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10 Psychological, Valuation, Adapative Investing Rules
Posted By Barry Ritholtz On April 9, 2010 @ 12:00 pm In Apprenticed Investor,Markets,Psychology,Really, really bad calls,Valuation | Comments Disabled
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 . . .
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