Posts filed under “Rules”

Jesse Livermore’s Trading Rules (1940)

From Jesse Livermore comes these
Reminiscences of a Stock Operator: With New Commentary and Insights on the Life and Times of Jesse Livermore http://www.amazon.com/exec/obidos/ASIN/0470481595/thebigpictu09-20

1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.
2. Money cannot consistently be made trading every day or every week during the year.
3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
4. Markets are never wrong – opinions often are.
5. The real money made in speculating has been in commitments showing in profit right from the start.
6. At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
7. One should never permit speculative ventures to run into investments.
8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
9. Never buy a stock because it has had a big decline from its previous high.
10. Never sell a stock because it seems high-priced.
11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.
12. Never average losses.
13. The human side of every person is the greatest enemy of the average investor or speculator.
14. Wishful thinking must be banished.
15. Big movements take time to develop.
16. It is not good to be too curious about all the reasons behind price movements.
17. It is much easier to watch a few than many.
18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
19. The leaders of today may not be the leaders of two years from now.
20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.

Category: Rules, Trading

5 Signs You’ve Matured as a Trader

Joe Fahmy has guided his hedge fund to outperformance over the past 13 quarters. He has been sharing his trading skills to a novice to intermediate traders based on his 16 years of trading. This is our their attempt at creating bite size, easy to understand, bullet points for traders. The prior posts are here…Read More

Category: Apprenticed Investor, Rules, Trading

Jeremy Grantham: 10 Lessons

Nice list from Jeremy Grantham, via Marketwatch: 1. Believe in history “All bubbles break; all investment frenzies pass. The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience … it will go back to fair value. Your task is to survive until that happens.” 2….Read More

Category: Apprenticed Investor, Investing, Psychology, Rules

5 Qualities of All Great Traders

I met Joe Fahmy a few years ago at Lindzenpalooza. He has a great way of communicating his trading skills to a novice to intermediate traders based on his 16 years of trading. Fahmy has guided his hedge fund to outperformance over the past 13 quarters. As previously mentioned, I wanted to present something less…Read More

Category: Apprenticed Investor, Rules, Trading

David Merkel: The Eight Rules of My Investing

David J. Merkel is a CFA, FSA. His forthcoming equity asset management shop is tentatively called Aleph Investments. From 2008-2010, he was the Chief Economist and Director of Research of Finacorp Securities.where he researched a wide variety of fixed income and equity securities, and trading strategies. Until 2007, he was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. From 2003-2007, he was a leading commentator at the investment website RealMoney.com.

These are his Eight Rules of Investing:

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My objective in guiding investors is to teach them how to tilt the odds of success in their favor. As a value investor that rotates sectors, I have eight methods that each tilt the odds a little in my favor. Individually, each tilt is worth a little. As a group, they have been very powerful for my past results. Unaudited, these methods have allowed me to beat the market since the strategy started in September of 2000.

  1. Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.
  2. Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.
  3. Stick with higher quality companies for a given industry.
  4. Purchase companies appropriately sized to serve their market niches.
  5. Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.
  6. Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.
  7. Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.
  8. Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

Each of these rules enforces a discipline on the overall portfolio that most professionals and individual investors do not possess. It takes the emotion out of investing, and forces us to think like risk-sensitive, profit-seeking businessmen. I agree with Buffett when he said, “I am a better businessman because I am an investor, and I am a better investor because I am a businessman.” The two disciplines mutually reinforce each other, leading to better results.

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Part II is after the jump

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Category: Apprenticed Investor, Investing, Rules

Ed Easterling’s 12 Rules of Market Cycles

Ed Easterling of Crestmont Research boils down his views on long term markets to 12 rules of secular stock market cycles. In case you are unfamiliar with Ed’s work, several books, including Unexpected Returns: Understanding Secular Stock Market Cycles; he also wrote Probable Outcomes. Here are Ed Easterling’s 12 Rules of Market Cycles: 1. Secular cycles…Read More

Category: Cycles, Earnings, Investing, Markets, Psychology, Rules

UPDATED: Trading Rules, Aphorisms & Books

Last month, we put together a full run of Trading Rules & Aphorisms.  In the intervening weeks, I discovered I overlooked quite a few lists that are on the site.

Here is the updated version:

Livermores Seven Trading Lessons

Bob Farrell’s 10 Rules for Investing

James Montier’s Seven Immutable Laws of Investing

John Murphy’s Ten Laws of Technical Trading

Six Rules of Michael Steinhardt

Art Huprich’s Market Truisms and Axioms

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

Lessons from Merrill Lynch

Rosie’s Rules to Remember

In Defense of the “Old Always” (Montier)

Lessons Learned from 37 Years of Futures Trading

Richard Russell’s The Power of Compounding

My (Ritholtz) own rules

Rules for Shorting

15 Inviolable Rules for Dealing with Wall Street

10 Psychological, Valuation, Adapative Investing Rules

The Zen of Trading

After this run, I plan on updating this list every quarter . . .

Books after the jump

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Category: Investing, Rules, Trading

Art Huprich’s Market Truisms and Axioms

Raymond James’ P. Arthur Huprich published a terrific list of rules at year’s end. Other than commandment #1, they are in no particular order: • Commandment #1: “Thou Shall Not Trade Against the Trend.” • Portfolios heavy with underperforming stocks rarely outperform the stock market! • There is nothing new on Wall Street. There can’t…Read More

Category: Apprenticed Investor, Investing, Rules, Trading

10 Lessons of Madoff’s Ponzi Scheme

Its been two years since the Madoff crime erupted across headlines. The massive theft punctured what little faith investors  had in the markets, investment firms and regulators. Fraud rarely has a silver lining, but the least we can do is try to learn from other people’s mistakes. There were many many lessons to be learned…Read More

Category: Investing, Legal, Rules

15 Inviolable Rules for Dealing with Wall Street

The never ending parade of stock scandals seems to continue unabated, the stock lending scam being only the most recent. As history has shown us — from Mexico to Orange County to analyst banking crisis to Derivatives to etc., when the Street comes aknockin, best for you to hide your wallets. For reasons we are…Read More

Category: Apprenticed Investor, Corporate Management, Investing, Really, really bad calls, Rules