The ways successful traders and investors think

The Twelve Commandments

I found that they are of general application to either trading or investing. Here are my renditions of his commandments:

1. It is important to be diversified as a trader or an investor. Never put more than 10% of your funds into one stock and no more that 20% into the one industry sector.

2. Regularly check how your investments are performing. Look at each one separately, ignoring the overall results for the last period. Be ruthless rather than hopeful.

3. Keep at least 50% of your funds in stocks that pay dividends.

4. Dividend yield is much less important that capital gain for investors as well as traders.

5. Close out losing trades and investments quickly. Be very reluctant to realise profits.

6. Never exceed 25% of you funds in speculative stocks, illiquid stocks or a stock about which information is not published regularly.

7. Never, ever invest on the basis of “inside information”. You can be sure you are the last to hear it.

8. Never ask advice about what stocks to buy or sell. Do your own work, based on facts, not the opinions of others.

9. Mechanical formulas and methods for trading, investing or analysing investments should be avoided. Thinking is hard work, but these things make you intellectually lazy.

10. In boom conditions, half your funds should be moved into short-term bonds.

11. Never borrow heavily to invest and only when stocks are depressed.

12. Consider putting a small proportion of your funds into long-term options (if available) in promising companies.

Finally, a direct quotation from Phil Carret’s The Art of Speculation, which contains one of the most important of the ways successful traders and investors think that is the exact opposite to the way losing traders and investors look at the problem:

If (the speculator) has 100 shares of a given stock, for example, which is selling at 90, he should disregard entirely the price that he paid for it and ask himself this question: “If I had $9,000 cash today and wished to purchase some security, would I choose that stock in preference to every one of the thousands of other securities available to me?” If the answer is strongly negative, he should sell the stock. It should not make the slightest difference in this connection whether the stock cost 50 or 130. That is a fact which is entirely beside the point, though the average individual will give it considerable weight.

http://www.bwts.com.au/download/redir/015-229cbe1fa45d50d9186c7357e9edddc4.pdf