For those who take a vacation to Vegas everyday Via the Stock Market

[bran987]

I've probably just done as much if not more research on the stock market as I have real estate. I've been reading books and following it since I was 16, almost 25 now.

This is the only time I'll write this because I firmly believe it's something you have to learn on your own, but this is what I've learned.

YOU ARE NOT WARREN BUFFETT JUST BECAUSE YOU READ ONE OF HIS BOOKS

Same goes for Peter Lynch, George Soros, Ben Graham, or my personal favorite, Jesse Livermore!

Here is one thing 99% of people who think they will trade stocks don't know, that the pros do.

You should in almost all cases never risk (bet) more than 1% of your portfolio on any one trade. i.e. $1,000 out of $100,000. This is called Position Sizing.

If you risk 2% or more on one trade, you are what the pros call a GUNSLINGER. Why? Because over the long run, if you proceed to trade this way, you will lose all of your money!!

Did you think about that last time you decided to invest $2,500 out of your $10,000 because a stock "looked like it was about to go up from the news and the chart and the research I did"

I'm not making this up, it has been proven over and over and over and over again.

Hundreds of thousands of people before you have thought they were going to do this.

I just have to be firm because we are smart people and we tend to think we will be different.

YOU ARE NOT A UNIQUE AND BEAUTIFUL SNOWFLAKE.

There is a lifetime of knowledge to learn, and all I know is that I learned enough to decide there are MUCH easier ways to earn a living.

Do you know what you will do if one of your trades is down 25%? Or 50%? Or up that much? I do, because you are human. You have your natural psychology working against you. But you don't know yourself very well until you've been there, and even then you won't even know why you are behaving the way you are until you study up.

I will give you one lesson on Position Sizing so you can see it illustrated.

Let's say the system you've devised (which you have paper traded for at least 6 months and still has a positive expectancy) tells you it's time to put a trade on. Your system says Buy MSFT at $25.

Your system also tells you that if you are wrong, you in this case are willing to lose $3 per share before you will close the position at a loss.

You have $100,000 in your account and you are going to risk 1% of your equity on this trade, ($1,000)

$1,000 / $3 (max loss per share) = 333 shares.

Buy 333 shares of MSFT at $25, total of $8,325.

If MSFT goes down to $22, (your max loss allowed) you will have lost $1,000 and your stop loss order should trigger, selling the 333 shares for $22 per share, leaving you with $7,325, ($1000 less than you started with).

your worst case scenario still left you with 99% of your equity.

There should also be in your system, a strategy to follow if the stock goes up 25% (i.e. do you buy more? or sell some?) and it should ALL be tested in paper trading before you risk your real money. There are lots of ways to devise systems, but you have to learn the ropes.

This is the most basic lesson you can learn. I can't stress to you enough if you go in to the market on hunches, gunslinging or trying to read a company's financial statements and think you are getting "a good deal" in the long run, you will lose all of your money. You might even last 5 years, but the stock market, like all businesses is the same. If you Fail to Plan you are Planning to Fail.

This is my warning, but I know many of you will think it doesn't apply to you. Like I said, the stock market is very exciting.

Best wishes to all!

P.S. Read Market Wizards : Interviews with Top Traders
by Jack D. Schwager
http://www.amazon.com/exec/obidos/t...102-2539339-8540110?v=glance&s=books&n=507846

 

[bran987]

I hope it was obvious I'm talking to people who want to be TRADERS. If you want to be a buy & hold investor and you can afford to buy 20 or more individual stocks, you have eliminated most of the market risk associated with being an individual stock investor, and for all intents and purposes are as well diversified as a mutual fund would be without the fees but you have to factor in commissions on all those individual purchases.

 

[Razorguns]

cool thanks. Have you made much money off the market -- or you decided after all that reading and subsequent research, that the risks and effort involved just wasn't worth it?

 

[Synpax]

Few things to add. I've been trading on paper since I was 8 and my degree is in finance from a pretty respected institution.

First, I'm not sure anyone should be a trader in the way that Bran describes. I'm also confused by Bran's description of a trader. He says you shouldn't put more than 1% of your portfolio into a single trade, yet he says you aren't a trader anymore if you have 20 or more individual stocks. Ergo, his portfolio threshold needs to be over 5%, not 1%.

Trader rules about how much to invest, how long to hold, vary tremendously. I'm not saying that 'this' is right, but other rules I've heard is not to put more than 10% into a trade/single equity unless it is a diverse/holding company, allowing you to maybe 20% (Hewlett Packard is a good example).

Also, make sure you lock your sell trigger at around 10%. Some more advanced traders go for 7.5%.

Regarding funds, never buy a mutual fund with a load. The reason is you can always get funds that are managed just as well that are no-load and come out ahead.

Moving along, historical analysis is garbage. Any time you see someone showing a chart and suggesting that it will predict the future, change the channel. They may as well be looking for patterns on a static TV screen.

Historically, people who trade using historical analysis loose money over time compared to major indexes or normally managed funds. The reason is the efficient market theory (google it for more info).

So how do people like Warren Buffet, etc. do it? And by do it, I mean beat the market. They trade on what is effectively insider information. They can look at the same thing you do and see things you can't (like body language in the CEO presenting the annual report). Or they actually have someone go to the factory and quietly look the place over or go to the after-work bar and pump the employees there for information on the downlow, in-cognito.

Of course, there is my method. Find a company with a good product and a leadership team with good values that is making good decisions, and you can't go wrong.

 

[bran987]

First, I'm not sure anyone should be a trader in the way that Bran describes. I'm also confused by Bran's description of a trader. He says you shouldn't put more than 1% of your portfolio into a single trade, yet he says you aren't a trader anymore if you have 20 or more individual stocks. Ergo, his portfolio threshold needs to be over 5%, not 1%.

If you read the description of my trade, 1% of the equity was at RISK because the stop loss order, but he bought $8,325 worth of stock, so 8.325% of his equity was in the trade. I am shocked you have never heard of the position sizing theory? Some of the most successful traders in history use this as their #1 rule. Again, read Market Wizards, it is simply interviews with traders who have funds that have managed extraordinary returns over an extended period of time. I think you especially would love this book.

I guess I shouldn't be surprised. I also have a finance degree from a pretty good school and they didn't teach it. However they did beat that efficient market theory into my head.

When I spoke of 20 individual stocks, I merely meant that is the point where market specific risk (as opposed to firm specific risk) is all but eliminated (which is why mutual funds are recommended for diversification).

I wasn't saying if you have 20 or more individual stocks, you aren't a trader. I was merely illustrating a safe way to be a buy & hold investor. If you buy 20 stocks and hold them, I don't see you as a trader.

Trader rules about how much to invest, how long to hold, vary tremendously. I'm not saying that 'this' is right, but other rules I've heard is not to put more than 10% into a trade/single equity unless it is a diverse/holding company, allowing you to maybe 20% (Hewlett Packard is a good example).

Also, make sure you lock your sell trigger at around 10%. Some more advanced traders go for 7.5%.

See above, the little example I used of 8% almost matches what you have seen recommended. Put a sell trigger (or as I said stop loss order) around 10% and we are talking apples to apples.

Regarding funds, never buy a mutual fund with a load. The reason is you can always get funds that are managed just as well that are no-load and come out ahead.

agree.

Moving along, historical analysis is garbage. Any time you see someone showing a chart and suggesting that it will predict the future, change the channel. They may as well be looking for patterns on a static TV screen.

mostly agree.

So how do people like Warren Buffet, etc. do it? And by do it, I mean beat the market. They trade on what is effectively insider information. They can look at the same thing you do and see things you can't (like body language in the CEO presenting the annual report). Or they actually have someone go to the factory and quietly look the place over or go to the after-work bar and pump the employees there for information on the downlow, in-cognito.

my advice is if you want to trade like warren buffett, just buy berkshire hathaway

 

[bran987]

cool thanks. Have you made much money off the market -- or you decided after all that reading and subsequent research, that the risks and effort involved just wasn't worth it?

I have made money, lost money, made money, lost money, made money, after all that reading and subsequent research during all the making and losing of money, decided that the risks and effort involved just wasn't worth it.

I encourage people to try it for themselves for awhile, you will never experience more sleepless nights and upset stomach

Unless you devote some real time to it, serious, serious time. Not a game I recommend playing.

 

[Synpax]

Never heard of market sizing, will never read a book on 'trading in the market.' It'sall just gizmos and crap for common sense. I know most of the buzz words and sometimes listen to Bob Brinker's show.

Here's a tip - other than the 401k/retirement type stuff, if you are earning less than 100k, stay out of the market game.

Why? Cause if you have the money to put into the market, there MUST be better places you can put it. Like into a grad degree / tech certification or a new business (even land-lording) or paying off high interest debt - or like our friend on this board starting a supplement distributorship.

Look at it this way. Companies start paying dividends when they can no invest that money in themselves in a way to produce reasonable growth, so they give it to the investors to pour back into places where it can grow faster.

If you are screwing around in the stock market, you are like that corporation that is paying dividends. And I really don't think many of you are in that position yet. I know I'm not. Outside of retirement planning, I will probably never invest in the stock market because I will always be able to make a better return with my own hands.

 

[bran987]

Never heard of market sizing, will never read a book on 'trading in the market.' It'sall just gizmos and crap for common sense.

It's position sizing, not market sizing. It is part of risk management, managing the downside. And all those traders you are talking about know what it is if they have lasted, whether they call it that or not!

Anyway the book is just interesting interviews, no gizmos or crap but fair enough.

I agree on your points about the market. It should be how YOU pay out dividends. If you can't grow it faster on your own, buy an index fund or better a REIT!

 

[Devastation]

interesting thoughts. i manage a portfolio of approximately $300,000 for my pops and have two stocks split up in the entire portfolio. one a reinsurance company and another a payroll processor. i've never slept better

p.s. i've been managing his portfolio since may '99. it was a rollercoaster sept 2001 and since Christmas of that year, i changed my approach to investing. all i can say is i sleep much better now, and experience is the best teacher

 

[bran987]

experience is the best teacher

so you have $300k in 2 stocks? a braver man than I am

or did you say you have since changed policy?

experience is a expensive but effective teacher, I wish you the best!