Bernard Baruch: 10 Rules of Investing

“Being so skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learned from my own experience which might be worth listing for those who are able to muster the necessary self-discipline:

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters — of anyone — bringing gifts of “inside” information or “tips.”

3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.

The Secret to Trading Success

The most important thing you must learn in every market cycle is where the money is flowing. It is flowing into the companies where the earnings are growing. As long as mutual funds have capital in flows instead of net out flows then they must put new money to work investing in stocks. If you want to make your job as a trader much easier then find where the flow is going. Mutual fund managers can not go to an all cash position they can only move money around. A bear market sinks most stocks because managers have to sell everything to raise money to redeem shares. In an uptrend they have to buy stocks with the incoming money flows. Where does this money go? It goes into the sectors and stocks that are in favor due to increased earnings in a sector and individual stocks that are dominating their sector and changing the world in the process. You want the leaders not the has been. You want the best the market has to offer. Where are consumers dollars flowing into? That is where the money is going. What companies have the best growth prospects? The stock can only grow in price if the underlying company does. Mutual fund managers are the biggest customers in the market when they start buying a stock that increases huge demand and price support.

Your job is to follow the big money, shorting in bear markets, going long in bull markets. Following the trend of what is in favor. Do not fight the action, flow with it.

Finicky Traders are Good Traders

In trading focus is crucial. You have to know who you are as a trader and exactly what your method and trading plan is, and you must follow it. In trading discipline makes money, focus makes money, monster stocks make money, while risk management allows you to keep the money that you have made. You could say you must be finicky to be a good trader.

Here are the areas to be finicky about:

A good trader is picky about the methodology they decide to trade, they study diligently to see what works before they begin trading.
Be very picky about the stocks you trade, only trade the very best monster stocks long and only short the absolute biggest junk stocks.
Being picky about your entry point is crucial, stick with your plan, buy only when the odds are in your favor for winning.
You can not just trade any amount of stock, you have to be picky about the quantity of shares you trade and base it on your risk management guidelines.
Be very picky about who you follow on twitter, look for a teacher not a stock picker, beware of big egos.
Only study the very best traders of all time not the mediocre ones. You want proven track records not just theory.
Listen to real traders not talking heads on Blue Channels.
Read only the very best trading books available that come highly recommended.
If you trade options only trade the ones with the most liquidity so you do not lose money between the bid/ask spread.
Continuously filter all your sources of trading information, ONLY keep that which enables you to make money in the markets.

16 Goals

Commitment–to common goals and to being successful
Unselfishness–there is no “I” in team.
Unity–Come together as never before.
Improve–everyday…as a player, person, and student
Be tough–mentally and physically.
Self Discipline–do it right, and don’t accept less.
Great Effort
Enthusiasm
Eliminate Mistakes–don’t beat yourself.
Never Give Up
Don’t Accept Losing–if you do so one time, it will be easy to do so for the rest of your life.
No Self-Limitations–expect more of yourself.
Expect to Win–and truly believe we will.
Consistency–your very, very best every time.
Leadership–everyone can set the example.
Responsibility–you are responsible for your own performance.

Martin, The Risk Takers-Book Review

Individual traders are often told that they should view their activity as a business. But what exactly does this mean? After all, one business after the other fails; presumably these aren’t the best models. Renee and Don Martin, successful entrepreneurs themselves, come to the rescue with The Risk Takers: 16 Women and Men Share Their Entrepreneurial Strategies for Success (Vanguard Press, 2010). No, it’s not a new book, but I hadn’t read it and I suspect most of you haven’t either.

With two exceptions, the entrepreneurs founded their companies—Curves, Alvarado Construction, Kinko’s, Liz Lange Maternity, Geek Squad, The Corcoran Group, World Wide Technology, Build-A-Bear Workshop, John Paul Mitchell Systems, Spanx, Amy’s Kitchen, Trilogy, Invacare, Tova, The WW Group (Weight Watchers), and (the author’s own) The Cal-Surance Companies.

Many—actually, probably most—of the entrepreneurs were dreadful students. Many went from rags to riches, sometimes back to rags again before they ultimately triumphed, but I won’t recount any of these personal journeys. Rather, I’m going to pull out a few quotations that may have applicability to the trading business, although I’ll point out how some of them can steer the trader wrong.

“Risk taking is also about embracing change. …change takes you out of your comfort zone, but how else can a business grow? ‘I think people like me learn to like feeling uncomfortable…. In fact, we get comfortable with being uncomfortable.’” (p. 46)

The successful entrepreneur never stops reinventing his company to adapt to changes. “I have an appreciation for challenges…. You either go through a challenge or you’re stopped by it. There’s always opportunity at the end. If you give up, obviously, there’s no chance of ever having any hope of reaching that end where the prize is.” (p. 178)

“Not dreaming big enough is one of the biggest mistakes entrepreneurs make.” (p. 193) Yes, but risking too much is also one of the biggest trading mistakes. There should always be a significant gap between the risk actually taken and the dreams of major success.

“Successful people do all the things unsuccessful people don’t want to do. They’ll knock on ten doors, and even when every one is slammed in their face, they’re just as excited on door number 11—or door number 582.” (p. 223) In trading, however, by door number 582 you’d better understand that your trading system is broken; in fact, you’re probably broke yourself.

“Clearly, you either shy away from competition or you thrive on it. I’ve always loved competition and excellence. I’ve always said, ‘Show me a good loser, and I’ll show you a loser.’ I don’t always come in first, but I sure as heck try to get there.” (pp. 310-11) Losing is, of course, part of any trading business.

And finally, a few sentences about Barbara Corcoran that encapsulate several of the book’s themes: “Barbara had spotted a trend and pounced.” Even though both her competitors and her own advisors thought she was on the wrong track by paying so much attention to the West Side, which had historically lagged behind in property values, “she trusted her gut and did it anyway. In effect, she was positioning her company to hit ’em where they ain’t.” (pp. 143-44) Scrap the “trusted her gut” phrase. The Corcoran Group had done extensive market research that predicted a surge in demand for apartments on the West Side. She trusted the data.

Minervini, Trade Like a

Stock Market Wizard-Book Review

Mark Minervini, U.S. investing champion in 1997, averaged a 220% return per year from 1994 to 2000 for a compounded total return of 33,500%. Yes, we all know that these astonishing figures coincided with a major bull market, but how many traders came anywhere close to his record during this period?

In Trade Like a Stock Market Wizard: How to Achieve Superperformance in Stocks in Any Market (McGraw-Hill, 2013) Minervini shares his SEPA (Specific Entry Point Analysis) trading strategy. It’s essentially a trend following/breakout strategy that screens for such variables as earnings surprises and relative strength and that looks for catalysts driving institutional interest. It relies on both fundamentals and technicals. Its focus is on youthful small- to mid-cap stocks.

There are strong echoes of Bill O’Neil, Ben and Mitch Zacks, Richard Donchian, even Jesse Livermore in Minervini’s work. That he borrows from such luminaries is not surprising. Having dropped out of school at the age of 15, he subsequently became “a fanatical student of the stock market. … Over the years,” he writes, “I’ve read an incredible number of investment books, including more than 1,000 titles in my personal library alone.” (p. 3)

Minervini’s approach is not for the lazy—unless, of course, you want to subscribe to his real-time service. Although some of the screens can be done with the push of a button, the investor will have to follow up with his own fundamental research and chart analysis. For instance, what is the quality of a company’s earnings? How powerful is the competition? As an example, Minervini writes that “It’s no coincidence that within only 15 trading days of Netflix going public, Blockbuster Video’s stock permanently topped out. … From the point at which Netflix went public [to its high in 2011], the stock increased more than 3,400 percent. During the same period Blockbuster’s stock price lost 99 percent of its value.” (pp. 102-104)

For those who have the guts to buy 52-week highs, for those who are looking for the next mega-performer, and for those who are willing to put in the time to become a skilled analyst and trader, Minervini’s book will resonate. Even those who are disinclined to chase performance (which often simply means buying after a trend has been established) will discover that the book has a lot of merit.

Instead of delving deeper into SEPA, however worthy a task, let me share three thoughts from his section on risk management.

“To achieve consistent profitability, you must protect your profits and principal. As a matter of fact, I don’t differentiate between the two. A big mistake I see many traders make is to consider trading profits as house money…. Let’s say I make $5,000 on Monday. I don’t consider myself $5,000 ‘ahead of the game,’ free to risk that amount shooting for the moon. My account simply has a new starting balance, subject to the same set of rules as before.” (p. 273)

And, a subhead: “If you’re not feeling stupid, you’re not managing risk.” He continues: “Making you feel stupid is the market’s way of pressuring you to act foolish. Don’t succumb. Remain disciplined and cut your losses. The alternative to managing risk is not managing risk, and that never turns out well.” (p. 289)

Finally, perhaps with a nod to Warren Buffett, “You will never achieve superperformance if you overly diversify and rely on diversification for protection. … If you are strict with your selection criteria and demand the best for your portfolio, it should be difficult to find a lot of names that are worthy to be included among your elite group.” (pp. 312-13)

Trading with No Regrets

Trading is really not as much of a numbers game as it is a mind game. Winning or losing in the long term will come down to whether you quit or keep going on your trading journey. Trading is not for everyone, there is no easy money in the markets. You will fight for your dollars, you will make money by doing the uncomfortable you will lose money when you think you are in a trade that just can’t lose. The emotional and mental pain will be unbearable if you do not believe in yourself and your method. If you are trading with no plan, no rules, and no system or method you will tend to be very hard on yourself for every losing trade. It was your decision that made you lose money, you will beat yourself up, and feel stupid. You will have 100% accountability for your mistake.This will not work.

What you must do is transition the accountability from yourself to your system or method. You must trade a proven methodology that will win based on the market action not your personal actions. You can not control odd out of left field events. You can not help it if you trade a trend or a pattern and suddenly it loses. All you can do is take trades with great probabilities that match your beliefs about the market and if they are losers then you can’t blame yourself you can only cut your losses and look for the next trade that meets your parameters.

When you can shrug off a loss with no emotional or mental pain and move on to the next one you are at the next level. All you can control is your entry parameters, risk management, position size, exit, and mind set, the market determines whether you win or lose, not you. You must have self confidence and faith in a proven method, take your trades let the market separate the winners from the losers.

Nine Business Lessons From Celebrities

If you pay attention, you can find inspiration and lessons that you can apply to your business everywhere you look…

Lance Armstrong: Be disciplined. No business will succeed without a lot of hard work and discipline. Commit to it. Stick with it. Eventually, you’ll reach your destination.

Paula Deen: Be yourself (and be bold about it). You will naturally succeed if you build a base of followers who are naturally attracted to your personality. Don’t worry about being liked by everybody. Just let your own unique personality shine through.

Mr. Rogers: Be positive. I can’t imagine making it in business without a whole lot of optimism.

Ellen Degeneres: Have fun. The daily grind, even when you work for yourself, can be dull at times. Doing something you love, surrounding yourself with clients and connections that energize you, and taking time to appreciate the good things in life make it all worthwhile, and who doesn’t enjoy a good laugh every once in a while?

Bill Cosby: Keep learning. I used to be so intimidated by what I didn’t know. But I’ve come to realize that such a list is endless, so I just continue to work at it, and I learn more and more each day about how to build a successful business.

Carol Burnett: Be creative. Sometimes you have to improvise. You figure it out, and you come to enjoy the journey.

Oprah: Build a platform. To succeed in business, you have to have a group of people who believe in you, who want to hear what you have to say, and who want to support you in everything you do.

Jim Carrey & Steve Carell: Don’t take it all so seriously. You’re going to mess up, and you will look silly on occasion. Learn to be OK with that.

Maya Angelou: Be resilient. Things will not always be easy, but if you refuse to give up and keep bouncing back, they manage to work themselves out.

Trading wisdom from 2,400 years ago

If you are a trader, you will relate

When an archer is shooting for nothing . . . he has all his skill.

If he shoots for a brass buckle . . . he is already nervous.

If he shoots for a prize of gold . . . he goes blind;

or sees two targets . . . he is out of his mind!

His skill has not changed. But the prize . . . divides him. He cares.

He thinks more of winning than of shooting . . .

and the need to win drains him of power.

– Chuang Tzu, 400 B.C..

If you do not relate, then you are not likely a trader.

Think & Grow Rich