The Rules

[selkirk]

Have posted these Rules starting in September 1998, and on most boards where I made any posts. Cannot find them so must have been a while.

Will make another post about another set of rules, these should be used for guidelines. the Rules in the post have been around for over 100 years, and they will apply for as long as people trade in stocks.

1. Nothing new occurs in the business of speculating or investing in securities.

2. Money cannot be consistently be made trading every day or every week during the year.

3. Don't trust you own opinion and back your judgement 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 a profit from the start.

6. As long as a stock is acting right, and the material is right, do not be in a hurry to take a profit.

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 sell a stock because it seems high priced.

10. Never buy a stock because it has had a big decline from its previous high.

11. I become a buyer as soon as a stock makes a new high on its movements 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 specualator.

14. It is not well to be too curious about the reasons behind price movements.

15. Wishfull thinking must be banished

16. Big movements take time to develop

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 market.

19. The leaders of today may not be the leaders two years from now.

20. Do not become completely bearish or bullish on the market because one stock in particular group has plainly reversed it's coarse from the general market trend.

21. Few people ever make money on tips. Beware of inside information. If there was any easy money lying around, no one would froce it into your pocket.

thanks
selkirk

 

[dawgball]

Will make another post about another set of rules, these should be used for guidelines. the Rules in the post have been around for over 100 years, and they will apply for as long as people trade in stocks.

2. Money cannot be consistently be made trading every day or every week during the year.

3. Don't trust you own opinion and back your judgement until the action of the market itself confirms your opinion.

4. Markets are never wrong, opinions often are.

9. Never sell a stock because it seems high priced.

10. Never buy a stock because it has had a big decline from its previous high.

14. It is not well to be too curious about the reasons behind price movements.

19. The leaders of today may not be the leaders two years from now.

thanks
selkirk

Thanks, Kirk. I will post two replies. This one is the ones that I either somewhat disagree with or have questions about. The next reply will be ones that whole-heartedly agree with. The ones that don't make either list, I either mildly agree with or it does not coincide with my investing style.

I would love your feedback on my humble opinions.

2. (Question) -- has this changed since the price of transactions is not even comparable to transaction prices 10 years ago (much less 50 or 100 years ago). Couple this with the plethora of information available to Reguar Joe investor.

I don't day-trade, but I do think there is consistent money to be made with the right disciplines.

3. (somewhat disagree) I think you should trust your opinion over the market's opinion (price is nothing more than overall market opinion). But I do think it is good to buy in stages just in case the market's opinion diverts even further from yours.

4. (completely disagree) In my opinion, markets are wrong just as often as opinions. If markets were never wrong, investing in stocks would be no different than buying T-bills.

9. (somewhat disagree) I think taking money off the table when your valuation of the company seems much lower than the market's opinion is one of the few ways to consistently make money in the market.

I relate this to any short positions that you have.

10. (slightly disagree) I don't buy positions merely because of a big decline off a previous high, but I do trade based on historical reference.

For example, I currently own DIS, JNJ, and WFC based upon their current valuation based on their long-term CAGR.

I'm very excited to discuss this one more.

14. (question) Why not?

This also is in contrast to my investing style. Looking at why a strong historical growth company is off of its historical CAGR is what keeps me from investing in "falling knives" (probably what you were referring to in #10) while getting in companies that are incorrectly priced lower.

19. (slight alteration) The leaders of today may not be the leaders two MONTHS from now. :scared


I look forward to your further input if you care to make it, kirk (and others)

 

[dawgball]

5. The Real money made in speculating has been in commitments showing a profit from the start.

6. As long as a stock is acting right, and the material is right, do not be in a hurry to take a profit.

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.

12. NEVER AVERAGE LOSSES

13. The human side of every person is the greatest enemy of the average investor or specualator.

15. Wishfull thinking must be banished

16. Big movements take time to develop

17. It is much easier to watch a few than many

21. Few people ever make money on tips. Beware of inside information. If there was any easy money lying around, no one would froce it into your pocket.

thanks
selkirk

6. (Agree) Don't cut winners short.

7. (Completely Agree) This is where people who think they are investing get into trouble. Too many newcomers (me included) try to make investments out of trades.

12. (AMEN!) Damn, do I hate when I hear someone give this advice. It literally makes me cringe.

13. (Completely Agree) I try to beat that son of a gun up every time I review my portfolio. :SIB

15. (Completely Agree) Nothing to add.

16. (Amen!) This goes along with my investing style perfectly.

17. Good advice.

21. Probably nothing to add, but it's amazing how quickly someone will act on a tip.

Good stuff, kirk. Thanks again!

 

[selkirk]

Dawgball some good questions and observations, now will focus on the rules you disagree.

2. Money cannot be consistently be made trading every day or every week during the year.

I agree that trasactions costs have dropped sharply, recently found (while going through some tapes) a program profiling day trading in Toronto and the students were paying 40-80 per trade. compared to today where most pay 10 or less.

still it is very hard to make money trading every day, read the day trader millionaire a few times, story however how many more were in the class. so the odds are not good. actually the person who ran the franchise and tried to start a day trading mutual fund (which failed) made a good point....back then stocks were trading a 1/8 1/4 fractions. so 1/4 was a decent move, now sometimes you have to pull teeth for .01

sometimes you can make money trading a stock, every week, try to find a stock that is in a trading range like to trade. did one recently on a trucking income trust, hit 8.45 buy sell 8.70. this worked in a few days, or weeks. however sold at 8.70 and now 8.90. also did this with ECA when it was at 64-68cdn. did the trade three times.

only problem sold at 68 and one time it hit 77, (still own some ECA, long term position.). better for the person starting to find stocks that will make a decent move than trying to collect pennies.

as for information though I agree that the average investor has much more information often wonder at some times it is over stated. will leave that point there however long topic, ie. insider information. has this changed, and how much and when do you know that information. sure you know more but so does everyone else, what is the difference from a hundred years ago, sure information was hours, days, however if the room of traders got it at the same time, what has changed from it flashing on a computer screen, or by telegram ect.

3. Don't trust you own opinion and back your judgement until the action of the market itself confirms your opinion.

(you should trust your opinion, I often do, however a stock that is losing or shows a lost is one I always look at....ie. there is a stock I like and mentioned here many times TLM. the stock has done well for me over all, however in the past two years, has had a habit of slighly missing production numbers.

recently it has slowly been moving up, they might be making predictions that they can keep and yes the company is cheap, it has moved up from 17 to 19.25. now that is showing strength. buy stocks that are moving and not lagging in their sector.
somtimes I own the laggers and believe they have value however will not add to position until it shows strength.

this rule is also meant to stop a trader from getting killed. ie. Bear BSC, was 150 a year ago, solid company been around a long time. look cheap, now by fall goes to 100. now we all have an opinion however why do I want to buy into a stock that losses 30-50% in a matter of months. heard many opinions that the company was just fine, you also heard this from management ( and it rebounded ) before it blew up...people (some ) still blame short seller. there are many examples BBD.b, nortel, Enron, Worldcom, if a stock is not acting well, there is no reason to be there or add to the positon especially.

if you are correct on a stock then if it start to move would add more, because the market confirms my opionion....do not need the first 5%.

4. Markets are never wrong, opinions often are.

would agree with you sometimes that stocks are over valued or under valued and sometimes certain stocks are cheap and neglated until they are discovered and move.

however believe this refers to a move...for instant do not fight the market.

knew someone who shorted penny minning stocks (late 90s) the sector blew up and his timing was correct, made over 85% (believe 89% on average for two years) he then decides to short tech stocks because in his opion they are....

he also was destroyed in 1999, now did most of this tech garbage deserve to go higher.... my first post ever was questioning the value of internet stocks, and someone even said it was different this time....

however though they were high, did not short one, well shorted a few later that year (fav. was Amazon, which covered way to early), however my biggest holding was a sci-tech fund.

the previous year it made 80%, and in 1999 it made over 280% most made over 200% now was this crazy, yes however the market were correct to like tech....

even in 2000 when the started coming off the rails that fund made 50%+ in three months. many people I know never sold even though they had 600% returns they rode it down to 50% loss, unbelievable.

I guess basically this rule is that markets are always right, ie. do not short gold stocks if gold is breaking else and eveyone is driving them up, just wait. do not fight the markets.

thanks
selkirk

 

[selkirk]

9. Never sell a stock because it seems high priced.

Dawgball when a stock moves up and make a nice move however believe this rule, is for stopping the investor/trader from taking off a position that is on a run.

ie. Fording coal , had a small position, well do my research and load up at 25-30. then sell in less than month ( well six weeks) most of my positon at 42-45. cdn. then goes over 120 and does a three for one split. and now has just had another run and is at 63, people love coal and the contracts are coming in higher than expected.

the price seems expensive however why sell at a predetermined target price, maybe shoud have sold half if that, if was on a great run, sit back and enjoy. I always sell some, however will never make that mistake again....well.....

10. Never buy a stock because it has had a big decline from its previous high.

imagine if someone bought BSC (by the way I am short the stock, mainly uncovered May calls) because at one time it was at 150 a year ago or 75 months ago, management says no worries.

when a stock drops sharply (and sharply underperforms) the market, then the market is ussually giving you a signal.

14. It is not well to be too curious about the reasons behind price movements.

(question) Why not?
good question, however believe it refers to the fact that is something is acting...

ie. if my Fording is going through the roof, then why be concerned I have no idea that coal contracts are about to go throuigh the roof.

or BSC there is know reason to look at a stock that is acting that badly.

19. agree, especially in this market, does not take long for managment to destroy value.

thanks
selkirk

 

[DOGS THAT BARK]

Great thread-- Thanks

 

[dawgball]

Thanks selkirk.

We agree on #2. I think it is very difficult to make money day trading, but I do think it is possible.

4. Markets are never wrong, opinions often are

Using another example that you used: Was the market wrong about Bear Stearns last year at 150? Hindsight says yes.

...which leads to #10.

I agree that you should never buy simply on a big downturn, but looking at it from another angle a stock that is mispriced (either high or low -- i.e. the market being "wrong" ) is a great signal for me to dig deeper.

BSC had serious problems as it was going down, so I never thought about purchasing.

But take WFC, for an example. The future may prove me wrong, but I think the price drop here is more warranted on the industry and not this particular stock... so I bought in when it was in the mid to upper 20s.

Same for JNJ and DIS. Compared to their historical and (imo) proven track record, they are mispriced based on their CAGR.

Great discussion, kirk.

Wayne -- what's your thoughts?

 

[DOGS THAT BARK]

Thanks selkirk.

We agree on #2. I think it is very difficult to make money day trading, but I do think it is possible.

4. Markets are never wrong, opinions often are

Using another example that you used: Was the market wrong about Bear Stearns last year at 150? Hindsight says yes.

...which leads to #10.

I agree that you should never buy simply on a big downturn, but looking at it from another angle a stock that is mispriced (either high or low -- i.e. the market being "wrong" ) is a great signal for me to dig deeper.

BSC had serious problems as it was going down, so I never thought about purchasing.

But take WFC, for an example. The future may prove me wrong, but I think the price drop here is more warranted on the industry and not this particular stock... so I bought in when it was in the mid to upper 20s.

Same for JNJ and DIS. Compared to their historical and (imo) proven track record, they are mispriced based on their CAGR.

Great discussion, kirk.

Wayne -- what's your thoughts?

only one I would opt to question to a small extent is buy stock on drop.

If you know reason (which most times the "big boys" (Market) are way ahead on us getting info--
then I think money can be made especially a very solid stock bought 1st day when market over reacts.

Have made some good gains in past--MERCK comes to mind when they had significant drop on Vioxx hoopla--

However have been wrong more than right when stock "I like" drops and I do not know reason but think opportunity to increase.
Have China stock (AOB)that I recently bought more of on this premise--however I think I can attribute drop to general decline of Asian stocks in general past 60 days. Time will tell if correct or not.

However as rule of thumb I generally try and follow most these cardinal rules and throttle back my emotions