By: Harvey Sax
I haven’t been able to conclusively cite the origin of the above quote, ‘Bear markets begin in good times. Bull markets begin in bad times’ but undoubtedly it was from an investor who survived the bear market. The good news is that you can make money in any kind of market. You can profit from the market rising or going down. You can even make money in a market that doesn’t move at all. But what you can’t do is make money without a plan. Ultimately you will only be successful by trading on your own ideas and style but that is going to come with time. Read everything you have the appetite and patience for, but at the end of the day you will have to set down a plan either in writing or in your head. Stick to it. Follow it religiously. Any plan, even a highly flawed one, will be better than no plan. No matter what you ultimately come up with as your investment plan, it’s going to have to incorporate these following principles.
Mute the TV volume. Keep your eyes open but form your own opinions. Listening to pundits on CNBC and Bloomberg has cost me money and caused a lot of anxiety. The best gurus on TV are right less than half the time. I can’t imagine any other occupation where you can stand up and act like you know exactly what you are talking about and be continuously wrong (politics/weather?). Before I take anyone’s investment advice seriously, I want to see his track record. Few have a better one than my own. That saves me a lot of time right off the bat.
Read analyst’s reports but ignore their recommendations. Research analysts are generally super smart people and they may know a lot about a company, but they are often ignorant of the investment prospects. There is ego and peer pressure involved being an analyst like any other profession. Some are reluctant to get off the bandwagon and slow to admit a mistake. They often issues sells and buys just after a major move down or up at prices you could never have actually gotten. For example a company announces after hours an earnings shortfall. The analyst downgrades it to a ‘sell’ that evening and uses the closing price as his own sell price. It opens the next day down 20% but you could never have actually gotten out at they analyst’s recommended ‘sell’ price as the market was closed when he initiated the recommendation. There is sometimes a hidden agenda that may involve securing investment banking business, ridding a firm or good customer of it’s inventory, or even just stirring the pot to generate commissions.
Never trade impulsively on other people’s advice. I used to think this fell under the category of common sense. I have seen more people invest on ‘hot’ tips from a friend, a stockbroker’s cold call recommendation, or a rumored takeover. Think things through and ask the tough questions before acting. Don’t chase what’s working for others. It usually stops working when you buy it.
Do your own research. Examine the Merchandise before You Buy. Some investments will sour and inevitably turn against you. You need to have conviction and that begins when you know why you bought or sold something in the first place.
Learn to take losses. When you accept that you don’t need to be right every time it opens up the floodgates of your imagination. Your investing acumen immediately jumps a notch. A common mistake is people unwilling to admit they are their wrong. They mistakenly believe if they hold it long enough, the investment will come back. In some cases this is true but more often than not, they only turn a small loss into a major one.
“Even being right three or four times out of 10 should yield a person a fortune if they have the sense to cut losses quickly.” Bernard Baruch
Consider for a moment if you went to a doctor and he told you that you have cancer. “We have to operate immediately on you.” Then after opening you up, he says the good news is you don’t have cancer, the bad news is the operation was unnecessary. A doctor that did this say for every four out of ten patients would have his license revoked after being sued into oblivion. A mutual fund manager with a 60% winning track record could find his photo on the cover of Time.
“Six out of ten is all it takes to produce an enviable record on Wall Street.”
Peter Lynch
Keep your confidence high. Follow your plan, learn from your mistakes, tweak it as you go and don’t’ get down on yourself. You will make lots of mistakes. Everyone does. Keep your confidence level high, however you can.