Been meaning to pen down some of the things I've learnt as I do my stock trading. Have been procrastinating on this for sometime until now, so here's the first note =)
Bought my first 5 stocks on 7 Nov 05 (Mon) =), namely BUD, BRKB, MSFT, DJ, GCI. No serious research went into the buys, rather, basic criteria were employed: Good business economics, depressed stock prices (simply from historical charts), total disregard for quality of management. Also looked at some Morningstar reports which gave them 5-star ratings.
Here's a summary of learning points so far:
- Don't place a market order unless you're really holding on for the long-term. A market order will place you in the unfavourable range of the bid-ask spread which can be quite a few ticks.
- Placing a limit-buy order on the current bid should guarantee a trade.
- If you are looking for a low point in the day to enter into a position, its better to wait until the trough has 'just' passed. Murphy's law seems to work well here: everytime you enter when you think its _the_ bottom, it will go down further.
- If intra-day fluctuations are large, and you want to hold the stock for a long period of time, its worthwhile to sell and re-buy during the day.
- Never be in a hurry enter into a position. Think! Do you really need to enter into a position now? immediately? Does it _REALLY_ matter?
- Never do intra-day dollar-cost-averaging (perhaps unless you have a few million in capital). The transaction cost is substantial and dollar-cost averaging only works in the long-run (no, one day is not long).
- Its good to look at the trade size and price of each trade. That's a better level of detail than just the bid-ask-last trade.
Other points that are not "trading" related:
- To make capital gains of say 30% on my total portfolio, I would need on average, all 5 stocks to go up 30%. That seemed harder than if I had concentrated my portfolio on 1-2 stocks. But it will have to mean that a lot more research needs to be done in order to concentrate the portfolio into a few highest-probability winners.
- Do you sell your winners or your losers so that you can get the capital to enter into another position? ALWAYS compare the expected rate of return (including probabilities). Look at the actual numbers. And put your money in the top few choices.
- If a position drops, do not "wait until it recovers". You don't have to make your money back the same way you lose it. If a stock drops from $100 to $90, it _is_ at $90. That is the value of your position at that time, no concept of profit/loss here. Again, calculate your expected return from that price point.
- If a stock goes up without any published news, its likely due to unpublished _public_ news (not online yet). Good to load up and prepare to unload very soon.
- Try to load stocks at such a low that you _know_ that you will never lose money. Its only how much you earn and when.
- Sometimes, repeated news is what would propel prices. For example, it was already reported months ago that Buffett had a significant stake in BUD. However, its only when the disclosure came a few months later on exactly how many shares that Buffett own (which gets very very widely carried), that BUD went up significantly.
I'm still thinking whether a risky strategy of trading seriously down-and-out stocks will give better returns than a long-term buy-and-hold strategy that should give 15-30% annually….