Posted by Jill Kerby on April 29 2009 @ 23:01
KNOW THE RULES BEFORE YOU TRADE
Investment clubs were all the rage during the boom years; groups of like minded people, with modest amounts of discretionary income to invest would get together once a month to pick and choose individual shares that would create a portfolio that would, ideally produce profits. A whole industry of training seminars and broking services grew around the new investment hobby.
As a member of such a club, I also know the downsides: enthusiasm tends to wane after the first few meetings; a few people tend to dominate the club and the group can be easily swayed by the dominant figures.
Another problem is that most members prefer to be presented with stocks to buy, rather than either do any research or assessment and anyway, the level of research can be very rudimentary, especially during a boom when everyone is already convinced that the shares will only keep going that way.
The easiest part of the club is its organisation – the setting up of the rules and appointment of club officers, the collection of contributions, the buying and selling – all the things you may think could be complicated and time-consuming.
In hindsight, probably every thinking member of an investment club set up in the last few years would do a lot of things differently – including my own club. Aside from the half-hearted research, we foolishly failed to implement two of the most important rules of successful share investing/trading – the setting up of a trailing stop order which automatically sells shares that drop by a certain value and to never buy more shares once their price is in freefall.
Professional traders and investors – at least the genuine ones who make more money than they lose – say that the vast majority of novices and the clubs they belong to make all of these mistakes and more. “Any idiot can make money in a booming stock market” they say. It’s when markets are falling or highly volatile that you “you see who is swimming naked”, as the legendary investor Warren Buffett once famously remarked.
If you believe that there are many great shares to buy and trade right now then you might want to look over Dennis Gartman’s Rules of Trading which you can see in its entirety here: (http://www.page88.co.za/cr/tradingrules.shtml)
Keep in mind that many people believe that despite the recent, shaky, stock market rally, there is a lot of bad economic news still to come and globally, stocks may have some way to fall yet before they bottom out. Use this time before you get in to do your research and to ‘learn the rules’:
- Never, under any circumstance add to a losing position ... to do otherwise will eventually and absolutely lead to ruin!
- Trade with confidence; be willing to “change sides readily when one side has gained the upper hand”. [This is also where having an automatic trailing stop is essential.]
- Your ‘mental capital’ – your fund of knowledge and research - is “more important and expensive” than your financial capital.
- Buy high and sell higher. “We can never know what price is ‘low’. Nor can we know what price is ‘high’. Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed ‘cheap’ many times along the way.”
- Understand the fundamental differences of trading in a rising bull market and a falling bear market.
- ‘Markets can remain illogical longer than you or I can remain solvent’ – John Maynard Keynes.
- Sell markets that show the greatest weakness, and buy those that show the greatest strength.
- Timing is important…but very difficult. Trading runs are cyclical…trade large and aggressively when trading well; trade small and modestly when trading poorly.
- To trade successfully, think like a fundamentalist; trade like a technician. Keep your technical systems simple.
- Respect and embrace the very normal 50%-62% retracing of share prices back to major trends. [The idea is not to be on the wrong side of the retracement.]
- Markets are driven be human beings making human errors and also making super-human insights.
- Bear markets [like now] are more violent than bull markets.
- Be patient with winning trades; be enormously impatient with losing trades.
- The market is the sum total of the wisdom ... and the ignorance of those who deal in it and we dare not argue with the market's wisdom.
- If a market is strong, buy more; if a market is weak, sell more. [Just be sure about the true nature of its ‘strength’ and ‘weakness’.]
- Do the trade that is hard to do and that the crowd finds objectionable.
- There is never just one ‘bad news’ cockroach!
- All rules are meant to be broken…. but only very, very infrequently.