10 golden investing rules
Post on 01-Feb-2016
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DESCRIPTION10 Rules of Investing
The battlefield is a scene of constant chaos. The winner will
be the one who controls that chaos, both his own and the
110 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
Hi! My name is Michael Comeau and Im the executive editor of T3 Live.
I run T3 Lives Buzz & Banter real-time market intelligence service and help manage our other premium subscription services.
I studied business, finance, accounting, and economics in college. Translation: I learned boring formulas and theories from overpriced textbooks.
My real financial education started when I was thrown in front of a trading platform and told to make sense of it. In the real world, stocks and bonds and options and commodities do crazy things.
Take Shake Shack (SHAK).
On conventional valuation measures like P/E and EV/EBITDA ratios, it was definitely expensive when it came public in early 2015 at $21 per share -- my finance professors would not have approved!
But what happened next?
Well, it opened for trading at $47... and then it went to $96.75 in less than 4 months.
And in late 2014, countless financial
gurus called China a bubble because of its slowing economy and overheated stock markets.
Was China a bubble? Yes. But that bubble got bigger.
The Shanghai Composite went up 50% and the Shenzen rose 100%.
Financial markets are chaos come to life. So if you want to succeed, youve got to think outside the box.
Ive read a lot of What Id Tell My 22-Year Old Self articles lately. 22 was an important age for me. I was in my first senior year of college -- I was on a five-year plan.
And I knew everything about what markets were supposed to do but nothing about how markets actually worked.
In this report, Im going to tell you exactly what I would have told my 22-year old self about investing.
Im going to show you why Bruce Lee can teach you as much about investing as Warren Buffett.
Ill share tricks for sniffing out hucksters. And most importantly, Ill explain why brainpower is vastly overrated.
210 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
Emotional Intelligence Isthe Only Kind That Matters
Your biggest enemy isnt high-frequent traders, evil phantom hedge funds, or even the Fed.
Just like my biggest enemy is me.
I can trace all of my worst investment decisions to acting emotionally instead of rationally.
In early November 2014, I sold a long position in Disney (DIS) at $91 because I was worried about its next earnings report.
I originally bought the stock because I was bullish on the companys 2015 movie release slate including the next Avengers and Star Wars films which had exactly nothing to do with that particular earnings report.
By acting emotionally, I cost myself a great deal of money -- Disney hit $113 in May 2015!
You dont need to be a rocket scientist to be a great trader. However, you must develop high emotional intelligence.
Top performers have the ability to identify and manage their emotions.
They dont let winning trades inflate their egos and they dont let losing trades depress them.
They look at every day as a fresh start. Yesterdays baggage always gets tossed aside.
And most importantly, the best of the best dont fight the market.
They understand that being wrong is part of trading and that perfection is not a requirement for success.
Basketball legend Michael Jordan missed over 9,000 shots in his career and blew the game-winning basket 26 times.
He also led the Chicago Bulls to 6 NBA championships and was voted Most Valuable Player 5 times.
We all fall down from time to time. Our results are based on how well we bounce back from our errors.
310 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
Be Like Bruce Lee
As active investors, we hear nonstop about what financial icons like Warren Buffett, Carl Icahn, and Jeff Gundlach are doing.
But you know what?
I want to be like Bruce Lee.
I think his philosophy is infinitely more valuable than Wall Street clichs like buy low, sell high and diversify your portfolio.
He can teach us a lot about investing. Lets go through some of Bruce Lees most famous quotes:
Be like water making its way through cracks. Do not be assertive, but adjust to the object, and you shall find a way around or through it. If nothing within you stays rigid, outward things will disclose themselves.
Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup.
You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend. To me, being water means being flexible and going with the flow -- not fighting it.
Do you know what happens to investors that dig in their heels insist the price action is somehow wrong?
They go broke!
Bruce also said:
It is not a shame to be knocked down by other people. The important thing is to ask when youre being knocked down, Why am I being knocked down? If a person can reflect in this way, then there is hope for this person..
Glorifying victories and ignoring losses is an easy route to a big ego.
Big egos dont last.
410 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
So we should pay extra attention to trades that dont work out we can avoid similar mistakes in the future.
Did I fail to properly gauge a stocks reaction to a specific event?
Did I make an incorrect forecast?
Or did an unforeseen event occur?
Even if we cant always perfectly explain our investing mistakes, we must ask ourselves these questions.
510 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
If Youre Going to Lose,Lose Small
Since were on the topic of losing, we should go through a rare piece of conventional Wall Street wisdom that is actually true!
Theres a basic problem with big investing losses.
They require even bigger gains to make up for them.
Lets say you start off with $10,000.
If you lose 50% of that money, youre down to $5,000.
To get back up to $10,000, you need to make another $5,000. Thats a 100% gain, or double your money.
But aside from the mathematics, theres a second and bigger factor at play -- big losses will frustrate you to no end.
Its much easier to move on from a 10% loss than a 50% loss.
Remember what I said about emotional intelligence?
Big losses put you at risk of mismanaging your emotions. You could swing for the fences a little too hard on the next trade,
or you could become gun shy precisely when its time to embrace risk.
Therefore, you must have a plan to prevent small losers from turning into major losers.
The simplest solution is to institute stop losses.
For example, you could sell a stock when it loses 7% or 10%.
Or, you could do what I do, and take a mental gut check.
If a trade is going against me, I sit back, take a deep breath, and think about whether Id put it on again right then and there.
In the past, Ive had a tendency to get stopped out of trades on the lows, so I find it best to not rush to the exits too quickly.
610 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
Your Memory Stinks,So Start a Diary
Albert Einstein said
If you cant explain it to a six year old, you dont understand it yourself.
If you have a compelling trading or investment thesis, you should be able to get your point across in a few sentences that the average investor can understand.
You can spend days or even months cranking through complex spreadsheets and industry data, but if you cant boil your research down to a few paragraphs, you dont have an idea.
So test yourself.
Take your biggest stock position.
Now imagine you have a school assignment to write 400 words explaining why that stock is worth owning.
If you cant do that why do you own it?
You dont have to be Ernest Hemingway, but writing about your ideas will force you to organize your thoughts and present them in an organized way.
And if you do this on a consistent basis, youll have a trading diary to which you can refer in the future.
Having a diary is important because it will keep you accountable. Investors tend to have very selective and very inaccurate memories.
If you think a stock looks okay at $50 and it goes to $100, odds are youll remember yourself thinking I was pounding the table on that as a strong buy!
Writing is the best way to keep those false memories in check.
So do yourself a favor and start a diary in Google Docs today.
Even if youre just sketching down bullet points, youll be surprised at how much you learn about your process once you start recording it.
710 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU
You Must Knowthe Serenity Prayer
Every investor must learn the serenity prayer.
It doesnt matter what religion you are. You could even be an atheist.
But say these words out loud right now:
God, grant me the serenity to accept the things I cannot change;Courage to change the things I can;And wisdom to know the difference.
Bad investors are obsessed with things they cant control.