Over the last two weeks a lot of the bullish sentiment that was imbedded in the market has now given way to fear. We have written many articles posted here on this website about the rules of investing and no one pays attention to such rules until they have broken them all. Now is no different. Just last week I received an email regarding the correction in silver and his recent purchase near the top. After telling him all the reasons that he should sell into a bounce and remove the losing position from the portfolio – ultimately he just wanted to hear that someday it could well return to his purchase price. He is still holding that position today hoping that at some point he will once again break even on the investment.
This attitude is the single most common mistake that investors make. The idea of selling something when it isn’t working is revolting to their very nature, it means they are a loser. This is absolutely the worst possible mistake an investor can make. In investing you have to get used to the idea of losses. They will occur as regularly as the sun rises and sets. The difference between a successful long term investor and an unsuccessful one really comes down to following these very simple rules. Yes, I said simple rules, and they are – but they are the most difficult set of rules for any one individual to follow because of the simple fact that they require you to do the exact OPPOSITE of what your basic human emotions tell you do – buy stuff when it is being liquidated by everyone else and sell stuff when it is going to the moon.
The 7 Impossible Trading Rules To Follow:
Here are the rules – they are not unique or new. They are time tested and successful investor approved. Like Mom’s chicken soup for a cold – the rules are the rules. If you follow them you succeed – if you don’t, you don’t.
1) Sell Losers Short: Let Winners Run: It seems like a simple thing to do but when it comes down to it the average investor sells their winners and keeps their losers hoping they will come back to even.
2) Buy Cheap And Sell Expensive: You haggle, negotiate and shop extensively for the best deals on cars and flat screen televisions. However, you will pay any price for a stock because someone on television told you too. Insist on making investments when you are getting a “good deal” on it. If it isn’t – it isn’t, don’t try and come up with an excuse to justify overpaying for an investment. In the long run – overpaying will end in misery.
3) This Time Is Never Different: As much as our emotions and psychological makeup want to always hope and pray for the best – this time is never different than the past. History may not repeat exactly but it surely rhymes awfully well.
4) Be Patient: As with item number 2; there is never a rush to make an investment and there is NOTHING WRONG with sitting on cash until a good deal, a real bargin, comes along. Being patient is not only a virtue – it is a good way to keep yourself out of trouble.
5) Turn Off The Television: Any good investment is dictated by day to day movements of the market which is merely nothing more than noise. If you have done your homework, made a good investment at a good price and have confirmed your analysis to correct – then the day to day market actions will have little, if any, bearing on the longer term success of your investment. The only thing you achieve by watching the television from one minute to the next is increasing your blood pressure.
6) Risk Is Not Equal To Your Return: Taking RISK in an investment or strategy is not equivalent to how much money you will make. It only relates to the permanent loss of capital that will be incurred when you are wrong. Invest conservatively and grow your money over time with the LEAST amount of risk possible.
7) Go Against The Herd: The populous is generally right in the middle of a move up in the markets but they are seldom right at major turning points. When everyone agrees on the direction of the market due to any given set of reasons – generally something else happens. However, this also cedes to points 2) and 4) – in order to buy something cheap or sell something at the best price – you are generally buying when everyone is selling and selling when everyone else is buying.
These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them you will succeed in your investment goals in the long run. You most likely WILL NOT outperform the markets on the way up but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing – it is impossible to replace lost capital.
Currently the market has issued a sell signal on a weekly basis which should not be ignored. This implies that you should be increasing exposure to cash and fixed income and reducing exposure to risk based assets. HOWEVER, on a daily basis the markets have gotten oversold so any selling is recommended on a bounce in the markets over the next several days to a week.
Summer months tend to be the weaker months of the year to invested in the markets so reducing some exposure to risk makes some sense. Sell losing positions first on a rally and then trim back positions that have gotten overvalued and stretched during the run up from the lows of last summer.
Holding a cushion of cash will be beneficial over the next couple of months and should we have another correction as we saw last summer (I have marked the retracement levels) we could have several good opportunities to add value to portfolio holdings at better prices.
Economics are showing signs of deterioration on many fronts so we want to keep a watch on the broader macroeconomic issues but from an investment standpoint managing the risk in portfolios is highly important to longer term success. As my uncle used to say – “…if you prune your garden from time to time it will yield a much more bountiful harvest.“