Saturday, January 8, 2011

Beanie's 19 Rules

Below are 19 stock market thoughts:

1. If you're going to trade, use both technical and fundamental analysis. Trading from a purely technical analysis standpoint is reckless. Scanning just the charts for ideas will inevitably take you to many dangerous stocks you should not be touching even though their charts look "good". It is best that both chart technicals and fundamentals converge before putting your money in the stock.

2. Give some time for your ideas to play out.  You don't need to have a stoploss set all the time, unless you own crappy stocks.

3. Use more money on safer plays, and much less on speculative ones. Walmart deserves much more of your investment dollars than Crox.

4. If you're going to trade, make it count. There is no point in putting only 1% of your account in each of your trades. It is nearly impossible for your account to double, if you have to make 100 trades that has to gain an average of 100%? Over-diversification leads to sub par returns. Make your best and safest trades count. Better to put most of your eggs in a great basket and watch it like a hawk than to over diversify.

5. Use trading systems that are simple that even a fool or a 15-year-old can be taught to do it. Complex systems are unnecessary, overly confusing and cause brain paralysis. Great systems are usually simple, logical and makes mathematical sense.

6. It is almost always better to be a bull than a bear. Historically, market bulls kill market bears. If Warren Buffett was a permabear, he would never have achieved over 300,000% return. If you track the returns of all bears the last few decades, their average compounded returns don't even come close to Warren Buffett's 22-25%. End of story.

7. Avoid futures trading. It is unnecessary and entails massive risk. I think you have a better chance at the craps table.

8. Generally, avoid options trading for the bulk of your account, other than for hedging purposes in big (institutional) accounts. Options were originally designed for portfolio insurance and should be treated as such.

9. Avoid the world of pump-n-dump penny stocks. Even if you're wildly successful, it isn't a scalable process. In other words, it won't work as your account grows bigger. You will never find a Warren Buffett of Penny Stocks. The goal of putting money in the market is to make big stock market returns in the long run. Penny stocks, therefore, cannot be the solution to that end.

10. Contrary to popular belief, you can make money in bear markets going mostly long. For instance, you can buy and add to great bargains of great stocks. When the market returns to a bull market, you will see the wisdom of the play. How else do you think Buffett made his money?

11. Don't take too long to decide that you are no longer as convicted to your position.

12. Warren Buffett is a must-read for traders, not just for investors. If you learn nothing else from him, other than "don't bet against America", you were buying late 2008 and early 2009.

13. Money management is much more important than stock picks. But when you do find a great stock that has incredible moat, is profitable and is selling for cheap, you buy meaningfully and you watch it like a hawk.

14. "Nobody ever went broke taking quick profits" is absolutely not true. In fact, many have gone broke taking quick profits. They are called day traders.

15. Avoid strict day trading and scalping, where a trader goes to all cash by the closing bell. It's too much work for little return.

16. Compounding is the 8th, 9th, and 10th Wonder of the World.

17. I think all great traders became great traders after a powerful moment of epiphany, when all the thinking, perspiration and preparation finally all come together for them. "Eureka!"

18. Not all approaches are equal -- some or better and some are worse. But the right approach does mean everything. Some approaches may never lead to a moment of epiphany.

19. Read The Best Trading System by Chris Beanie, above all else.

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