Believe Your Eyes, Not Your Brains. Ask Yourself What, Not Why.

Seventeen thousand money managers around the globe pay to use BlackRock’s Aladdin risk assessment platform to manage $15 Trillion.  Therefore, nearly 7% of the world’s $225 Trillion in financial assets are being managed by people who all ponder the markets using the same tools.  As a result, 30,000 of the world’s most significant investment portfolios are kept track of by Aladdin.  And so, by default, any flaws in the system matter to every investor, not just to Aladdin subscribers.

It is my belief that there is no professional out there who truly understands the truckloads of reports and analysis that Aladdin regularly produces.  Certainly there is no way for individual investors to do their own legwork and come up with the equivalent of Aladdin’s risk models, but I submit to you that this should never be our focus.  Instead, let your eyeballs do the work.  What matters most is not why these 17,000 money managers vote with their dollars in a particular manner.  What matters most is that we see where they are deploying their assets and what they are voting for.  Believe your eyes and not your brains.  It’s their gigantic footprints that they leave all over our charts that really matter.

Source:
Gatis Roze -  Believe Your Eyes, Not Your Brains Ask Yourself What, Not Why

We Are Traders - A tribute to all those trading the markets

Niels Jensen’s Confessions of an Investor

The problems with Modern Portfolio Theory (MPT)

“..I would like to spend a moment on MPT, as I believe it is important to understand the shortcomings of the prevailing approach to investment and risk management. [..] Let’s take a closer look at three of the most important assumptions behind MPT (there are many more assumptions behind Modern Portfolio Theory. Wikipedia is a good place to start should you wish to read more about it):

1. Risk-free investments exist and every rational investor invests at least some of his savings in such assets, which pay a risk-free rate of return.

2. Returns are independently and identically-distributed random variables (returns are trendless and follow a normal distribution, in plain English).

3. Investors can establish objective and accurate forecasts of future returns by observing historical return patterns. Strictly speaking, this assumption was relaxed by Fischer Black in 1972 when he demonstrated that MPT doesn’t require the presence of a risk-free asset; an asset with a beta of zero to the market would suffice.

Well, if these assumptions are meant to stand the test of time, then good old Markowitz (the father of MPT) is in trouble. Truth be told, none of the three stand up to closer scrutiny. The concept of risk-free investing no longer exists, post 2008. Banks are giant hedge funds which cannot be trusted and even government bonds look dicey in today’s world. Secondly, returns are clearly not random. If you have any doubts, just look at how the trend-following managed futures funds make their money. Thirdly, from 26 years of investment experience, I can testify to the fact that historical returns provide little or no guidance as to the direction of future returns.

A new approach is required.

So what does all of this mean? First of all it means that universities and business schools all over the world should clear up their acts. Two generations of so-called financial experts have been indoctrinated to believe that MPT is how you should approach the management of investments and risk whereas, in reality, nothing could be further from the truth. It also means that investors should kick some old habits and re-think how they do their portfolio construction. Specifically, it means that: [..]

i. the notion of the “market portfolio” being an appropriate performance benchmark should be discarded;

ii. there is in reality no meaningful distinction between strategic and tactical asset allocation – the difference is illusory;

iii. investors should once and for all reject the notion that there is an optimal portfolio for each investor from which he or she should only deviate “tactically” in the shorter run;

iv. market timing deserves more credit than it is given;

v. MPT is a straitjacket preventing investors from rotating between different classes of risky assets (with vastly different risk/return profiles) as market conditions change.

Please note that this does not imply that asset allocation is irrelevant. Far from it. However, it does mean that a bespoke approach to asset allocation, where individual circumstances drive portfolio construction, is likely to be superior to a more generic approach based on a strategic core and a tactical overlay.

[..]

A solution to the problem

Here is what I would do in terms of applying his thinking into a modern day investment approach:

1. Do what you do best. Some investors are made for short-term trading. Others are much more suited for long-term investing (like me). Don’t be shy to utilize whatever edge you may have. MPT suggests that markets are efficient. Nothing could be further from the truth. If you have spent your entire career in the medical device industry, the chances are that you understand this industry better than most. Use it when managing your own assets. Insider trading is illegal; utilizing a life time of experience is not.

2. Take advantage of mean reversion. Mean reversion is one of the most powerful mechanisms in the world of investments. At the highest of levels, wealth has a long term ‘equilibrium’ value of about 3.5 times GDP. As recently as 2007, wealth was well above the long term equilibrium value and signaled overvaluation in many asset classes. But be careful with the timing aspect of mean reversion. The fact that an asset class is over - or undervalued relative to its long term average tells you nothing in terms of when the trend will reverse. A good rule of thumb is to buy into asset classes when they are at least a couple of standard deviations below their mean value.

3. Be cognizant of herding. We are all guilty of keeping at least one eye on other investors, and we are certainly guilty of letting it influence our own investment decisions. This is how investment trends become investment bubbles and fortunes are wiped out. Herding is relatively easy to spot despite the fact that former Fed chairman Alan Greenspan argued otherwise – probably because it was a convenient argument at the time. But herding is also subject to the greater fool theory. You can make a lot of money investing in fundamentally unsound assets, as long as you can find a greater fool to whom you can sell it at a higher price. It works fine but only to a point.

4. Think outside-the-box. All those millions of baby boomers all over the western world who will retire in the next 10-15 years have been told by the MPT-trained financial advisers that they need to lighten up on equities and fill their portfolios with bonds, because they need the income to live on in old age. STOP! Who says that bonds can’t be riskier investments than equities? When circumstances change, you should change your investment approach accordingly and not rely on historical norms. Given the state of fiscal affairs in Europe and North America, it does not seem unreasonable to suggest that circumstances have indeed changed.

5. Bring non-correlated asset classes into the frame. One should consider having a core allocation to non-correlated assets. Traditionally, many non-correlated asset classes have not met the liquidity terms required by the majority of investors [..], but there are exceptions, the most obvious one being managed futures. The asset class proved its worth in 2008 with managed futures funds typically up in the range of 20-30% that year.

6. Take advantage of investor constraints and biases. The classic, but by no means only, example is the outsized impact a downgrade to below investment grade (i.e. a credit rating below BBB) may have on corporate bonds, as some institutional investors are not permitted to own high yield bonds and are thus forced to sell regardless of price when the downgrade takes place.”

Source: Birthdays and Investment Risk.

On Pattern Recognition

"The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements."

Jesse Livermore

James Montier's Seven Immutable Laws of Investing

1. Always insist on a margin of safety

2. This time is never different

3. Be patient and wait for the fat pitch

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage

7. Never invest in something you don't understand

Source: GMO

Paul Desmond's Market Musings

"On a fundamental basis, the fundamental factors are always different in every bull market or every bear market. But the technical factors are based upon something much simpler. They are based on human psychology. Investors tend to go from periods of extreme depression at market bottoms, to extreme elation at market tops. And there are always a different set of circumstances that help boost that change in psychology. But the range of human psychology remains pretty much the same. And we simply move from panic at market bottoms, fear at market bottoms, and finally we move to greed at market tops. And that is the limit of what technical analysis is really doing — measuring the psychology of investors regardless of events that may have inspired their bullishness or bearishness."

"You cannot time the market off of fundamental information, because the stock market operates off of expectations as to what is going to happen six months or nine months down the road. In other words, investors don't buy stocks because of what they know today. They buy because of what they think they are going to know six months or nine months from now. So the market is always ahead of the economy. And as a result, if you are trying to look at fundamental information, you are always too late."

"..if we were in the fall foliage season prior to winter, what we would tend to see in the trees up north, we'd start to see leaves dropping off the tree one at a time. And the stock market is very, very similar, that as you get into the latter stages of a bull market, individual stocks tend to peak out and begin to drop into their own individual bear markets, while there are still a lot of stocks continuing to advance. As the bull market becomes more and more mature, a greater number of individual stocks tend to fall off the trees, so to speak, and drift to the ground, whereas the investment community is not watching the leaves, they are watching the indexes."

"You have to be willing to buy in the face of bad news. By the same token, at market tops, the news is dominated by good news, and that is the time to watch out because if the news can't get any better then all it can do is get worse."

"..the important things for investors to realize is that market declines start out with complacency as being the most dominant emotion at that time. And the means that most people are half asleep, and they are just not paying attention. They don't think the markets can go down, so they don't think there is any need be watchful, but that is exactly when an investor needs to be particularly alert. The last stages of a decline, the very last couple of months of a market decline are the most intense, because that is when the panic sets in, and that is when it is absolutely essential that you are already out of the market. You surely don't want to go through that final stage."

Source: Q&A: Paul Desmond of Lowry's Reports

The Zurich Axioms

On Risk:
- Worry is not a sickness but a sign of health – if you are not worried, you are not risking enough.
- Always play for meaningful stakes – if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
- Resist the allure of diversification.

On Greed:
- Always take your profit too soon.
- Decide in advance what gain you want from a venture, and when you get it, get out.

On Hope:
- When the ship starts sinking, don’t pray. Jump.
- Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

On Forecasts:
- Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

On Patterns:
- Chaos is not dangerous until it starts to look orderly.
- Beware the historian’s trap – it is based on the age-old but entirely unwarranted belief that the orderly repetition of history allows for accurate forecasting in certain situations.
- Beware the chartist’s illusion – it is characteristic of human minds to perceive links of cause and effect where none exist.
- Beware the gambler’s fallacy – there’s no such thing as “Today’s my lucky day” or “I’m hot tonight”.

On Mobility:
- Avoid putting down roots. They impede motion.
- Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
- Never hesitate to abandon a venture if something more attractive comes into view.

On Intuition:
- A hunch can be trusted if it can be explained.
- Never confuse a hunch with a hope.

On the Occult:
- If astrology worked, all astrologers would be rich.
- A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.

On Optimism & Pessimism:
- Optimism means expecting the best, but confidence mean knowing how you will handle the worst. Never make a move if you are merely optimistic.

On Consensus:
- Disregard the majority opinion. It is probably wrong.
- Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.

On Stubbornness:
- If it doesn’t pay off the first time, forget it.
- Never try to save a bad investment by “averaging down”.

On Planning:
- Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans or other people’s seriously. In essence these axioms point to the benefit of having an investment strategy and sticking to it, regardless of what other investors say or do. If you don’t have an investment strategy, you could do worse than adopt these principles. However, don’t be afraid to add or subtract ones according to what works for you.

Source: Max Gunther's Zurich Axioms via TBP

Soros on market forecasting

"The financial markets generally are unpredictable. So that one has to have different scenarios. The idea that you can actually predict what's going to happen contradicts my way of looking at the market."

George Soros

The Seven Sins of Fund Management

“This collection of notes aims to explore some of the more obvious behavioral weaknesses inherent in the ‘average’ investment process. Seven sins (common mistakes) were identified:

1. The first was placing forecasting at the very heart of the investment process. An enormous amount of evidence suggests that investors are generally hopeless at forecasting. So using forecasts as an integral part of the investment process is like tying one hand behind your back before you start.

2. Secondly, investors seem to be obsessed with information. Instead of focusing on a few important factors (such as valuations and earnings quality), many investors spend countless hours trying to become experts about almost everything. The evidence suggests that in general more information just makes us increasingly over-confident rather than better at making decisions.

3. Thirdly, the insistence of spending hours meeting company managements strikes us as bizarre from a psychological standpoint. We aren’t good at looking for information that will prove us to be wrong. So most of the time, these meetings are likely to be mutual love-ins. Our ability to spot deception is also very poor, so we won’t even spot who is lying.

4. Fourthly, many investors spend their time trying to ‘beat the gun’ as Keynes put it. Effectively, everyone thinks they can get in at the bottom and out at the top. However, this seems to be remarkably hubristic.

5. Fifthly, many investors seem to end up trying to perform on very short time horizons and overtrade as a consequence. The average holding period for a stock on the NYSE is 11 months [in 2005, nowadays is less, according to the same author]! This has nothing to do with investment; it is speculation, pure and simple.

6. Penultimately, we all appear to be hardwired to accept stories. However, stories can be very misleading. Investors would be better served by looking at the facts, rather than getting sucked into a great (but often hollow) tale.

7. And finally, many of the decisions taken by investors are the result of group interaction. Unfortunately groups are far more a behavioral panacea. In general, they amplify rather than alleviate the problems of decision making.

Each of these sins seems to be a largely self imposed handicap when it comes to trying to outperform. Identifying the psychological flaws in the ‘average’ investment process is an important first step in trying to design a superior version that might just be more robust to behavioral biases.”



Source:

James Montier – Seven Sins of Fund Management

Why we love predictions

"Behavioral scientists have discovered that at the core of the dislike human beings have for randomness, is an overwhelming desire to believe we are in control. "Knowing" that the S&P 500 will close at 1,450 next year gives investors that feeling of control, even though it gets us into the stock market after it has doubled."

Below you have some healthy advice about the "The Folly of Forecasting":

"Whenever you find yourself reading (or watching) someone who tells you where a stock or the markets are going, consider these factors:

- No one truly knows what tomorrow will bring. Nobody. Any and all forecasts are, at best, educated guesses.

- All prognostications are instantly stale, subject to further revision. Conditions change, new data are released, events unfold. Yesterday's prediction can be undone by tomorrow's press release.

- In order to "become right," some investors will stand by their predictions despite a stock or the market going the opposite way, hoping to be proven correct. Ned Davis called this the curse of "being right rather than making money."

Sources:

Allan Roth - 5 Financial Predictions for 2011

Barry Ritholtz - The Folly of Forecasting

Arthur Huprich's List of Investment Rules

P. Arthur Huprich published a terrific list of rules at year’s end. Other than commandment #1, they are in no particular order:

• Commandment #1: “Thou Shall Not Trade Against the Trend.”

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

• There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

• Sell when you can, not when you have to.

• Bulls make money, bears make money, and “pigs” get slaughtered.

• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

• Understanding mass psychology is just as important as understanding fundamentals and economics.

• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

• Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

• When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

• Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

• When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

• As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

• Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

• Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

• Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

• Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

• Wishful thinking can be detrimental to your financial wealth.

• Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

• Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

• Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

• Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

• Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.

• As many participants have come to realize from 1999 to 2010, during which the S&P 500 has made no upside progress, you can lose money even in the “best companies” if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a “mixed” fundamental opinion.

• To the best of your ability, try to keep your priorities in line. Don’t let the “greed factor” that Wall Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.

• Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!


Source: Art Huprich’s Market Truisms and Axioms

Behavioral Investment Tips

Top tips for better decision making

This applies to me, you and everyone else.

You know less than you think you do.

Be less certain in your views, aim for timid forecast and bold choices.

Don’t get hung up on one technique tool, approach or view – flexibility and pragmatism are the order of the day.

Listen to those who don’t agree with you.

Top tips for better decisions

You didn’t know it all along, you just think you did. Forget relative valuation, forget market prices, work out what the stock is worth (use reverse DCFs).

Don’t take information at face value, think carefully about how it was presented to you.

Don’t confuse good firms with good investments, or good earnings growth with good returns.

Vivid, easy to recall events are less likely than you think they are, subtle causes are underestimated.

Try to focus on facts, not stories.

Sell your losers and ride your winners.

Beating the biases

Being aware of the biases is not enough. It is just an important first step.

Need to create a framework that incorporates mental best practice. Easier said than done. Mental bad habits are persistent.

The good news, we continue to create new brain cells throughout our lives.

Source:

James Montier - Behavioural Finance: Insights into Irrational Minds and Markets

The Whipsaw Song

by Ed Seykota

Jesse Livermore's Trading Rules

Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he'll be proven wrong and exit a position. If a trader doesn't know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser's game.

Lesson Number Four: Let profits ride until price action dictates otherwise.

"It never was my thinking that made the big money for me. It always was my sitting."

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position.

Lesson Number Five: Buy all-time new highs.

The psychological merits of buying all-time or 52-week highs are immense and shouldn't be discounted as a part of your overall strategy.

Lesson Number Six: Use pivot points to determine trends.

When going long, traders are continually looking for confirmation by assessing the strength of a move. Higher highs and higher lows are a solid indicator that a current uptrend is merely taking a slight pause, and the odds of higher prices are in their favor. These same pivot points are integral to drawing support and resistance lines to give traders their line in the sand. Taken together, trend lines and pivot points can enlighten a trader to a change in momentum, which may change the character of a trade.

Lesson Number Seven: Control your emotions.

Our goal as traders should be to also make a critical yet honest assessment of the areas we can improve so the bottom line will support our claims of truly being seasoned traders. Adhering to the time-tested rules of Jesse Livermore would be a great start for anyone.

Source: Livermore's Trading Rules

Bob Farrell’s 10 Market Rules to Remember

Wall Street “gurus” come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987 crash.

Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below. The words of wisdom are timeless and are especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction

Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past six years, only to get cut in half. As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom

That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

I would suggest that as of August 2008, we are on our third reflexive rebound – the January rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
We have yet to see the long-drawn-out fundamental portion of the bear market.

9. When all the experts and forecasts agree – something else is going to happen

As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?” Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

Source: Investment Postcards

Market Wizard Quote of the Day

“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be".

William Eckhardt

The most signicant lesson Soros taught Druckenmiller

The most signicant lesson Soros taught him, Druckenmiller suggested, was “that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.”

He learned this soon after he began work at Quantum. He had been unenthusiastic about the dollar and he took a large short position against the German mark. The position began to go in his favor, and he was quite pleased with himself. Soros dropped in on him in his ofce and discussed the trade.

“How big a position do you have?” he asked.

“One billion dollars,” Druckenmiller answered.

“You call that a position?” Soros said, a question that has become part of Wall Street folklore.

Soros suggested that Druckenmiller double his position. He did. And, just as Soros had predicted, even more prots poured into Quantum.

“Soros has taught me,” noted Druckenmiller, “that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a prot with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”

Source: SOROS - The Unauthorized Biography, Robert Slater

Six Rules of Michael Steinhardt

Michael Steinhardt was one of the most successful hedge fund managers of all time. A dollar invested with Steinhardt Partners LP in 1967 was worth $481 when Steinhardt retired in 1995.

The following six rules were pulled out from a speech he gave:

1. Make all your mistakes early in life: The more tough lessons you learn early on, the fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something.

2. Always make your living doing something you enjoy: Devote your full intensity for success over the long-term.

3. Be intellectually competitive: Do constant research on subjects that make you money. Plow through the data so as to be able to sense a major change coming in the macro situation.

4. Make good decisions even with incomplete information: Investors never have all the data they need before they put their money at risk. Investing is all about decision-making with imperfect information. You will never have all the info you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation.

5. Always trust your intuition: Intuition is more than just a hunch — it resembles a hidden supercomputer in the mind that you’re not even aware is there. It can help you do the right thing at the right time if you give it a chance. Over time, your own trading experience will help develop your intuition so that major pitfalls can be avoided.

6. Don’t make small investments: You only have so much time and energy so when you put your money in play. So, if you’re going to put money at risk, make sure the reward is high enough to justify it.

Source: Six Rules of Michael Steinhardt

12 Trading Rules by Joe DiNapoli

1. Loss of opportunity is preferable to loss of capital.

2. Picking safe, readable, and ultimately high probability trades is the way to go.

3. Use logical profit objectives for all positions. Know your exits and stick to them.

4. Markets are squirrelly animals - make your trading plans ahead of the market.

5. Don't buy new highs or sell new lows - wait for the market to come to you. Buy retracements. If you miss the train, don't beat yourself up - another one will come by shortly.

6. Above all, follow your own trading plan and no one else's.

7. Trade quietly - with the exception of a mentor, tell no one about your positions, profits, or losses. This is especially true for those who are close to you, like your wife, husband, or friends. This self-gratification process or sharing process will put you under psychological pressure to win on every trade and can be a primary reason for failure to follow your plan.

8. Don't carry a sizeable position when traveling. The market will always catch you off guard at the most inopportune time.

9. You are only one trade from humility. A swelled head does not belong on a trader's shoulders.

10. Add to your knowledge before attempting to add to your wallet. Newbie traders think they can become pros with little more than a computer and hope. In this business, hope is a four letter word. Show me a humble trader, and I'll show you someone ready to learn.

11. Develop your sense of humor - you'll definitely need it.

12. Help other traders whenever you can. This is more practical than philosophical - giving keeps the ego in line and when you need help, and you will, you'll find it.

Source:

The Kirk Report

11 Rules For Better Trading In 2008

1. Be data centric in your approach. Take the time and make the effort to understand what works and what doesn’t. Trading decisions should be objective and based upon the data.

2. Be disciplined. The data should guide you in your decisions. This is the only way to navigate a potentially hostile and fearful environment.

3. Be flexible. At first glance this would seem to contradict Rule #2; however, I recognize that markets change and that trading strategies cannot account for every conceivable factor. Giving yourself some wiggle room or discretion is ok, but I would not stray too far from the data or your strategies.

4. Always question the prevailing dogma. The markets love dogma. “Prices are above the 50 day moving average”, “prices are breaking out”, and “don’t fight the Fed” are some of the most often heard sayings. But what do they really mean for prices? Make your own observations and define your own rules. See Rule #1.

5. Understand your market edge. My edge is my ability to use my computer to define the price action. I level the playing field by trading markets and not companies.

6. Money management. Money management. Money management. It is so important that it is worth saying three times. There are so few factors you can control in the markets, but this is one of them. Learn to exploit it.

7. Time frame. Know the time frame you are operating on. Don’t let a trade turn into an investment and don’t trade yourself out of an investment.

8. Confidence and conviction. Believe in your strategies and bet wisely but with conviction. There is nothing more frustrating than having a good strategy work as you expect, yet at the end of the day, you have very little winnings to show for your efforts.

9. Persistence. It takes persistence to operate in the markets. Success doesn’t come easy, and if it does, then I would be careful. Even the best strategies come with losses, and they always seem to come when you get the nerve to make the big bet. Stay with your plan. If you have done your home work, the winning trades will follow.

10. Passion. In the end, trading has to be about your bottom line, but you have to love what you do and no amount of money is worth it if you aren’t passionate about the process. No matter how much success you enjoy, in the markets you can never stop learning.

11. Take care of yourself. No amount of money is worth it if your health is failing or you have managed to alienate yourself from family and friends in the process.

Source:
The TechnicalTake by Guy M. Lerner