FYI | Dec 08 2008
(This story was originally published on Wednesday, 3 December 2008. It has now been republished to make it available to non-paying registered readers at FNArena).
“I always sold too early”.
Before you read my editorial this week, have another look at the quote I put on top. It’s believed to be Jesse Livermore’s answer to the question: what is the secret of your success?
Even if I tried a million times, I don’t think I can ever match the amount of investor wisdom in such a brief and concise response. I urge all readers who trade the markets, be they young or old, part-time or professional, to write this sentence down on a piece of paper and put it in your wallet, on top of your pc screen, the wall next to your desk, opposite the toilet seat,.. Anywhere where you can easily be reminded of its content and of its universal wisdom.
Jesse Livermore is part of the Wall Street legend. He made money when others went bankrupt and became insolvent. He designed his own trading systems, and his own rules. And when he failed to stick to his own rules, he lost his complete fortune. Three times, so the legend goes, did he become a millionaire through the US stock market. But every time he lost it all again. After the crash of 1929 Livermore was reportedly worth US$100m. Ten years later only $5m was left. Livermore shot himself in 1940. He was 63.
Amongst the many legacies he has left today’s investors, traders and speculators, I rank the quote on top of this page as simply brilliant. My second favourite would be:
“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side”.
Another one to pen down and think about, every now and then.
Another universal piece of wisdom I picked up from the late Rene Rivkin, who, just like Livermore, decided to end his own life. One of Rivkin’s rules was always be prepared to sit down and ask yourself the question: Why do I own this stock?
I bought it at a higher price and cannot take any losses is not a correct answer to the question.
I bought it at a lower price and don’t feel like cashing in on my gains is not a correct answer either.
You should own these shares because you believe they will bring you the highest return. Simple, but oh so difficult to put in practice. I too have sinned against these rules, multiple times, just like everyone who is reading this story. Even Rivkin admitted he occasionally would disregard his own rules, and come to regret it afterwards.
Maybe the two lessons to draw from all this are: don’t be afraid to make an error, just make sure you learn from it; plus, it’s okay to have a set of rules, but you need discipline too.
Time to introduce the simple but oh so wise trading rules of Dennis Gartman, daily publisher of The Gartman Letter and whose market experience reaches further than the date of my birth many decades ago. Every year Gartman sends his “Gartman’s simple rules of trading” to the subscribers of his newsletter. I regard them as compulsory reading for anyone who tries to make money in the share market.
My advice is the same as with regards to Jesse Livermore’s quote: print out, keep it somewhere safe and read regularly. It’ll make you a much better investor than without doing all these things.
Gartman’s Simple Rules Of Trading
1. Never, Ever, Ever, Under Any Circumstance, Add To A Losing Position… Ever!
Adding to losing positions will lead to ruin. You can count on it. Ask the Nobel Laureates in Economics at Long Term Capital!
2. Trade Like A Mercenary Soldier: As Jesse Livermore said, it is not ours to be bullish or bearish, but to be right. (For the exact quote: see above).
3. Mental Capital Trumps Real Capital: Capital comes in two types; mental and real. Holding losing positions costs measurable real capital, but immeasurable mental capital.
4. We Are Not A Business Of Buying Low And Selling High; We are, however, a business of buying high and selling higher. Strength begets strength, and weakness further weakness almost always.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident, but very few understand it, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You Or I Can Remain Solvent.” J.M. Keynes. Illogic does often reign, and it is our duty to learn to handle it as best we might.
7. Buy Markets That Show The Greatest Strength; Sell Markets That Show The Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like A Fundamentalist; Trade Like A Chartist: The fundamentals may drive a market and need to be understood, but if the chart is not bullish, why be bullish? Trade when the technicals and fundamentals, as you understand them, run in concert, one with the other.
9. Trading Runs in Cycles; Some Good; Most Bad: In “good times,” even errors turn to profits; in “bad times,” the most well researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11: In Trading/Investing, An Understanding Of Mass Psychology is Often More Important Than An Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! and when they are yellin’, you should be sellin’!” This is psychology at work and it’s most elegant.
12. It Takes Buying And Lots Of It To Put A Market Up; It Takes Only A Lack Of Buying To Put Any Market Down: Gravity is an amazing force of nature; it is even more amazing in the world of investing.
13. There Is Never Just One Cockroach: The lesson of most markets is that bad news follows bad… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient With Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Fear Turns To Greed At Break Even… And Vice Versa: Know this; understand this; accept this and deal with it.
16. Do More Of That Which Is Working and Less Of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; Cut or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
17. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper, but when one must, one must!
With these thoughts I leave you all this week. (But not before making one final point: see below).
Till next week!
Your editor,
Rudi Filapek-Vandyck
(As always firmly supported by Andrew, Grahame, Greg, Chris, Pat, Joyce and George)
P.S. To those who believe I might be too bearish in my assessments of the outlook for global economic growth, and demand for commodities, in the year ahead I’d like to draw attention to a story that was published by Bloomberg today. At least one stockbroker sent it around to all staff in Sydney today. This is without any doubt the most bearish assessment I have come across in terms of what is currently happening in The Big Country Of The Commodity Bulls’ Last Hope. Having said so, it fits in perfectly with what I have been pointing out over the past weeks: the trend remains negative. The odds remain in favour of further “disappointments” – China will turn out not to be an exception.
Anyway, see for yourself here: http://www.bloomberg.com/apps/news?pid=20601109&sid=ay7HZbCLGLEA&refer=home
