Article Reviews, Trading

Investing and Trading Rules

I recently came across two sets of “investing rules”. I think after investing for some time, every one tends to come up with their own set of investing or trading rules. I previously wrote about John Templeton’s 16 Rules for Investment Success. This post captures one set from Bob Farrell (Merrill Lynch chief market strategist from 1967-1992), and another set from Walter Schloss, and another from Dennis Gartman.

Bob Farrell’s 11 Investing Rules

  1. Markets tend to return to the mean over time (i.e. return to their long-term trend).
  2. Excesses in one direction will lead to an opposite excess in the other direction.
  3. There are no new eras — excesses are never permanent.
  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
  5. The public buys the most at the top and the least at the bottom.
  6. Fear and greed are stronger than long-term resolve.
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names (e.g. broad market momentum is better than investors crowding into a handful of names).
  8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend.
  9. When all the experts and forecasts agree — something else is going to happen.
  10. Bull markets are more fun than bear markets.
  11. Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains essentially the same.

Walter Schloss’s 16 Rules (1994)

  1. Price is the most important factor to use in relation to value.
  2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.
  3. Use the book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity (capital and surplus for the common stock).
  4. Have patience. Stocks don’t go up immediately.
  5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
  6. Don’t be afraid to be a loner but be sure you are correct in your judgement. You can’t be 100% certain but try to look for weaknesses in your thinking. Buy on a scale and sell on a scale up.
  7. Have the courage of your convictions once you have made a decision.
  8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.
  9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock a goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high? Is the stock market historically high? Are people very optimistic etc?
  10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. Three years before the stock sold at 20 which shows there is some vulnerability to it.
  11.  Try to buy assets at a discount rather than to buy earnings. Earnings can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
  12. Listen to suggestions from people you respect. This does not mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money it is hard to make it back.
  13. Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
  14. Remember the work of compounding. For example, if you can make 12% a year and reinvest the money back you will double your money in six years, taxes excluded. Remember the rule of 72. Your rate of return divided into 72 will tell you the number of years to double your money.
  15. Prefer stocks over bonds. Bonds will limit your gains and inflation will limit your purchasing power.
  16. Be careful of leverage. It can go against you.

Dennis Gartman’s Trading Rules

  1. Never, under any circumstance add to a losing position…. ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
  2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
  3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
  4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.
  5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
  6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
  7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.
  8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.
  9.  Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.
  10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.
  11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly” reversals.
  12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
  13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen… just as we are about to give up hope that they shall not.
  14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.
  15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.
  16. Bear markets are more violent than are bull markets and so also are their retracements.
  17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.
  18. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.
  19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.
  20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.
  21. There is never one cockroach! This is the “winning” new rule submitted by our friend, Tom Powell.
  22. All rules are meant to be broken: The trick is knowing when… and how infrequently this rule may be invoked!

W. D. Gann’s Never-Failing / Valuable Rules

  1. Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.
  2. Use stop loss orders. Always protect a trade when you make it with a stop loss order 1 to 3 cents, never more than 5 cents away, cotton 20 to 40, never more than 60 points away. (3 to 5 points away for stocks)
  3. Never overtrade. This would be violating your capital rules.
  4. Never let a profit run into a loss. After you once have a profit of 3 cents or more, raise your stop loss order so that you will have no loss of capital. For cotton when the profits are 60 points or more place stop where there will be no loss.
  5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.
  6. When in doubt, get out, and don’t get in when in doubt.
  7. Trade only in active markets. Keep out of slow, dead ones.
  8. Equal distribution of risk. Trade in 2 or 3 different commodities, if possible. (Trade in 4 or 5 stocks, is possible.) Avoid tying up all your capital in any one commodity or stock.
  9. Never limit your orders or fix a buying or selling price. Trade at the market.
  10. Don’t close your trades without a good reason. Follow up with a stop loss order to protect your profits.
  11. Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic.
  12. Never buy or sell just to get a scalping profit. Never buy just to get a dividend.
  13. Never average a loss. This is one of the worst mistakes a trader can make.
  14. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
  15. Avoid taking small profits and big losses.
  16. Never cancel a stop loss order after you have placed it at the time you make a trade.
  17. Avoid getting in and out of the market too often.
  18. Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
  19. Never buy just because the price of a commodity or stock is low or sell short just because the price is high
  20. Be careful about pyramiding at the wrong time. Wait until the commodity or stock is very active and has crossed Resistance Levels before buying more and until it has broken out of the zone of distribution before
    selling more.
  21. Select the commodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short. For stocks, select the stocks with small volume of shares outstanding to pyramid on the buying side and the ones with the largest volume of stock outstanding to sell short.
  22. Never hedge. If you are long of one commodity or stock and it starts to go down, do not sell another commodity or stock short to hedge it. Get out at the market; take your loss and wait for another opportunity.
  23. Never change your position in the market without good reason. When you make a trade, let it be for some good reason or according to some definite rule; then do not get out without a definite indication of a
    change in trend.
  24. Avoid increasing your trading after a long period of success or a period of profitable trades.
  25. Don’t guess when the market is top. Let the market prove it is top. Don’t guess when the market is bottom. Let the market prove it is bottom. By following definite rules, you can do this.
  26. Do not follow another man’s advice unless you know that he knows more than you do.
  27. Reduce trading after first loss; never increase.
  28. Avoid getting in wrong and out wrong; getting in right and out wrong; this is making double mistakes.



No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Copyright © 2005-2014 All Rights Reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.

Blog Stats

  • 400,381 hits
%d bloggers like this: