t sell if you still believe in it. And don’t be overconfident for no good reason. It’s all very simple, isn’t it?

Of course it’s not. But then Tilson is not trying to be sanctimonious. His writings are littered with his own self-confessed pathetic examples of when he made exactly all the wrong decisions, for exactly all the wrong reasons.

Tilson’s guide to rational investment, hewn from years of good and bad experiences, is this:

- Don’t anchor on historical information, perceptions, or stock price;
- Keep an open mind;
- Update your initial estimate of intrinsic value;
- Erase historical prices from your mind; don’t fall into the "I missed it" trap;
- Think in terms of enterprise value, not stock price;
- Admit and learn from mistakes, but learn the right lessons and don’t obsess;
- Put your original investment thesis in writing so you can refer back to it;
- Sell your mistakes and move on; you don’t have to make it back the same way you lost it;
- Be careful of panicking and selling at the bottom;
- Don’t get fooled by randomness
- You are a child of the universe, no less than the trees and the stars – you have a right to be here. And whether or not it is clear to you, no doubt the universe is unfolding as it should.

Actually the last one is from Max Uhrmann’s Desiderata, but I thought it was apt.

 

[excalibur]

The real investor must learn to look at far and beyond.
(and never only up to the point of his nose)
Combined with a bit of luck!

LABOR
UNDER
CORRECT
KNOWLEDGE

 

[tech/a]

Great stuff there Investor!

 

[excalibur]

I hope that I am not neglecting in thanking anyone in his or her donation to this thread. May I make it clear that I am not a trading expert nor any psycologist. I am just someone who wants to hear peoples points of views and thoughts. Of course accumulated information and articles in the press are formly welcome and would like to thank those that have donated up to now.
Especially Investor.
His donations in this and many other threads are incredibly rich in information.
I would appreciate although that your messages remain as simply and as briefly as possible. Thoughts need time to be thought about...
And maybe discussed about.
No hard feelings anybody!

 

[DTM]

Borrowed from Dan Zanger:

DAN’S 10 RULES

1 - Make sure the stock has a well formed base or pattern such as one described on this web site and can be found on the tab “Understanding Chart Patterns” on the home page, before considering purchase. Dan highlights stocks with these patterns in his newsletter.

2 - Buy the stock as it moves over the trend line of that base or pattern and make sure that volume is above recent trend shortly after this “breakout” occurs. Never pay up by more than 5% above the trend line. You should also get to know your stocks thirty day moving average volume, which you can find on most stock quote pages such as eSignal’s quote page.

3 - Be very quick to sell your stock should it return back under the trend line or breakout point. Usually stops should be set about $1 below the breakout point. The more expensive the stock, the more leeway you can give it, but never have more than a $2 stop loss. Some people employ a 5% stop loss rule. This may mean selling a stock that just tried to breakout and fails in 20 minutes or 3 hours from the time it just broke out above your purchase price.

4 - Sell 20 to 30% of your position as the stock moves up 15 to 20% from its breakout point.

5 - Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. Remember stocks are only good when they are moving up.

6 - Identify and follow strong groups of stocks and try to keep your selections in the these groups

7 - After the market has moved for a substantial period of time, your stocks will become vulnerable to a sell off, which can happen so fast and hard you won’t believe it. Learn to set new higher trend lines and learn reversal patterns to help your exit of stocks. Some of you may benefit from reading a book on Candlesticks or reading Encyclopedia of Chart Patterns, by Bulkowski.

8 - Remember it takes volume to move stocks, so start getting to know your stock’s volume behavior and the how it reacts to spikes in volume. You can see these spikes on any chart. Volume is the key to your stock’s movement and success or failure.

9 - Many stocks are mentioned in the newsletter with buy points. However just because it’s mentioned with a buy point does not mean it’s an outright buy when a buy point is touched. One must first see the action in the stock and combine it with its volume for the day at the time that buy point is hit and take keen notice of the overall market environment before considering purchase. Are stocks moving briskly or are they acting sluggish or even worse, are we in a hefty sell off.

10 - Never go on margin until you have mastered the market, charts and your emotions. Margin can wipe you out.

Note: If you are new to trading or investing, I suggest reading these rules many times over until they become ingrained so you can act without emotions.

Stocks that breakout and move up with tremendous volume and close near the highs of the day seem to work out best. However many stocks that move up 15% or more on breakout day often fail. You’ll just have to watch your stocks action like a hawk and get to see and understand these things over a long period of time. If trading were easy everyone would be making millions. It’s not; it takes years and years of hard work and long hours.

Many traders employ a half hour rule, meaning that for the first half hour of the day many traders do not buy any stock that gaps up in price. If the price holds after the first half hour then often many traders will step in a buy the stock. I find this rule works good after the market has moved up for few strong weeks and is not very effective at the start of a new strong move.

If it’s earnings season then it’s an absolute must that you know the date that your company reports its earnings. Many traders prefer to be out 100% before a company reports its earnings in case the company misses its earnings or guides lower. Others I know reduce positions substantially before earnings are released to lower risk. The choice is up to you.

 

[excalibur]

A very nice check-list there DTM

Something to be printed I think.

 

[Battman64]

A great read,thanx

 

[excalibur]

A great read,thanx

Your welcome Battman
Hope to be hearing from you.

 

[Battman64]

Thanks excalibur,
I hope to post more often.

 

[Mofra]

OK, this is decades old (this version from 1949, from the book "45 Years in Wall St) but it is interesting to read the rules of one of the greatest traders of all time.

TWENTY FOUR NEVER-FAILING RULES BY WD GANN

1. Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital in any one trade.
2. Use stop loss orders. Always protect a trade when you make it with a stop loss order 3 to 5 points away.
3. Never overtrade. This would be violating your capital rule.
4. Never let a profit run into a loss. After you have made a profit or 3 points or more, raise your stop loss order so that you will have no loss of capital.
5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts.
6. When in doubt, get out, and don’t get in when in doubt.
7. Trade only in active stocks. Keep out of slow, dead ones.
8. Equal distribution of risk. Trade in 4 or 5 stocks, if possible. Avoid tying up all your capital in any one stock.
9. Never limit your orders or fix a buying or selling price. Trade at the market.
10. Don’t close your trades without good reason. Follow up with a stop loss order to protect your profits.
11. Accumulate a surplus. After your have made a series of successful trades, put some money into surplus account to be used only in emergency or times of panic.
12. Never buy just to get a dividend.
13. Never average a loss. This is one of the worst decisions a trader can make.
14. Never get out of the market just because you have lost patience or get into the market just because you are anxious from waiting.
15. Avoid taking small profits and big losses.
16. Never cancel a stop loss order after you have placed it at the time you make a trade.
17. Avoid getting in and out of the market too often.
18. Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
19. Never buy just because the price of a stock is low or sell short just because the price is high.
20. Be careful about pyramiding at the wrong time. Wait until the stock is very active and has crossed resistance levels before buying more.
21. Select the stocks with small volume of shares outstanding to pyramid on the buying side and the ones with the largest volume of stock outstanding to sell short.
22. Never hedge. If you are long one stock and it starts to go down, do not sell another stock short to hedge it. Get out at the market; take your loss and wait for another opportunity.
23. Never change your position in the market without good reason. When you make a trade, let it be for some good reason or according to some definite plan; then do not get out without a definite indication of a change in trend.
24. Avoid increasing your trading after a long period of success or a period of profitable trades.

 

[Mofra]

I should point out that I disagree with his rule no. 9, especially for ETOs - Gann obviously never faced our MMs :

 

[Battman64]

They are "Twenty-Four Never-Failing" great rules.
Thanks Mofra

When asked "Why do the great majority of people who buy and sell stocks lose?" WDGann gave these three main reasons:

1.They overtrade or buy and sell too much for their capital.
2.They do not place stop loss orders or limit their losses.
3. Lack of Knowledge. This is the most important reason of all.