Edge 83's 11 principles of speculation: I gathered these quotes and principles from reading about some of the best speculators in history. I'd like to hear about any ideas or concepts that you think are missing from the list.
1. Cut your losses quickly
Use a 7-10% stop loss on any stock that moves against you.
“Always sell what shows you a loss and keep what shows you a profit.” – Jesse Livermore
“My philosophy is that all stocks are bad. There are no good stocks unless they go up in price. If they go down instead, you have to cut your losses fast Letting losses run is the most serious mistake made by most investors.” – William O’Neil
“The whole secret to winning and losing in the stock market is to lose the least amount possible when you're not right.” - William O’Neil
“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.” – William O’Neil
“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” – Bernard Baruch
“In trading/ investing it's not about how much you make, but how much you don't lose” – Bernard Baruch
2. Stay disciplined
“I knew now that I had to keep rigidly to the system I had carved out for myself.” – Nicholas Darvas
“A peak performance trader is totally committed to being the best and doing whatever it takes to be the best. He feels totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business.” – Van K. Tharp
“If you personalize losses, you can't trade.” – Bruce Kovner
“So the first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to buy stocks that are coming out of broad bases and beginning to make new highs.” - William O’Neil
“Don't try to buy at the bottom and sell at the top. It can't be done except by liars. I'll give you the bottom 10% and the top 10% of any move if I get to keep the middle 80%.” – Bernard Baruch
“More than anything else, what differentiates people who live up to their potential from those who don't is a willingness to look at themselves and others objectively.” -Ray Dalio
“The more you think you know, the more closed-minded you'll be.” -Ray Dalio
“Do not feel bad about your mistakes or those of others. Love them! Remember that one: they are to be expected; two: they're the first and most essential part of the learning process; and three: feeling bad about them will prevent you from getting better.” -Ray Dalio
“The best investment you can make, is an investment in yourself... The more you learn, the more you'll earn.” - Warren Buffett
“Emotional makeup is more important than technical skill. If you cannot control your emotions, you cannot control your money. The key to success is emotional stability.” - Warren Buffett
“We don't have to be smarter than the rest. We have to be more disciplined than the rest.” - Warren Buffett
3. Study the market cycles
“A man must study general conditions, to seize them so as to be able to anticipate probabilities.” – Jesse Livermore
“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.” – Jesse Livermore
“Obviously, the thing to do was be bullish in a bull market, and bearish in a bear market. Sounds silly doesn’t it? But I had to grasp that principle firmly before I put it into practice, really meant to anticipate probabilities, it took me a long time to trade on those lines.” – Jesse Livermore
“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria” - John Templeton
“I believe in analysis and not forecasting.” – Nicholas Darvas
“90% of the people in the stock market, professionals and amateurs alike, simply haven't done enough homework.” - William O’Neil
“A speculator is a man who observes the future, and acts before it occurs.” -Bernard Baruch
4. Let your winners run.
“It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!” Jesse Livermore
“If you own a portfolio of stocks, you must learn to sell the worst performers first and keep the best a little longer.” - William O’Neil
“The way to build superior long-term returns is through preservation of capital and home runs...When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig.” - Stanley Druckenmiller
I’ve learned many things from him [George Soros], but perhaps the most significant is 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. - Stanley Druckenmiller
5. Don’t over diversify
“The greatest safety lies in putting all your eggs in one basket and watching that basket” - G. M. Loeb
"Know what you own, and know why you own it." - Peter Lynch
"Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
“Diversification is a necessity for the beginner. It is an impossibility for those able and capable of running risks to get rich” – G. M. Loeb
“When an investment is made, its prospects must be so good that placing a rather larger proportion of one’s total funds in such a single situation will not seem excessively risky” – G. M. Loeb
“Concentration of investments in a minimum of stocks insures that enough time will be given to the choice of of each so that every important detail about them will be known.” - G. M. Loeb
“Over-diversification is a hedge for ignorance.” - William O’Neil
Many of the speculators state that you should not have more than 10-20 stocks at a time.
Some endorse having up to 10-50% in a single stock. This depends on your risk tolerance and where you are in your investing career. Early when you have less capital you can afford to have a larger percentage in a single stock.
6. Ignore tips and suggestions from others.
You need to have your own research and guidance help you decide on the proper stocks to find.
“I listened eagerly to what they had to say and religiously followed their tips. Whatever I was told to buy, I bought. It took me a long time to discover that this is one method that never works.” ? Nicolas Darvas
“He will risk half his fortune in the stock market with less reflection that he devotes to the selection of a medium-priced automobile.” – Jesse Livermore
7. Don’t follow the herd, you have to:
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
"In investing, what is comfortable is rarely profitable." - Robert Arnott
“The first step for the individual trying to secure or preserve capital is to detach himself from the crowd” – G. M. Loeb
"Buy when there's blood in the streets, even if the blood is your own." – Baron Rothschild
“If you want to have a better performance than the crowd, you must do things differently from the crowd.” – John Templeton
“Invest at the point of maximum pessimism.” – John Templeton
“The four most dangerous words in investing are: This time it's different.” – John Templeton
“When nobody wants something, that creates an opportunity.” - Carl Icahn
8. Take your profits!
Your paper profits mean nothing until you lock in the gains.
"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." - Robert Kiyosaki
“I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market.” – Nicolas Darvas
9. Sell down to the sleeping point.
If you are nervous about your investments “Sell down to the sleeping point” – Jesse Livermore
“I decided never again to risk more money than I could afford to lose without ruining myself.” – Nicolas Darvas
10. Don’t over trade, go long in a bull market and short or stay in cash during a bear market.
“Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes
“The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.” – Jesse Livermore
“Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.” – Jesse Livermore
11. Pyramid up
Buy an initial position, add more if it is going in the right direction, add a 3rd tranche if it keeps moving in the direction you are anticipating.
“I made up my mind to buy high and sell higher.” – Nicholas Darvas
