June 8, 2022
This is a two-page excerpt of the 413 in the work-in-progress manuscript that was sent to my publisher. The book, which is as yet unnamed, is to be published at the end of August.
Anybody who has been reading my blog over the years has read all this before, but the publisher expects that this book will reach a large new audience.
…I have provided here a set of rules for investing and for trading, all of them to be consistently applied. But these rules must fit your needs and interests, or you will not stick with them.
Be aware that there are generally accepted securities industry advisories that are complete opposites to my thinking and experience, as follows:
- Very few people who work in financial services know how to invest or trade well. To the credit of most of them, they are well-educated decent people who work hard for their companies, colleagues, and clients. But, from having worked with the Sell-Side for many years, I know that most of them are not even involved in investing or trading during the day. They are in management, sales, research, investment banking, technology, and communications, legal, reception, back-office administration, and so forth. I admire the majority of them, but I believe that just like their firm’s clients, not more than 10% of them invest and trade successfully. Bottom line: the great majority of people on the sell-side, just like the buy-side, have a need to learn how to invest and trade.
- Although most investors trade Exchange Traded Funds (ETFs), I believe the ETF is definitely not as advertised, an effective risk management tool. Most ETFs, and most mutual funds, are passively managed traps as these instruments hold bad companies and bad stocks. For example, when shopping in a supermarket for fruit, you would never take the first dozen apples or bananas off the shelf. Nobody does. Enough said.
- Rather than ETFs, which by definition comprise good, bad, and often ugly securities, the best investors research high-quality individual companies to find the best ones in the best industries for economic and business cycles, and they buy the stocks of these companies when the price is out of favor, for whatever reason. It’s a fact that prices are often pushed to extreme lows by interventionists and skilled manipulators, their surrogate media, and the communications specialists in their employ. ETFs disguise those actions, so, I avoid ETFs, and I use the action of the market to help me find good stocks among the good companies I am interested in and need.
- Asset allocation is over-rated and hyped by sell-side financial services companies that promote their ETFs, their bonds, or their alternative investments. These are people who embrace collective thinking. I on the other hand believe that you ought to invest only in what you need, such as Growth (at or near market cycle bottoms), Value (often as Bull markets mature and even at or near market cycle tops), or Income (when you need it). For income, for example, I do not believe there is ever a need to buy pooled investments or in Bonds unless that portfolio is strictly for income and the prices of high-Quality Bonds at that time happened to be more attractive in yield than were dividends.
- I believe that averaging down is an essential part of one’s entry strategy. Professional investors call it ‘painting the bottom’ as nobody can pinpoint a precise cycle bottom in price. Having studied the industry drivers and company fundamentals, and the market prices of the stock and its benchmark prices, we use facts in our plan to accumulate stock. Then we buy into weakness, which means prices are low and possibly going lower as the sellers become exhausted. During distribution, we sell into strength, which means prices are high and possibly going higher as the buyers become exhausted. There will never be a bell rung at the top or bottom of a price cycle, so never wait for one. If someone ever says that you bought too early in a falling market, it’s because their fear and greed emotions are more acute than yours.
- I do not believe in giving a broker a stop-sell order because that information is disseminated to sophisticated financial services industry insiders, which information they observe and when it’s in their interest act upon to your detriment. This hidden use of client trading data, which is in fact a kind of insider trading, is one of the reasons why some people in the securities industry make money and the majority of their clients don’t.
- As you become a knowledgeable investor, you will see that the only reason for selling an investment holding earlier than anticipated is not price per se, but a relevant and material change in market drivers or corporate fundamentals that were the basis for your earlier decision to buy or a position in a particular stock. Nobody can accurately guess when these major changes are going to occur, so don’t try to guess. In the interim, you will have your own accumulation or distribution zone alerts and trade execution signals to guide your ongoing trading.
- Every talking head who announces their favorite stocks on Financial Entertainment Television is your enemy. They are really ‘talking their book’ in hopes that you are influenced to buy at higher prices than they paid, which you would do at your risk. I do not participate in major media for this reason. It’s a marketing exercise. In my case, I blog to my followers about what I do as well as my thinking as a way of teaching, not marketing or selling. I am an independent investor on the buy-side.