This chapter reviews and summarizes the important concepts in this book. I am a reader too to remind me on the lessons especially from my bad experiences. This book allows me to write down my ideas and experiences. I review them and monitor how many mistakes I still repeat in investing. I hope you will do the same for yourself. However, marketing a book is time-consuming, not financially rewarding and hence not encouraged.
1. A mistake may not be a mistake, or a win may not be a win.
Mistakes are repeated over and over again due to not staying consistently with a solid strategy and letting our emotions to influence our trading.
However, some ‘mistakes’ are not mistakes. I have evaluated my past trading record to determine whether my money losing episodes are real mistakes, just bad luck on uncontrollable circumstances or bad financial data.
If it is a real mistake, write it down to avoid repeating the same mistake. Often a trading mistake is worth more in future successes than experiencing a one-time windfall. To illustrate, I bought a small Chinese company that had excellent financial metrics, but it was all fraud and I lost most of my money in the stock. After a while, I made the same mistake again.
Cheat me once, shame on you. Cheat me twice, shame on me. I had that shame but plan not to repeat the same mistake.
It is the same for a win, but in reverse sense. We want to repeat wins with the same lesson.
Most readers do not have the large number (about 100 to 150) of stocks as I do. Draw your lessons by including stocks that have been evaluated even they have not been bought.
Overnight my MOS turned from profit into loss due to the collapse of the cartel in potash industry. It is an event we cannot control, expect or will be repeated soon, so this loss is not a lesson to be learned except on diversification.
I read many analyst reports on companies. First I have to ensure whether they’re written with hidden agenda. Second, I check out whether they make sense. Some companies fell even after good analyst reports. I reviewed them and sometimes I found their arguments were right. Several times I bought more shares and they turned out to beat the market by a good margin as a group. So it is only wrong in timing.
We are human and we all make mistakes. We should learn from our mistakes and reduce the chance to repeat them. I am guilty of repeating same mistakes such as buying foreign stocks that have been proven not profitable for over a year.
What should we do with a losing stock? Do another evaluation. If we really make a mistake, sell it and move on. I do not recommend to reverse the trade (i.e. short the loser) unless you have a convincing argument.
2. Spotting big plunges.
Market timing does not always work. However, when it works more times than it does not, we can benefit a lot in the long run. This book provides a lot of hints to detect big market plunges avoiding huge losses. Play defensive when the market is risky. Monitor how risky is the market routinely and act accordingly. Set up a schedule when to review market risk. In addition, understand market cycles.
Unless the same strategy is over-used, the chart should work. It may not give us ample time to react as the last two (2000 and 2008). Again, it depends on the data (the stock price), so it will not detect the bottom and the peak precisely, but it will spare you further losses and return in time when the long-term trend of the market is up. Recently we have more false alarms. Most of the time you do not lose much except for taxable accounts as it tells you to reenter the market shortly. Personally I try to keep 50% in cash when the market is risky and 100% in stocks during Early Recovery.
When the market is plunging, do not buy stocks. When it starts to recover, this is the best time such as 2009 to buy stock as almost every stock is on sale. It is similar to flash crashes and some fierce corrections. In the last flash crash, I participated one day late and still made some great profits. Next time my reasoning has to overcome my emotions.
Someone found the perfect screen producing an average return of 20% from the top 10 stocks and an average return of 5% for shorting the worst 10 stocks. However, in one abnormal year, the shorting lost 100% erasing all the gains for this strategy. It would work better with market timing.
3. Trade plan.
First, identify your objective in investing. Next, set up a simple trade plan to start, and then set up a schedule. Write down when to review market risk and when to trade. For casual investors, it could be a quarterly task. Excessive (such as everyday) checking our portfolios is a waste of time for most, not to mention about the damage to your spirit.
Following a trade plan consistently forces you to be disciplined in investing. You should stick with the strategies that have been proven recently and avoid the bad human natures such as greed, fears and ignorance.
This book could be part of a trade plan as a source for reference.
4. Match the ideas of this book to the current market conditions and your personal objectives and risk tolerance.
This book could be closest to the Holy Grail of investing: Adapt what work in the current market conditions including fundamental metrics and the screens you’re using. There is no evergreen strategy and the predictability of metrics change in different markets. I have a strategy called Magic. From 2000 to 2006, it beat SPY (the market to most) by 228%. However, from 2007 to 2015, it beat the market by -59%.
The market changes often and it is not always rational. Every one’s investing objective is different. Even couch potatoes can benefit from this book by reading the related chapters.
5. Risk tolerance.
My objective today is to make a decent return at the least risk and conserving of what I have is more important. Be a turtle investor who makes small but consistent profits. Most traders watch the screen all day long, spend a lot on commission for the large number of trades and pay higher taxes for short-term trades.
Many smartest people make millions but lose it all. Avoid options, leverages and margins. The exception is for well-off investors and / or during early recovery that has the highest profit potential.
I am a retiree with enough money to have a comfortable living and hopefully it will stay this way. My strategy is conservative. However, life will be no fun if I just buy CDs and treasury bills (so is losing money in reckless investing). I do not want to take any risk for the sake of selling books or boosting my ego. Here are my three major accounts.
- Ultra conservative. I keep more cash in this account than the other two accounts. I do practice the strategy of ‘all in’ only in the Early Recovery stage of the market cycle. Most other times, I have cash, stocks with high values or sometimes some contra ETFs to lower my market risk.
- Swing accounts. Buy deeply-valued stocks, and replace them with growth stocks during the Up and Peak stages of the market cycle. I am conservative in the Peak stage of the market cycle with mental stops. The average holding period is 6 months and longer for the more advantageous treatment of long-term capital gain tax.
- Momentum accounts (most in Roth IRAs). Switch at least some stocks to contra ETFs when the market is risky. The average holding period is one month. Stress on growth and momentum.
6. Investing advice.
Select the ones that are appropriate to your needs from web sites, magazines, newspapers, etc. The media usually emphasize the business news and some have their own agenda. However, I have profited from some, so I do not want to ignore most. Take time to analyze the news and only act on them when they make sense.
7. Evaluate your requirements and apply what makes sense.
Every one’s requirements are different and my investing style may be different from yours. Actually my current strategy is far safer than ten years ago. Write down your risk tolerance, your time available for investing and your general knowledge (and your desire to learn investing). Only apply those ideas that make sense and fit your requirements.
If you are a beginner in investing, learn from this book and other basic books. Trade on paper. Buy ETFs starting small. Believe in due diligence. Master market timing. Luck in investing only works short term.
For the intermediate investors, it is better to invest on mutual funds and ETFs.
8. Be politically neutral in making investment decisions.
A political statement often offends a lot of folks. Do not let political bias distort your investment decisions. When I made political remarks on any party, I could be 100% right or 100% wrong to you according to which party you belong.
You do not have to be politically correct in making investment decisions. In this book, I have reported my dislikes on both parties and may offend many unintentionally such as politicians in parties, union members, investment professionals…
Also do not let your bias cover your eyes in investing except to be socially responsible. To illustrate, do not let your religious belief to bar you from investing in stem cell technology. Do not buy your company’s stock solely because you work there. Do not be overconfident as the market is not always rational.
9. Trade effectively and monitor your trades.
Do not commit the same mistake again and again. Do not buy any stock without doing a thorough analysis. Be careful on hot tips and hot stocks from the media as they are usually too late and some may be manipulated especially on small companies. Do not trade a stock days before its earnings announcement date unless you have a reason to do so.
10. Investing is multi discipline.
Investing requires knowledge in finance, accounting, economy, psychology, probability, statistics, PC skills, politics and government… This book touches many areas in basic terms. I never stop learning in investing.
11. Best strategy.
The best strategy is not to lose big money. Refer to the chapter on Spotting Big Plunges. Try to identify Early Recovery phase of the market cycle and invest more aggressively in this phase. As in life, nothing is guarantee, but following the basic market timing would give you better chance of making money.
In other phases of the market cycle, choose one of the following strategies depending on your skill, time and risk tolerance. Personally I know more successful investors in using #1 and #2 than #3. When everyone is making easy money, the market could be risky. However, not participating in a rising market could be very tough. If you do participate, exit the market FAST when it is heading down; it could be the best insurance.
1. Conservative strategy. Remain more in cash all the time except during Early Recovery phase.
2. Less conservative. Buy Low and Sell High.
3. More aggressive. Besides ‘Buy Low and Sell High’, add ‘Buy High and Sell Higher’ to a small extent. Always protect your profits and cut down your losses by using ‘mantle’ stops.
In any case, do not gamble the money you cannot afford to lose and check how risky is the current market. Do not bet your entire farm in one trade even if you have a good record in predictions. One bad one could wipe out your entire savings.
This book provides you with a lot of knowledge in investing. However, you have to apply the ideas to the current market conditions and practice them.
When one strategy works consistently, stick with it. Limit your investing strategies to a few (one is fine) depending on your time and your objective.
When good strategies do not work, take a break. It happens once a while including 2015 when most value stock pickers fail. In 2015, I bet it was due to ‘bubble’ stocks such as FANG (Facebook, Amazon, Netflix and Google). It is hard to beat the market without owning them.
I encourage investing over trading. Be a turtle investor; only buy bubble stocks with exit strategies. However, some trading strategies explained in this book do work such as sector rotation, insider trading, etc. The difference is the holding period to me: At least 6 months for investing strategies based on value.
12. Be socially responsible and emotionally detached.
This book is my contribution to the marvelous country that allowed me to prosper and lead a comfortable life. Avoid defense companies, tobacco companies, etc. Sometimes you have to take out your humanity hat in making investing decisions. To make you feel better, donate your ‘loots’ to related charity such as the profit from tobacco stock to American Cancer Society.
Ignore daily news. My emotions could have gone wild on oil with the daily news on the oil price. Look at the long term. Short term wise, even the best expert cannot predict the direction of oil.
What I missed recently
· Bought AMAG from my regular brokerage. It gave me better price than my order. Placed another order with a ‘bargain broker (with no commission due to my deposit). During the day, it went lower than my order price. Hence, it should be executed, but not. No more ‘bargain’ broker.
· I expected the oil price to go up from Jan., 2016. It did as of 6/2016. However, it did but my OIL ETF only rose by 50% of the supposed gain. Should have bought USO.
· Wanted to buy stocks from companies into virtual reality. Acted too late as of 5/2016 and Sony was up by at least 5% in a day.
It is fine to make mistakes, but we have to learn from mistakes and hopefully not to repeat them.
This is one chapter of my book "Complete the Art of Investing". If it helps you, envision how 820 pages will help you.
For more of my reasoning, check out the book described next. It has 820 pages (6*9) for $9.99. It could be the best $10 you ever spend.
The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.
I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.