This morning’s post discussing Floyd Norris front page NYT column generated even more pushback than I expected.

I am always trying to create rules to help make better investment decisions and fight against my own wetware.  The earlier comment stream led me to these ten ideas; ignore them at your own risk:

• Whether a premise is fundamentally true or false is irrelevant as to whether it is actionable. If enough fools believe something is so, it will impact the markets.

• Always be conscious of the cognizant biases and selective perceptions you bring to investing. Learn to recognize the same bias in the crowd, the media, and Wall Street. Avoid the herding effect.

• After a collapse (i.e., a 55% market sell off), most of the terrible structural news that existed before the collapse is reflected in prices. Let it go.

• You must acknowledge when the data gets stronger or weaker, regardless of your current market posture. Be skeptical, but not rigid.

• Market Pros simply cannot afford to sit out a major (i.e., 75%+) rally; Individuals that miss that sort of move should reconsider what their investment strategies are. If your approach has you long during selloffs and in cash during rallies, something is wrong.

Everything cycles: Recessions turn into recoveries; bull markets give rise to bear markets. Every  rally that there ever was or there ever will be eventually ends. Adapt to this truism or lose your money.

• One of the hardest things to do in investing is to reverse your thinking. It is even more difficult to do after a specific approach has been profitable for a long time. The longer the period of successful thinking, the more important the reversal will be.

• Cheap markets can get cheaper; Expensive markets can get dearer.

• The markets frequently diverge from the macro economic environment. This can be both long lasting and maddening; Your job is to be aware of how wide the gap between the two is.

• Variant perception is a rarity; Identifying the moment when the crowd figures out they are wrong is rarer still.

For those of you fighting the tape, ignoring the data and arguing against even the mere idea of a recovery, ignore the above at your own risk . . .

Category: Apprenticed Investor, Markets, Psychology, Really, really bad calls, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

84 Responses to “10 Psychological, Valuation, Adapative Investing Rules”

  1. IvoZ says:

    Barry,

    I admire your desire to be and success in being practical.

    But some quotes need some more comments, e.g.

    “After a a 55% market sell off, most of the terrible structural news that existed before the collapse is reflected in prices. (Let it go).”
    -> Well, I have noticed some markets historically that dropped 75%+ after credit busts / major busts… (maybe not immediately though)

    “Market Pros simply cannot afford to sit out a 75% rally; Individuals that miss that sort of move should reconsider their investment strategies immediately”
    -> This rally has been too quick to be able to consider anything meaningful before it went too far. Do you suggest one chases it further? Is it party like it is 1999? What exactly is your better “investment strategy”?

    “The markets frequently diverge from the macro economic environment. This can be both long lasting and maddening; Your job is to be aware of how wide the gap between the two is”
    -> And do what with that knowledge? Hope to exit before anyone else?

  2. Greg0658 says:

    please rebutt .. theres a David Gilmour song with the line “theres no way out of here when you come in your in for good” .. seems that is a pysc in play .. and with the ceo pay thing & boards that choose whether to pay dividends or not .. wash rinse repeat / please rebutt …. love the pipes / don’t abuse them

  3. peter north says:

    Thanks, Barry. Some very useful wisdom in that list. Wish I had those items in mind over the last year.

    I’m pretty disappointed in myself for being so stubborn. But it seems like such a fine line between being open-minded and being too quick to second-guess/too easily swayed. I struggle with that.

    On the bright side, I make it a point to not have to re-learn painful lessons. :-)

  4. Peter,

    Thanks for the kind words

    PS: I’m a big fan of your video work.

  5. popejtr1 says:

    Barry, I have made a lot of money (by my standards) over the last two years by listening to you. You give the best advice available for people that want to make money in stocks, both for the long term and the short term. Unfortunately, the blog has gradually become a hang out for losers who constantly paint a negative picture of the economy, of the world , and of the future of America (If I read one more jerk spouting off about the end of the American empire and comparing our demise to the end of Rome I am going to puke). Most likely these posters have crappy personal lives, or a failed business, or some other problem and want everyone else to share their misery. Not sure what you can do this about this, but you used to get more balanced comments posted. Nevertheless, I plan to stay long stocks as long as you are long.

  6. Mannwich says:

    Great list, Barry. Keep on keepin’ on……..

  7. Mike in Nola says:

    Barry, I think you got a lot of pushback because of the now almost cliche disconnect between Main and Wall streets. So, a few trillion dollars here and in China generated a few positive months and some of those whose 401k’s are zooming back feel rich again and are spending a few bucks. But, that doesn’t remove skepticism about a real recovery. At some point the Fed cannot continue zero rates and the deficit has to be dealt with. It will come home to roost. You also have the property bubbles in China, Australian and Canada that will deflate at some point. We have to accept that we are not the big bopper any more what happens in these other places has a big effect.

    That said, I’m sure the prop desks, with free money from Ben, can drive the market higher and maybe suck in some late comers, as they did in 2007. Since you’re already in, there’s no sense in bailing.

    I think the conclusion of Edward Harrison’s post about the Greek situation this morning captured the mood of most here.
    http://www.creditwritedowns.com/2010/04/fitch-downgrades-greece-to-bbb-with-a-negative-outlook.html

  8. PatientCash says:

    To posit as a principle that no “market pro,” can afford to sit out a 75% rally is ridiculous. It’s the same kind of argument that realtors were making in 2006 in Sacramento. “If you don’t get on the elevator you’ll be left behind.” It was true for ten minutes, then it wasn’t anymore.

    If you have cash flow, savings, and a safe place to live you can afford to sit out any rally. The most dangerous sentiment to indulge is the the anxiety that everyone else is making easy money and you’re being left behind. That’s the latecomer’s mind. When those folks capitulate and get on the bull train, it’s ready for a reversal.

    ~~~

    BR: Ahhh, but the specs and flippers in SoCal weren’t professional managers of OPM!

    And so far, its been 13 months, and 76%, following an 18 month, 55% collapse — not 10 minutes.

  9. Robespierre says:

    Barry, why do you assume that people that are criticizing your previous retail blog are as you said “fighting the tape”?. Mish went bullish at the same time as you did (more or less) but he still drills on the data to find out what is what. The criticism is not if you are bullish or bearish the criticism is that you no longer seem to be objective about the underlying numbers. Don’t get me wrong anyone can still be long the market even after looking at the data under the hood…

  10. I was generalizing, not referring to Mish.

    But why assume I don’t drill beneath the data? The Household survey quarterly data change is somewhat obscure — less so now that its on the NYT front page.

    At a certain point, my rants about BLS Birth Death adjustment, U3/U6, and inflation gaming became boring, old hat to me — and wildly recognized. I have to laugh when I get an email from a newbie asking me if I know what U6 is. (My answer is usually “You know about this because 2 years ago, I convinced Bloomberg/WSJ/NYT into reporting it”)

    But really, does anyone want to hear another one of my rants about Hedonics? At a certain point I have to move on to the next great misreported data point.

    And speaking of which — ISI puts out a great State tax chart — I’ll have to dig up. But it confirms what the Retail and NFP data shows…

  11. KentWillard says:

    I thought the tax revenue data out of California was compellingly good news. But angry people tend to congregate on blogs and feed on each other’s bile. When anger has blinded them, and there is no rational discussion possible.

    To me the question is not if there is a recovery, but if it is sustainable. By Q4, will the benefits of government stimulus (fiscal and Fed buying) have peaked? Regardless, cheap money and increasing aggregate demand look assured for quarter or two.

    Most importantly, it is a beautiful day outside. I’m outta here.

  12. SavetheWhales says:

    Barry,

    With all due respect to your profession, the reckless gung-ho momentum swing trading that is willfully ignorant of fundamentals PREYS on wetware weaknesses. This immense rally is *morally* disgusting.

    Once again, worthless stocks are pumped to the moon. Once again leverage is abused.

    Having met my fair share of Wall St. types (and again no disrespect to you for generously providing your thoughts and this forum over the years), most are shameless in their pursuits. In well refereed endeavors, this is admirable.

    Our investing environment now is anything but well refereed. Taxpayers, savers and the prudent are getting openly robbed.

    Is it any surprise that bonuses are back, but jobs aren’t?

  13. [...] Ten investing rules from Barry Ritholtz.  (Big Picture) [...]

  14. Mike in Nola says:

    I guess Muriel Siebert must have a failed business or miserable personl life:
    http://www.cnbc.com/id/36315756

  15. george matkov says:

    Barry, I agree with a lot of what you say, but the time horizon for many of us is different:

    - some of us still remember that the Nikkei was was over 40K about 25 yrs ago. Didn’t tulips go for a hell of a lot more a couple of hundred years ago?
    - the word “investment” used to mean something you hold for at least 5yrs.
    - I haven’t figured out how to analyze the current market in the context of all the money being provided by the Fed. Until I feel more comfortable with that I am not putting new money in.
    - I have a life so I don’t want to have a market ticker in front of my face most of my waking hours.

    etc.

  16. alfred e says:

    I find it entertaining that you are waxing eloquent as you ride the crest of the wave up.

    Isn’t this how all the bubbles are supposed to work? First prove the bears wrong and you right, beat them into submission. And then take their money from them.

  17. Wasn’t I “waxing eloquent” as I rode the crest down the from 12/07 – 3/10 ?

    By the same logic, did not we prove the bulls wrong then, beat them into submission, and then take their money from them?

    Don’t get stuck at 5:30

  18. cognos says:

    Simply awesome stuff. I think the best line is –

    “One of the hardest things to do in investing is to reverse your thinking”

    IF you’ve been wrong and its been painful. You HAVE to have a bias to reversing your thinking. Breaking your attachment with a given stock, idea, thesis, etc… has long-term helpful consequences.

    Even IF you are eventually right… It reminds us, were looking to be right – in the first place. Not eventually.

  19. The Curmudgeon says:

    Those were nice tips for traders in the grand casino that is Wall Street. But you were emphatically not describing how to “invest”. Investment implies a much longer horizon than just riding short-term waves up and down. But I know, BR, you makes your money trading, and this is fundamentally a forum for traders, so I won’t bore you again w/ my reasoning that the fundamentals for “investment” still suck.

  20. Casual_Observer says:

    Barry,

    This is a good post, despite the negative critcism. I’m a recovering perma-bull, so your site has helped me immensely the past year.

    A few thoughts.

    I think your first point can be rephrased to the more common aporism of “perception is reality.”

    Second, I think some of the commenters above missed the import of your caveat “Market Pros,” which I think applied to more than one of your points. Stated alternatively, “if you get paid to manage other people’s money, you can’t miss this large of a market swing just because you don’t think the underlying data jives with the market’s direction.” You get paid to (i) protect downside AND (ii) generate reasaonble upside. I think some of the commenters neglected (ii).

    Also, I think another thought could be added, particularly for individual investors. One of the comments from a market pro that really struck me in the last twelve months was “I’ll give you the first 20% and the last 20% of any market move and I’ll be happy keeping the middle 60%.” (I didn’t write it down so I can’t attribute it. I think I may have seen it here.) I think that’s pretty wise for an individual investor. If you can keep that mindset, you can make a pretty good return without getting too caught up in emotion.

    Now, the question is really, when should we get out of this market? Are we in the last 20%.

  21. alfred e says:

    @BR: I think we are saying the same thing. It’s on the way down you pick-em clean.

    Anyway, a little sparring isn’t all bad is it?

  22. [...] Ritholtz at the Big Picture recently posted a list of ten rules for investing.  He notes how creating rules can help us offset [...]

  23. Casual_Observer says:

    That’s “aphorism”, not “aporism” in the thrid line above. Dangit.

  24. cognos says:

    Lets say there is roughly a 50% chance the S&P500 posts new all-time high earnings in 2011.

    Current estimates are for $94/shr in 2011.

    If that estimate gets beat (again, say 50/50)… where will stocks be?

  25. The Curmudgeon says:

    Only up cognos, only up. Trees, like stock markets, really do grow to the sky.

  26. jac says:

    Barry,

    Great job as always. You seem to hitting the right chords.

    Market acts like a wild animal in my view. It seems to make sense when it is working your way.

    More and more I think about the markets, technicals are always better than fundamentals. Fundamentals put a lot of human bias and subjective measures and can cause distortion to our conclusions.

    After getting bit by the horrible stock returns for a decade now, I am not surprised – people are bearish and I continue to think, they will stay that way for several more years. If people can’t take profits, I don’t think the bullish/bearish debate matters as much. People will give back their gains and market will moderately beat treasuries in coming years (Hussman and others predictions based on valuations and structural issues).

  27. Mike in Nola says:

    cognos: I suppose we can say there’s a 50% chance. No basis for it, but as long as we are theorizing.

  28. cognos says:

    Mike — why dont you like 50%? I actually would bet that detailed analysis of 2-yr out earnings estimate would show they get “beat” MORE than 50% of the time. The problem isnt estimates are too high, too OFTEN. Its that when they miss… they miss BIG.

    I have said it before… it is quite logical that earnings estimates get beat by around 10% around 80% of the time. Then of course when they miss, its because of an unforseen event (Lehman/AIG) and then they miss by -50%.

    Just because the magnitude of a miss is LARGE, does not make it a frequent occurance. In fact, it tends to make it and distinctly INFREQUENT occurance. My point then, is that the market is already priced for a significant miss / slowdown and yet it is more than 50% likely to beat and post all-time high estimates. Just playing the dumb historical stats.

    Classic recovery.

  29. Jim Greeen says:

    Over coming deeply emotional confirmation biases defies any rule of thumb for investing.

    Like trying to think clearly after you meet someone that absolutely rocks your world. All you can do is hang on, hope for the best and with a bit of luck enjoy the ride..

  30. call me ahab says:

    this line-

    “cannot afford to sit out a 75% rally; Individuals that miss that sort of move should reconsider their investment strategies immediately.”

    hahahahahahaha- tha’t funny shit there BR-

    it’s a joke right?

    aren’t all strategies pursued w/ the goal of making money or preserving capital- as it’s never one’s intention to lose money- right?

    and after 10 years of zero gains and gut wrenching movements in the stock market- this dude is giving lectures on what folks should have done- and that they should now reconsider their strategy after a 75% run up in stocks-

    the man’s obviously a genius-

    gibberish

  31. Ahab,

    If I was telling people to do this AFTER the fact, your criticism would be valid. But I have been saying this stuff — repeatedly — for many many years: See for example the Apprenticed Investors series I wrote at TheStreet.com in the mid 2000s about stop losses, buy & hold, cognitive biases, etc. THIS ISN’T AN AFTER THE FACT WARNING — it was all BEFORE THE FACT. And if you missed the repeated warnings HERE about Housing in 2005/06, Banks in 2006/07, Brokers in 2007/08, well then you simply were not paying close enough attention . . .

  32. Casual Observer says:

    Isn’t an investment something more than a liquidity fueled rally ? I think its checkmate for the investors out there because the truth of the matter is the stock market is primarily a liquidity driven machine and has little to do with investment fundamentals. I think another word for that is casino.

  33. call me ahab says:

    . . .and I guess my point is-

    it’s easy to look at an historical chart and point out all the entry and exit points points to make big change-

    so maybe ol’ Floyd Norris should have told people in real time to consider closing their shorts and going long- like Prechter did in February 2009- telling people what they should have done after the fact and to reconsider now seems pointless

  34. ZedLoch says:

    one of the best posts i’ve read in a long time.

  35. Marcus Aurelius says:

    Barry Ritholtz Says:
    April 9th, 2010 at 12:23 pm
    Peter,

    Thanks for the kind words

    PS: I’m a big fan of your video work.
    ____________

    Ha!

  36. wally says:

    “• Market Pros simply cannot afford to sit out a 75% rally; Individuals that miss that sort of move should reconsider their investment strategies immediately.”

    “• Cheap markets can get cheaper; Expensive markets can get dearer.”

    Contradictory things. The difficulty is that the first thing – a big rally – can only be identified after the fact. If you put your money into what was instead a ‘cheap market’ that got cheaper, you’d be toast and you wouldn’t be around later talking about the big rally. The hardest thing in investing is to look back and identify what you really “knew” as opposed to what you lucked into.

  37. call me ahab says:

    wally Says:

    “The hardest thing in investing is to look back and identify what you really “knew” as opposed to what you lucked into.”

    now those words beat anything Floyd Norris had to say- as if we haven’t heard his bullet points before- worded differently possibly and by different people- but saying the same old tired lines

  38. Rightline says:

    Lots of focus on this point…

    “cannot afford to sit out a 75% rally; Individuals that miss that sort of move should reconsider their investment strategies immediately.”

    The same thing was being said at 40%, 50%, 60%, 70%…

    The Denninger refugee mentality here is maddening.

    Pounding the table harder and screaming louder doesn’t equal gains.

    What happened to trading the tape you are given?

  39. Bokolis says:

    You were out front with seeing this mess and, more importantly, you seem to know how to ride the lightning…and it brought everybody to the party.

    You then took us to another party- the one with the cool kids- and you are the only one we know at this party. Like the girlfriend who’s had enough, we all want to leave. But, you’re our ride back and you want to have one (or two, or…) for the road (proving that bull markets ARE more fun). So, you’ve told everyone that doesn’t want to stay to take a cab and they’re all sore at you.

    Hope you had your specs on for Peter two-quart’s work…he doesn’t just get on with the girls, you know.

  40. Bokolis —

    That is quite a fascinating way to describe it — I appreciate the poetry of the image you paint about the market party (‘ll leave the JOMG specifics about Mr. North to others)

  41. PatientCash says:

    Market Pros, ie. professional money managers, can’t afford to miss a 75% rally because they’d be out of a job. I wonder what the net flows have been in Mish/Sitka’s Hedged Growth since mid-2009?

    Ordinary mortals can afford to miss any rally, as long as they have income, savings, and a place to live. The market is cyclical and there are new opportunities all the time.

    What ordinary mortals cannot afford is to risk coming late to the party and paying for the beer. Anyone who’s been sitting cash since March 2009 would be wise to think twice before going all in at this point. This is just regression. The current rally is stretched, by any measure.

    The most dangerous point in the market cycle for the cautious investor is exactly here, when he begins to feel that he’s being left behind. As these folks begin to capitulate and put their money into the market the stage is set for a reversal. When the most timid guy in the office reluctantly puts his 401k back in play, that’s when I’d look to take profits.

    I have no idea if we’re there yet or not, and because I didn’t get in early I’ll express my uncertainty with lots of cash in my portfolio. No way will I short this rally. No way will I buy it.

  42. Sunny129 says:

    If the professionals disagree so deep and wide on “Are we on recover wagon or a wagon heading over the cliff, again” imagine the mental anguish and dilemma of retail investor like me!

    You read blogs focusing fundamentals which most them are perma bear like Mish Shedlock which I ended up agreeing most of the time. Then read blogs like BP where fundamentals second seat to technical and perception induced by vested interests including massive intervention of Govt favoring one industry over another and sudden suspension of M to M.

    My approach to the market was successful till the M to fantasy accounting was adopted. I utterly and foolishly (in retrospect) ignored the severe effect of that on my portfolio holdings. I was +8% in Nov of 2008 and gave up all my gains and then some, as BP aptly ,put it fighting the tape. I adopted to the changing ‘perception’ since last fall but what I was able to protect in 2008 compared to majority, I lost instead in 2009. I am self educated investor and have been successfully investing since 1982. But the events in early 2009 and brazen and deep intervention of Govt, into so called free market” rigging the market repeatedly is simply shocking! I never thought this would occur in America, birth place of FREE MARKET CAPITALIST Economy!

    Perception has won over ‘reality’ based fundamentals repeatedly so far!

    All the good stats favoring recovery, stated on numerous comments above, came after throwing Trillions of Taxpayers money for the past 18 months and suspending of M to M! Are all these sunny data mentioned real or propped up, will be revealed when the real ‘Mr. Economy’ tries stand up in the next 2-3 qtrs!

    But again, in the end I grudgingly have to agree with BR – Do you want to be right or make money. Hard to disagree.

  43. VennData says:

    Ahab,

    Those who don’t learn from the past… are joining the Tea Party “movement.”

  44. jrod918 says:

    BR:

    What do you need to see that would cause the market to correct 20% to 30%?

    Thanks for the great blog!

  45. call me ahab says:

    here is some sage advive for you Rightline- if only because I am a genius and “all knowing”-

    right before the market crash of 1987 you should have shorted the market- and then went long immediately thereafter-

    if you didn’t- please reconsider your investment strategey- because you cant afford to sit those things out

  46. call me ahab says:

    oh I’m always learning VennData- I have just learned that BR- from his newest thread- is basically all in on any company that has government backing- such as C- which he lambasted for better part of a year-

    also- VD- is this is not valid?

    “so maybe ol’ Floyd Norris should have told people in real time to consider closing their shorts and going long- like Prechter did in February 2009″

    and please see my post to Rightline- it’s sage-

    and the Tea Party- please- never heard of a middle class rebellion in my life- nonsense- sure they’ll vote- but that’s about all they’ll do- all noise-

    and you should be grateful- if it helps splinter the Republicans- it will only help Obama

  47. Rightline says:

    ahab, your advise is well taken. you may also want to look at what bespoke has to say about this trend and potential pullback…

  48. peter north says:

    C’mon, Ahab. If you want to take shots at some useless turd who adds no value, I’d respectfully direct you toward CNBS. Tons of ‘em there. But Barry doesn’t deserve that.

    I’m a young-ish (under 40) long/short equity portfolio manager, and I consider myself pretty sharp. But I’ve learned a lot from BR. The stuff in his list might be common sense to you and some others, but I will admit it wasn’t for me.

    I don’t expect Barry (or myself) to be Nostradamus; the market could go up or down from here. The direction it goes doesn’t invalidate solid reasoning or wisdom. What to do now is up to each of us. Just my opinion.

    PN

    PS: Thanks RE my video work, Barry, but as Jackie Treehorn said, “Standards have fallen in adult entertainment. It’s video, Dude. Now that we’re competing with the amateurs…” You know, working in the financial markets isn’t all that different, really.

    BR is nothing like those types. I’m reading Bailout Nation right now (love it), and I have gotten a lot of helpful nuggets since I’ve been following Barry. I appreciate his irreverent angle, and even if I had some instincts about some of the points in the list above, I didn’t listen to them. So, count me as one pro who wou

  49. peter north says:

    Whoops. Thought that last paragraph was lost. My copy editor is fired.

  50. call me ahab says:

    peter north-

    from BR’s latest post- just buy C- all you need know to be a financial “winner”-

    his latest advice- “buy what you hate”- the companies w/ the worst management and track record- winning advice my friend- what could go wrong?

    ~~~

    BR: Read the whole interview — I even WTF? the headline, cause its so bizarre. Also, it is true to the idea of following your metrics even when they lead you to crap you hate.

  51. I-Man says:

    Excellent post Jah Ritholtz…

    Bookmarked.

    1L,
    -I

  52. alfred e says:

    @peter:

    “PS: Thanks RE my video work, Barry, but as Jackie Treehorn said, “Standards have fallen in adult entertainment. It’s video, Dude. Now that we’re competing with the amateurs…

    ” You know, working in the financial markets isn’t all that different, really. ”

    Gosh, let me think about what that last quote means.

  53. leftback says:

    I just read Barry’s thoughtful posts today and the comments. I hear it, understand it, get it. All of it.. and yet..

    Quite a lot of Bear taunting. It must be especially hard for those who were short at the “Dougie Kass Bottom” (aka the Leftback Lows) and refused to change their philosophy. It’s bad enough for those of us who called the rally but then bailed on it too early.

    Of course a lot of the taunters are Permabulls who are back to being 25% underwater or so… it’s really getting very hubristic among equity longs now. Not that Barry hasn’t been correct but the people who are following him now (COGNOS et al.) are not thinking about The Big Picture any more, it’s just stocks stocks stocks, market going up forever, despite the absurdities we see every day – e.g. the rallies in stocks that will probably prove to have zero value, while dividend paying stocks languish. This is the stuff of tops, or melt-ups into tops.

    If you are Bernanke & Co., then to avoid a cataclysm one of the things you had to do was you needed to launch a rally that was LARGE enough and last LONG enough to make people feel like it was a new BULL MARKET and to make BEARS question their sanity, a point that we have clearly reached. But really, unwind the Fed’s balance sheet, stop the QE, and where are we? At what point does that begin to matter?

    Thinking about the bizarre nature of where we are: with QE, ZIRP and the associated distortions of the FX, bond and commodity markets has helped to anchor my mind through this.

    Another week of being a Giant Insect. We watch and wait.

  54. Thor says:

    I’m trying to understand where all the anger seems to be coming from . . . I understand the critical analysis of BR’s trading advice, I can even understand strongly disagreeing with him, but there seems to be a lot of emotion in some of the comments. Why is that?

  55. leftback says:

    The anger and emotion are misplaced, for many people it is easier to vent than be angry with oneself. Both are basically a waste of energy. It is what it is. You place your bets, and spin the wheel.

    People don’t like to be wrong… most people are predominantly emotional about investing. Right now is a very difficult time as there is so much peer pressure for people to get on board the rally.

    Enjoy your stuff, Barry. Especially admire your ability to be “split brain” about this current market. In other words, hold your nose and buy the banks. The major lesson I have learned these last few years is how LONG the trends can last once they are in place, even in an environment that seems manifestly unstable in many ways.

  56. I-Man says:

    “Variant Perception.”

    Thats the main point I took from this post. I and I know the root, but couldnt have expressed it in words with such prescience. Reminds the I of Andy T and his multi slide looks at the SPX cash.

  57. call me ahab says:

    BR- dude- to be clear- if you re-read my post at 2:34- you will see I am critiquing a Floyd Norris bullet point-

    and that you said it was worth heeding- I never said YOU gave advice “after the fact” as your rebuttal seems to imply-

    sheeesh

    ~~~

    BR: I see that now — but it can be easily misread either way . . .

  58. Officer L says:

    Barry, thanks for all you share. I am a lurker/infrequent poster for about 3 years. I happen to be a police lieutenant in XXXXXXXX. Insights here helped save my 457 retirement plan from being decimated. I have a FOP (Fraternal Order of Police) courtesy card for you if you like. It is usually recognized even in your area for a minor offense such as cell while driving or minor infraction. This way you won’t have to waste a day in court again and can post more on your way to 14,000 (blog posts or dow level ???).

    Anyway if you want it send back an address to mail…thanks.

  59. MRegan says:

    Agnosticism, anyone?

    Here is a thought I would like to share (whether out of malice, pride, or foolishness, it matters not):

    “I pay attention to discourse and I really don’t care about the
    purported truth, one way or another. Primates are thieves, humans are
    primates, therefore Socrates nicked my last quid.”

    As a retail investor, one of your few advantages is knowledge and intuition. You must anticipate where things are going and get there first. Time is the primary vector.

  60. MRegan says:

    “one of your few advantages is knowledge and intuition.”

    Grammar police, issue this guy a ticket.

    How about:

    “one of your few advantages is knowledge; another is intuition.”

  61. mad97123 says:

    Barry, you say avoid the herding effect, while also saying go along for the ride with the fools. Then you say every rally comes to an end, but figuring out when the crowd is wrong is near impossible! [BR: I said difficult, not impossible]

    Now that individuals have missed a 75% rally they should reconsider and jump in after the move, because expensive markets can continue to get dearer? [BR: Not jump in -- i suggested they needed to rethink their approach]

    But as the positive news continues to come in, the market will frequently diverge and go negative? Just how wide is the gap and how is one to assess the gap created by markets which are not free anymore and on full Government support? Terrible structural problems existed before the crash, and that resulted in a 55% decline. How is the market pricing in the structural debt problems that exist now? I suppose we need to suffer another 50% decline before we know how the market is pricing those problems.

    Your sudden bout of chest thumping about being long is starting to sound like a contrary indicator. At a minimum, you are asking your readers to join in the making of another bubble, assuming they will know when to get out. You’re not investing, your short-term trading. This kind of thinking (enjoy the bubble while it lasts) is at the core of what is wrong with our system.

    ~~~

    BR: Forget investing . . . work on reading comprehension, an area you need to do a little work on. Forget nuance and subtlety, you are missing the major points . . .

  62. ben22 says:

    I liked the post. I remember Steenbarger posted here a few times on similar topics and reviewing these types of things are always valuable to a trader. Thanks BR.

  63. cognos says:

    Leftback -

    I am up double digits every year, including 2008. Worked for one of the finest $10B hedge funds in the land.

    I was laughing at guys who were saying, “it was the opportunity of a lifetime” in Oct/Nov 2008. Yet, in hindsight they were kinda right and of course I wish I took MORE risk at the bottom. Wish I looked MORE for killer opportunities (MTL, TRA, FCX, FITB, GGP, etc). I caught a few well sized 3x, 4x plays.

    Fundamentals are 90% of what I do and upward momentum in both company fundamentals and economic recovery indicators continue to be ABSURDLY strong. If you dont see that… get out of the game. Dont disagree with me, go find economic research by Ed Hyman… he runs the best macroeconomic research shop and has for 2 decades. Or watch what the smartest money managers are doing (preparing for the 3-5 yr bull cycle).

  64. Peter Pan says:

    Barry’s comments are spot on if you’re an asset manager for OPM. Either you keep on dancing while the music’s playing or else run smack into career risk. Thank goodness that MJ’s still dead and that I’m not an asset manager of OPM.

    I appreciated Barry’s helpful comments (and Doug Kass and Toddo) for providing insight that convinced me to take a bite in late February and early March of 2009.

    P.S. – I’m also a big fan of Peter North’s money shot videos.

  65. constantnormal says:

    @BR — so when did your metrics lead you to believe there was the potential of a 75% rally?

    At the beginning?
    When it was up 33%?
    When it was up 50%?
    When it was up 67%?
    when it was up 74%?

    And finally, do you see it going to 100%?

    ~~~

    BR: One of the Yahoo Tech ticker appearances (June 09 ?) I said that 70% was the median secular bear market rally (not a forecast, just within the range of possibilities).

    And in Berlin in November, I showed the Nikkei chart rallying 135%, and the recession still not ending !

    I must’ve run that chart of median secular bear markets 100 times by now.

  66. call me ahab says:

    constant-

    please- don’t set the bar so low- think Michaelangelo-

    “The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark. ”

    so you see- think 1000%- or more (-:!!

  67. alfred e says:

    @cognos: How about getting off your high horse and stepping outside the WS whorehouse.

    Try it from the outside looking in, without being part of the whoring hedgedom.

    Then you can brag about how many digits you’re up.

    All you’re doing right now is proving how much of a hedge insider game it is.

  68. Dennis the menace says:

    Take it as confirmation you are onto something right when so many people freak over it. You are obviously pushing buttons, taking them out of their comfort zones. Dude, if the masses aren’t bent out of shape by what you are saying, then its not strong enough.

    You are rocking the house, scaring the cat, fighting the man — and having fun doing it while you make beaucoup bucks. Enjoy the ride.

    You are a threesome with 24 year old twins away from being a rock star.

  69. Jim Stack says:

    Wall Street truisms always make profitable investing sound easier than it really is. Over the past decade, the greedy speculators who got caught up in the New Paradigm Era or housing boom certainly got slaughtered. But so did the bulls – by two of the biggest bear markets in Wall Street history. And there isn’t a bear out there whose “short” portfolio hasn’t been decimated by the tremendous gains of the past year – the biggest first year gain of any bull market in over 7o years!

    The truth is the best long-term gains come to those investors who
    have two very basic traits in common…

    First, they have a long-term time horizon. They’re not buying the trading software or attending the overcrowded workshops at investment conferences on how to trade options or commodities. Yeah, we know a lot of people who have made money doing that, but they eventually and inevitably lose it a lot faster in the end.

    Second, they have a flexible investment strategy. They don’t call themselves “bulls” or “bears.” Instead, they simply think of themselves as “investors” who are always looking for value and have a healthy respect for historical risk. They realize the investment strategy that is most profitable in the depths of recession (when stocks are selling at a 50% discount) isn’t the most prudent strategy in a maturing economic recovery when interest rates are rising and valuations are pricey.

  70. miamiocean says:

    Sensible post. As an individual investor I missed the rally, but also missed the larger downside of 2008, so I call it even. It has only been in the last month that my previous portfolio’s paper value has crawled above where it had been before I moved to cash in 2008. Barry is correct. I have been resisting the positive economic news every step of the way since last March. I just could not reconcile my belief that American consumers were necessary for a recovery with the fact that there was one occurring without them. Smart corporations have been cultivating non-U.S. markets for years, and just when they needed it most, that international growth has shored up what could have been a very shaky recovery even with government largess. I had bought into the rhetoric that American businesses don’t make anything anymore. The truth is more nuanced, they just don’t make cheap consumer goods anymore (for the most part). A big difference.

    I also should have guessed that experienced fund managers knew what they were doing when my best previous equity fund dumped Walmart and bought heavily in the newly dirt cheap financial stocks. Lesson learned. My preconceived and naive notions about what a recovery would (or should) look like bit me.

  71. [...] I loved this list of investing psychology rules.  (TBP) [...]

  72. If you’re not comfortable taking investment risk when the market is down 55% then you should be taking smaller investment bites. It is important to take those bites though. That is the best way to psychologically train yourself to be a contrarian which is a key trading skill. Training yourself to buy when everyone is selling and sell when everyone is buying is fundamental to investment success.
    It is pointless to know how to be in cash a crisis points if you can’t deploy that cash when it is going to be most profitable to yourself

    Similarly, if the market has moved 75% I wouldn’t feel comfortable being fully invested. Using mean reversion theory as a guidepost is helpful

    Remember, the crowd tends to panic and funds are often forced, due to one constraint or another, to sell against their own good judgment. Small, nimble traders should be able to use that to their advantage. Trade while keeping an eye on the elephants of the market and what they are doing

  73. OscarWildeDog says:

    If one were to apply these rules, then one must acknowledge that “buy and hold” is indeed dead. The new and improved art of being nimble (or as one of the CNBC pieholes phrased it the other day – “nimbletivity” – is the “new normal” as I see it. No longer am I a proponent of being an advocate of the technicals or fundamentals. Play OTM spreads in everything you do, and learn how to adjust…let the suckers play the direction and the speed. Man, there are calls and puts to be sold on equities where the delta will still give you a 98% probability of success! The trend (and volatility) is your friend!

    How many times in the last couple of months have we seen the arbitrageurs and the high speed traders bid up the market in the last hour or so? I mean, the RUT is only approximately 150 points from its high back in ’07 (852). From a low of 341, that means it has improved about 108% from its low – with really nothing changed from ’07 except the govt’s intervention (credit is worse, regulation hasn’t changed, same people in charge, unemployment worse, etc.)

    So, “you da man, Barry” – I’m not buying shares like Buffett because I don’t get the coupon deals he gets. I nibble at the edges and listen to you.

  74. cognos says:

    CommonMan-

    Nice post – “train yourself to be a contrarian”, “buy when others are selling”, “incremental approach”, ” only reason to: be in cash, is to deploy it” – real GEMS!”

  75. engineerd1 says:

    Barry’s advice is pretty good…..But its hard to know how to apply it procedurally….. For the embittered but sincerely seeking… here is a procedure that anyone can follow…. I think it matches the environment that has obtained for the last year pretty well….its not too late to apply it now….

    1) do not chase this tape….do not put a nickel into the market except under the following conditions…
    2) put 25% of your portfolio into diversified stock etfs the next time that IBD Big Picture transitions from correction to uptrend (of course this means we first need an IBD-recognized correction)
    3) repeat step 2) until you hit 100% or the maximum you wish to expose to the market long term
    4) do not remove one nickel added under step 2 unless and until the SP500 50 day moving average decisively crosses its 200 day ma. you must be bold…..you will get regular head fakes trying to get you to sell out…..initially you may lose money, expect this……you will be tempted to “get out before the house of cards collapses”, or anticipate the next correction…..there will be daily articles, some loaded with “data”, some just wishful thinking, calling to you to get out before its too late….you must have the strength of character to ignore this noise….and yes, ignore this “data”….
    5) forget about the market except for monitoring the step 2 and 4 triggers; live life… learn a musical instrument… a new language….. buy a new bicycle and get some exercise…

  76. @cognos

    Money in the game affects your psychology and I have found that starting small and building up are ways to handle the psychological pressures of trading. It is known that losses affect gains in our psychological makeup at a 2:1 ratio. It may not be the only way, but one of the best ways to train for handling those pressures is actually trading.

    I remember when I first started trading. It was a whole different world from knowing what to do on paper. Once you are playing with your hard earned labor things take on a different dynamic. Seeing months of earnings disappear in a puff of smoke from one or two mistakes really tests your mettle and for some people it is a one and gone type of experience. I remember having experiences like that when I had no real mentor starting out and it left me depressed for months. Fortunately, it made me stronger and a better trader for it. It wasn’t the last of my lessons but it was one of the hardest.

    That is why I always counsel people, if they are really sure about getting into trading, that they start as small as possible. That will give them time to learn their own psychological make up and what makes them tick. Then they can build a trading strategy around that and move forward in a much safer manner

  77. cognos says:

    The prior post was great. This latest post was lame x100.

    The business of making money in markets is not at all psychological. Its not about “training” to be a “trader”. Its about actually have a process that consistently adds enormous value. This is a game of hard work x creative intelligence. Most amateurs and many professional investors have little of both, ergo they should just follow the broad strategic advice in your first post and try to work with the business cycle.

  78. When push comes to shove it is still about executing. Especially when no one is around to hold your hand or fire you

  79. [...] light of some of the pushback to Friday’s commentary, I thought it might be worthwhile trotting it out again. This is an [...]

  80. flipspiceland says:

    This blog entry breaks down into two camps:

    A) Those very, very few who managed to take a risk in March 2009 and go all in, or at least half in.
    b) Those who did not

    As in all things, your view depends entirely upon your perspective.

    Had I been BR or some others, it would be easy to talk about 75% rallys and 50% declines as if I were an oracle or some kind of very wise Buddha who could see into the future. Or some shaman who thinks that 666 was a signal from the hell that this thing had crashed too far and the apocalypse would be avoided, Lord Blankfein (Beelzebub) would make a deal with Hank Paulson (The Great Satan) to place a bid under everything, turn on the robots and pump the market back up to within 10% of its all time high while stunning bankruptcies of the largest corporations in the world, rotten fundamentals, retail gamblers cowering in their basements, and a global credit liquidation had turned off all lending.

    Until those who currently are sitting 3X profits in the last 13 months actually sell, they have no credibility in their prognostications. My guess is that but for a very very few, no one who actually went all in, in March of last year, is sitting on their gains. The gains have been passed on or rotated among those few buying and selling, mostly to each other.

    If BR and other apostles have sold their positions, I’d like to know when. If they are holding, then they can only speculate about ‘fighting the tape’.

    As for the naysayers, I am willing to admit that I haven’ t a clue about the direction of the market, never did. What I do know is that I was in a foreign country in May of 2007, in the middle of a vacation, logged on to my investment accounts and as I saw everything green, green, green with 6 years of consistent gains, I no longer felt victorious instead I had this enormous sense of forboding (that I did not pay proper attention to) that screamed quietly to SELL, SELL, SELL everything and enjoy the rest of my trip.

    Had I done that I would have locked in all my previous gains and, after this last 3 years, would still be further ahead than those who bought in at 666. And would feel I was some kind of investment genius, in the company of BR, and a few others. And still be further ahead than they are and may or may not get to be.

  81. @flip

    I don’t know if you are an institutional trader or not but as a retail trader this is how I look at it

    There is never a time I want to be completely out of the market. I am primarily in the market in the first place to create cash flow. That is what I’m targeting in order to replace my working income. My trading just helps to grow the cash flow

    In my practice/dream million dollar portfolio I have a minimum 25% in whatever equity I’m trading (in other words if I’m trading 1000 shares I will always have at least 250 shares in the stock no matter what it is doing) in order to collect dividends. Yes, that is going to lose me money under some circumstances (that is the nature of risk) but I have found pops and snapbacks are almost impossible to catch as a retail trader so I don’t want to be missing those. Plus, if you are buying good, low debt, dividend equities you should not have to worry too much about the downside because the elephants in the market are not going to let those drop too much without scooping them up

    You also have to keep in mind that if you are in a stock that has high institutional interest the institutions will work to protect that risk. My experience in the market has shown this to be true. As I said in a post above, sometimes there are situations where the institutions are forced to buy or sell through not fault of their own. We can watch out for those times and even capitalize or hedge against them but most other times they are going to be wanting to protect their stakes and make their profits In a good, widely held stock, the upside and downside are going to have buffers on them

  82. comet52 says:

    Barry, I appreciate your generally pragmatic approach. I’m not sure why you attract the typical gang of no-perspective, bombastic econ blog commentors though. They usually follow around after gloom and doom types like Mish or ZH, not after people who tend to be objective rather than pumping apocalyptic fantasies over and over. Oh well.

  83. [...] the past few weeks, we’ve been debating the state of the economic recovery. The posts that have emphasized the shift in data towards the [...]