In investing, there is no holy grail which can deliver riches to all who follow. But there is a collective wisdom that has coalesced amongst market traders and long term investors, a set of axioms which, while they won’t guarantee success, will certainly have you moving in the right direction.
Here are some of our favourite quotes, and why we love them.
1.“Unless you can watch your stock holding decline by 50 per cent without becoming panic stricken, you should not be in the stock market.”
– Warren Buffett.
50% is a large loss to carry and we wouldn’t really recommend this type of risk management but what Buffett is saying is that for all the fundamental or technical analysis you undertake as part of your planning, for an investment or a trade you need to have a small enough position to keep your emotions out of it.
Sure, Buffett might really be able to ride a monster loss but most traders and investors can’t, so the rule here is: “keep each of your positions small enough that you can sleep at night”.
2. “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
– Benjamin Graham.
This is one of my favourite quotes for trading and not unrelated to the Buffett quote above. This quote from Graham goes to the very heart of investing and trading – you have to get your time frames right.
In the short-run, noise, luck and random price action plays a much greater role in the outcome you receive than the long-run. Sentiment is much more important as traders respond to the latest piece of news, the views of their colleagues or even how they feel or the colour of the tie they or their colleagues are wearing.
Price action moves around with this sentiment and news as the market “votes” on the outcome.
In the long-run though, fundamentals win out and the market has no choice but to weigh seriously either side of the argument and reflect that in prices. The long-run is made up of almost infinite short runs so getting the time frame right and having the patience to do so highlights the importance of our first quote.
3. “Novice Traders trade 5 to 10 times too big. They are taking 5 to 10% risks on a trade they should be taking 1 to 2 percent risks.”
– Bruce Kovner.
The promise of riches from the market can be alluring. There is a big risk for traders who treat investing more like a casino than a business and want to get rich quick.
That means that rather than trading small, learning their craft and respecting rules 1 and 2, they often but a large slab of their investment account down on one stock, currency or commodity and in one trade.
They get a great outcome if they are right but when you lose 10% of your portfolio you need to make 11% to get back to square. Lose 20% and you need a 25% return to get back to where you started and lose 50% and you have to return 100% on your account just to get back to where you started.
Put another way, you’ll go out the back door much faster betting 10% a trade than you will betting 1%. It may take longer to make serious money if you are correct with your trades but the probability of your risk of ruin is much lower with smaller trade size.
4. “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
– Nobel Laureate for Economics Paul Samuelson.
Trading is the best job you can have in the world, well maybe besides a pro-surfer, but it is still a job. You have to be unemotional in your trading and investment decisions so that you can identify and institute trades, set your stop-losses and know when to close your trades.
It’s as easy and as difficult as that.
5. “The minute you get away from the fundamentals – whether it’s proper technique, work ethic, or mental preparation – the bottom can fall out of your game.”
– Basketball Legend Michael Jordan.
Okay, so you don’t usually associate Michael Jordan with investment quotes but one of the key themes I’m sure you can already see is that hard work and a disciplined approach, when combined with a solid technique – call it investment approach – increase the likelihood of success.
Whether you believe in Malcom Gladwell’s famous 10,000 hours or not there is no escaping that when it comes to investing practice and preparation are big pluses. And don’t underestimate the mental side, if you want to be successful over the long run.
The standard investment version of this quote is from Benjamin Graham and says, “Successful investing professionals are disciplined and consistent and they think a great deal about what they do and how they do it.”
The final two come from the great Jesse Livermore who, under the pseudonym Edward Leferve, wrote the must read book for all traders “Reminiscences of a Stock Operator”
6. “Markets are never wrong – opinions often are.”
– Jesse Livermore (American stock trader of the 1920s).
After more than a quarter century in and around markets and trading this is one of the most important lessons that traders have to learn, understand and assimilate. This is the no-excuses quote – the market is not wrong, you are.
Why is it so important, you ask? Because when trading and investing the fastest way to the poor house is to not accept the verdict of the market and to hang onto a losing position until you are forced to liquidate either through panic, loss of capital or a margin call that cannot be met.
Golfers who have studied the teachings of Harvey Penick will have learnt a similar lesson in his entreaty to “dance with what brung you”. Or traders with a little experience will hear other traders saying you have to trade the market in front of you.
It is all about not imposing your will on the market because that is impossible – you need to trade with the flow if you want to be profitable in the timeframe of your investment strategy and horizon.
7. “At long as a stock is acting right, and the market is right, do not be in a hurry to take profits. One should never permit speculative ventures to run into investments.”
– Jesse Livermore.
The two biggest hurdles for traders is to cut their losses and let their profits run. To the uninitiated this may seem the whole point of trading and investing, but human psychology often gets in the way.
Indeed one of the hardest trades to stay in is a winning trade. Resisting the desire to quickly book the profit and the subsequent fear of turning a winner into a losing trade carries with it one of the heaviest emotional burdens for traders.
It’s not easy to let your profits run and cut your losses short – you have to fight yourself the whole way. But if you want to build a long term sustainable portfolio this is the one lesson all traders needs to learn.
Investors, as the first quote from Warren Buffett suggests, have a little more luxury but in the end, making and keeping profits is what investing is all about.
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