Michael Marcus - Blighting Never Strikes Twice
Bruce Kovner-The World Trader
making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money
First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.
I almost always trade on a market view; I don't trade simply on technical information. I use technical analysis a great deal and it is terrific, but I can't hold a position unless I understand why the market should move.
The market usually leads because there are people who know more than you do.
It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.
In a bear market, you have to use sharp countertrend rallies to enter positions.
Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading.
First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half.
Richard Dennis-A Legend Retires
For a lot of traders, it doesn't matter so much whether their first big trade is successful or not, but whether their first big profit is on the long or short side. Those people tend to be perennial bulls or bears, and that is very bad.
at a minimum, it is important not to have a short position with a loss on Friday if the market closes at a high, or a long position if it closes at a low.
I made a particularly bad trade and lost about $300. Since I only had about $3,000, that was a very big loss and it was destabilizing. I then compounded the error by reversing my original position and losing again. To top things off, I then reversed back to my original position and lost a third time. By the end of the day, I had lost $1,000, or one-third of my entire capitalization.
I learned to avoid trying to catch up or double up to recoup losses. I also learned that a certain amount of loss will affect your judgment, so you have to put some time between that loss and the next trade.
I made a lot of money going short sugar at 60 cents, but I lost much more going long sugar at 6 cents.
You should expect the unexpected in this business; expect the extreme. Don't think in terms of boundaries that limit what the market might do.
Demonstrably, commodities are trending and, arguably, stocks are random.
If you have any doubt about getting out as fast as possible in a situation like that, then you are really in big trouble.
The secret is being as short term or as long term as you can stand, depending on your trading style. It is the intermediate term that picks up the vast majority of trend followers. The best strategy is to avoid the middle like the plague.
Dennis believes that one of the worst mistakes a trader can make is to miss a major profit opportunity. According to his own estimate, 95 percent of his profits have come from only 5 percent of his trades.
One particularly useful piece of advice offered by Dennis is that the times when you least want to think about trading—the losing periods—are precisely the times when you need to focus most on trading.
Paul Tudor Jones-The Art of Aggressive Trading
First of all, never play macho man with the market. Second, never overtrade.
Don't ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don't have control. For example, I don't risk significant amounts of money in front of key reports, since that is gambling, not trading.
The most important rale of trading is to play great defense, not great offense.
One of the things that Tullis taught me was the importance of time. When I trade, I don't just use a price stop, I also use a time stop. If I think a market should break, and it doesn't, I will often get out even if I am not losing any money.
Gary Bielfeldt-Yes, They Do Trade T-Bonds in Peoria
Bielfeldt does not believe in diversification. His trading philosophy is that you
pick one area and become expert at it.
The most important is discipline—I am sure everyone tells you that. Second, you have to have patience; if you have a good trade on, you have to be able to stay with it. Third, you need courage to go into the market, and courage comes from adequate capitalization. Fourth, you must have a willingness to lose; that is also related to adequate capitalization. Fifth, you need a strong desire to
win.
Ed Seykota-Everybody Gets What They Want
In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.
Psychologically, I tend to alter my activity depending on performance. I tend to be more aggressive after I have been winning, and less so after losses. These tendencies seem OK. In contrast, a costly tendency is to get emotional over a loss and then try to get even with an overly large position.
a. Cut losses.
b. Ride winners.
c. Keep bets small.
d. Follow the rules without question.
e. Know when to break the rules.
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
Larry Hite-Respecting Risk
There is a very important message here: People don't change. That is why this whole game works.
First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom.
Never risk more than 1 percent of total equity on any trade. By only risking 1 percent, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.
There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose.
The speculator can choose to only bet when the odds are in his favor. That is an
important positional advantage.
I have two basic rules about winning in trading as well as in life: (1) If you don't bet, you can't win. (2) If you lose all your chips, you can't bet.
Part II-Mostly Stocks
Michael Steinhardt-The Concept of Variant Perception
If you have made a mistake, deal with the mistake; don't compound it.So when I first started trading, it was like taking candy from a baby.
Recognize that this is a very competitive business, and that when you decide to buy or sell a stock, you are competing with people who have devoted a good portion of their lives to this same endeavor.
The trick is not being a contrarian, but being a contrarian at the right time. Such judgments cannot be made on the basis of simple formulate. The successful contrarian needs to be able to filter out the true opportunities. Steinhardt's filters are a combination of a keen sense of fundamentals and market timing.
William O'Neil-The Art of Stock Selection
O'Neil says, "Great opportunities occur every year in America. Get yourself
prepared and go for it."
In 1988, O'Neil combined his concepts in the book How to Make Money in Stocks, published by McGraw-Hill. The book combines clarity and brevity with excellent and very specific trading advice.
So the first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to buy stocks that are coming out of broad bases and beginning to make new highs relative to the preceding price base. You are trying to find the beginning of a major move so that you don't waste six or nine months sitting in a stock that is going nowhere.
CANSLIM
The "C" stands for current earnings per share. The best performing stocks showed a 70 percent average increase in earnings for the current quarter over the same quarter in the prior year before they began their major advance.
There is absolutely no reason for a stock to go up if the current earnings are poor.
The "A" in our formula stands for annual earnings per share. In our studies, the prior five-year average annual compounded earnings growth rate of outstanding performing stocks at their early emerging stage was 24 percent. Ideally, each year's earnings per share should show an increase over the prior year's earnings.
The "N" in our formula stands for something new. The "new" can be a new product or service, a change in the industry, or new management. In our research we found that 95 percent of the greatest winners had something new that fell within these categories. The "new" also refers to a new high price for the stock. In our seminars we find that 98 percent of investors are unwilling to buy a stock at a new high. Yet, it is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.
The "S" in the formula stands for shares outstanding. Ninety-five percent of the stocks that performed best in our studies had less than twenty-five million shares of capitalization during the period when they had their best performance. The average capitalization of all of these stocks was 11.8 million shares, while the median figure was only 4.6 million. Many institutional investors handicap themselves by restricting their purchases to only large-capitalization companies. By doing so, they automatically eliminate some of the best growth companies.
The "L" in our formula stands for leader or laggard. The 500 best-performing stocks during the 1953-1985 period had an average relative strength of 87 before their major price increase actually began.
The "I" in the formula stands for institutional sponsorship. The institutional buyers are by far the largest source of demand for stocks. Leading stocks usually have institutional backing. However, although some institutional sponsorship is desired, excessive sponsorship is not, because it would be a source of large selling if anything went wrong with the company or the market in general. This
is why the most widely owned institutional stocks can be poor performers. By the time a company's performance is so obvious that almost all institutions own a stock, it is probably too late to buy.
The "M" in our formula stands for market. Three out of four stocks will go in the same direction as a significant move in the market averages. That is why you need to learn how to interpret price and volume on a daily basis for signs that the market has topped.
The idea is to buy when there is the least probability of a loss. If you buy within the base, the stock will frequently fluctuate 10 or 15 percent in normal trading action, and it is very easy to get shaken out of the position. But if I buy at exactly the right time, the stock is usually not going to go down to my maximum 7 percent stop-loss point.
Top formations in the market averages occur in only one of two ways. First, the average moves up to a new high, but does so on low volume. This tells you that the demand for stocks is poor at that point and that the rally is vulnerable. Second, volume surges for several days, but there is very little, if any, upside price progress as measured by market closes. In this latter case, there may not
be a pickup in volume when the market initially tops, since the distribution has taken place on the way up.
Another way to determine the direction of the general market is to focus on how the leading stocks are performing. If the stocks that have been leading the bull market start breaking down, that is a major sign the market has topped.
The following list of common mistakes is excerpted from O'Neil's book How to Make Money in Stocks, published by McGraw-Hill in 1988.
1.Most investors never get past the starting gate because they do not use good selection criteria. They do not know what to look for to find a successful stock. Therefore, they buy fourth-rate "nothing-to-write-home-about" stocks that are not acting particularly well in the marketplace and are not real market leaders.
2.A good way to ensure miserable results is to buy on the way down in price; a declining stock seems a real bargain because it's cheaper than it was a few months earlier. For example, an acquaintance of mine bought International Harvester at $19 in March 1981 because it was down in price sharply and seemed a great bargain. This was his first investment, and he made the classic tyro's mistake. He bought a stock near its low for the year. As it turned out, the company was in serious trouble and was headed, at the time, for possible bankruptcy.
3.An even worse habit is to average down in your buying, rather than up. If you buy a stock at $40 and then buy more at $30 and average out your cost at $35, you are following up your losers and mistakes by putting good money after bad. This amateur strategy can produce serious losses and weigh you down with a few big losers.
4.The public loves to buy cheap stocks selling at low prices per share. They incorrectly feel it's wiser to buy more shares of stock in round lots of 100 or 1,000 shares, and this makes them feel better, perhaps more important. You would be better off buying 30 or 50 shares of higher-priced, sounder companies. You must think in terms of the number of dollars you are investing, not the number of shares you can buy. Buy the best merchandise available, not the poorest. The appeal of a $2, $5, or $10 stock seems irresistible. But most stocks selling for $10 or lower are there because the companies have either been inferior in the past or have had something wrong with them recently. Stocks are like anything else. You can't buy the best quality at the cheapest price!
It usually costs more in commissions and markups to buy low-priced stocks, and your risk is greater, since cheap stocks can drop 15 to 20 percent faster than most higher-priced stocks. Professionals and institutions will not normally buy the $5 and $10 stocks, so you have a much poorer grade following and support for these low-quality securities. As discussed earlier, institutional sponsorship is one of the ingredients needed to help propel a stock higher in price.
5.First-time speculators want to make a killing in the market. They want too much, too fast, without doing the necessary study and preparation or acquiring the essential methods and skills. They are looking for an easy way to make a quick buck without spending any time or effort really learning what they are doing.
6.Mainstream America delights in buying on tips, rumors, stories, and advisory service recommendations. In other words, they are willing to risk their hard-earned money on what someone else says, rather than on knowing for sure what they are doing themselves. Most rumors are false, and even if a tip is correct, the stock ironically will, in many cases, go down in price.
7.Investors buy second-rate stocks because of dividends or low price/earnings ratios. Dividends are not as important as earnings per share; in fact, the more a company pays in dividends, the weaker the company may be because it may have to pay high interest rates to replenish internally needed funds that were paid out in the form of dividends. An investor can lose the amount of a dividend in
one or two days' fluctuation in the price of the stock. A low P/E, of course, is probably low because the company's past record is inferior.
8.People buy company names they are familiar with, names they know. Just because you used to work for General Motors doesn't make General Motors necessarily a good stock to buy. Many of the best investments will be names you won't know very well but could and should know if you would do a little studying and research.
9.Most investors are not able to find good information and advice. Many, if they had sound advice, would not recognize or follow it. The average friend, stockbroker, or advisory service could be a source of losing advice. It is always the exceedingly small minority of your friends, brokers, or advisory services that are successful enough in the market themselves that merit your consideration. Outstanding stockbrokers or advisory services are no more frequent than are outstanding doctors, lawyers, or baseball players. Only one out of nine baseball players that sign professional contracts ever make it to the big leagues. And, of course, the majority of ballplayers that graduate from college are not even good enough to sign a professional contract,
10. Over 98 percent of the masses are afraid to buy a stock that is beginning to go into new high ground, pricewise. It just seems too high to them. Personal feelings and opinions are far less accurate than markets.
11.The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.
12. In a similar vein, investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with a profit before they will sell one with a loss.
13.Individual investors worry too much about taxes and commissions. Your key objective should be to first make a net profit. Excessive worrying about taxes usually leads to unsound investments in the hope of achieving a tax shelter. At other times in the past, investors lost a good profit by holding on too long, trying to get a long-term capital gain. Some investors, even erroneously,
convince themselves they can't sell because of taxes—strong ego, weak judgment.
Commission costs of buying or selling stocks, especially through a discount broker, are a relatively minor factor, compared to more important aspects such as making the right decisions in the first place and taking action when needed. One of the great advantages of owning stock over real estate is the substantially lower commission and instant marketability and liquidity. This enables you to
protect yourself quickly at a low cost or to take advantage of highly profitable new trends as they continually evolve.
14.The multitude speculates in options too much because they think it is a way to get rich quick. When they buy options, they incorrectly concentrate entirely in shorter-term, lower-priced options that involve greater volatility and risk rather than in longer-term options. The limited time period works against short-term option holders. Many options speculators also write what are referred to
as "naked options," which are nothing but taking a great risk for a potentially small reward and, therefore, a relatively unsound investment procedure.
15.Novice investors like to put price limits on their buy-and-sell orders. They rarely place market orders. This procedure is poor because the investor is quibbling for eighths and quarters of a point, rather than emphasizing the more important and larger overall movement. Limit orders eventually result in your completely missing the market and not getting out of stocks that should be sold to avoid substantial losses.
16.Some investors have trouble making decisions to buy or sell. In other words, they vacillate and can't make up their minds. They are unsure because they really don't know what they are doing. They do not have a plan, a set of principles, or rules to guide them and, therefore, are uncertain of what they should be doing.
17.Most investors cannot look at stocks objectively. They are always hoping and having favorites, and they rely on their hopes and personal opinions rather than paying attention to the opinion of the marketplace, which is more frequently right.
18.Investors are usually influenced by things that are not really crucial, such as stock splits, increased dividends, news announcements, and brokerage firm or advisory recommendations.
David Ryan-Stock Investment as a Treasure Hunt
Every time I buy a stock, I write down the reasons why I bought it.
I would probably place relative strength first, then EPS. Many times the relative strength takes off before that big earnings report comes out.
I check the number of shares outstanding. I am looking for stocks with less than thirty million shares and preferably only five to ten million shares.
I usually hold my big winners for about six to twelve months, stocks that aren't that strong about three months, and my losers less than two weeks.
Right, because no one ahead of you is at a loss and wants to get out at the first opportunity. Everybody has a profit; everybody is happy.
If it reenters its base, I have a rule to cut at least 50 percent of the position.
Stocks should be at a profit the first day you buy them. In fact, having a profit on the first day is one of the best indicators that you are going to make money on the trade.
Divergence between the Dow and the daily advance/decline line. The advance/decline tends to top out a few months before the Dow does.
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