The Times Aren’t Changing, and these Investment Rules Still Apply

Truth is, investing is simple. It really is. The rules are always the same, because the markets never change. The only thing constant is change. So if it’s all so easy, why do a lot of people still lose money? The answer is simple. The rules of the game may never change, but most players can’t adhere to the rules. They let their own emotions take over. So without further ado, here are 12 more rules you should keep in mind.

  1. Rule #1 is pretty obvious. In a bull market, be bullish. The problem that most traders have is that they only catch the initial 40% of the bull market. The instant we see crazed bullishness, we sell out our position. We say that the markets have moved too high, too fast. Then what happens? The market keeps moving up! It moves up day after day, relentlessly. So our judgement was right, but we only caught 40% of the trend, and missed the big chunk!
  2. That being said, one should only be either long or on the sidelines. Many legendary investors have been killed when they tried to short bubbles. Julian Robertson. R.I.P. 2000. George Soros. Got killed when shorting the tech bubble, but reversed his position, and went overly long. No position, a lot of times, is the best position one can have.
  3. Fewer trades, better trades. Have you ever seen a good baseball player take a swing at every lousy pitch? No. They go all out when they feel that their potential to hit a home run is highest. A lot of people say “I’m just gonna invest in this, make 20%, and get out when I reach my goal.” Enter every trade as if you were trying to hit a home run. That means well planned out, exit strategy in mind, and adding-to-position strategy in mind.
  4. Par your trade down. I big mistake I once made was to sell 100% of my position in one order. Then the market kept moving higher. I generally like the rule of thirds. If I have $300,000, I’ll buy $100,000 worth of XYZ at $20, another $100,000 at $25, and another $100,000 at $30. That being said, buy on strenght. On the flip side of things, if the market is going down, sell $100,000 at $30, another $100,000 at $27, and another $100,000 at $24. Sell on weakness. By breaking up my sell and buy orders into thirds, I won’t be easily washed out by a temporary movement in the markets.
  5. Never trust your gut feeling. I’ve tried “going with my gut feeling” before, and honestly, that chance of you suceeding in your trade is 50%. It’s like gambling. You hear the big traders saying “oh, I have this gut feeling that XYZ will move up 30%”. Gut feelings come from your analysis – your mind hasn’t had enough time to fully digest your analysis of the investment, but deep inside, you already know that something is wrong. If you’re not a really experienced investor, do not rely on your gut feeling, because that’s the same as throwing caution into the wind and allowing your emotions to reign free.
  6. Investing is a lot like gambling. But even in poker, there are the pros who consistently beat the newbies. Do not expect to be right 100% of the time. Like Michael Steindhart once said “all I ask is to be right 60% of the time.”
  7. Holding on to a losing trade is exhausting – both to your monetary capital (if you have a large position) and ot your mental capital. Day after day you sit there looking at the red ink on your monitor. It makes you depressed, and muddles your clear thinking. So close your position, and take a break. You may not be able to see the big picture as a player in the game, but as a bystander, you can see the big picture from an objective point of view.
  8. A continued point from rule #7 is to take a break when you’ve suddenly lost a chunk of capital. The sudden pain that feels like a chunk of flesh was carved out of you will urge you to make that money back, quickly. And as we all know, patience is key.
  9. When things are working out well, trade more. When things aren’t working out for you, par down your trades.
  10. The biggest difference between a trader and an economist? Economists want to be right, but traders just want to make money. Economists want to say “see, I told you that would happen!”, while traders don’t care if their initial analysis was right. The instant they’re proved wrong by the market, good traders will switch to the winning side.
  11. Markets peak in heavy trading with huge volatility, but bottom in quiet periods.
  12. The final 5% of a bull market creates 40% of the price movement. Markets take a long time to gather the energy at the bottom. But it’s ok to miss the top 40%, because you’re also missing the possibility to be down 50% in a flash when the inevitable crash comes.