Gems

The recent market turmoil has forced me to spend more time reading and reflecting on my investing philosophy. I have re-read a few of my old books and some new ones. I have found some very useful ideas in these books and I decided to reproduce the most thought provoking and most relevant to our current situation here.

These 15 Gems are from: One up on Wall Street – Peter Lynch; Survive and profit in ferocious markets – John Rothchild; Stock market wizards – Jack Schwager; Trading for a living – Alex Elder; and How to make money in stocks- William O’Neil. My comments are in italics.

1. Force yourself to buy on extreme weakness and sell on extreme strength. Although a fairly straight forward advice it is very difficult to implement as I recently found out. Buying on extreme weakness requires a lot of guts and self belief. My target entry price on Dangote Sugar has recently been met but I have been agonizing whether to buy. I finally decided to buy half of my initial plan on Monday. I will complete the trade depending on the direction of the marker in the next few days.

2. Market declines are great opportunities to buy stocks in companies you like. Supports the first gem. With this in mind it becomes a bit easier to implement the first advice.

3. Be patient. When the fundamentals say a stock is under priced but the market does not respond, stick with it. The market will respond.

4. Buying a company with mediocre prospects just because it is cheap is a losing technique.

5. Ignore the short term. True but easier said than done.

6. Think trades through. Including profit/loss exit points before you commit. It is essential to have an investment plan. Performance can then be compared to the plan and necessary decisions can be taken from a sound basis.

7. When you invest, ask yourself what is the worst that can happen. Consider the risks before the rewards.

8. Bear markets can last for 6 months or in rare cases 2 years. Don’t let them diminish your long term resolve. I hope the current bear run doesn’t go beyond 6 months. If it does, my resolve will be severely tested.

9. Bear markets are more compressed in time, more sharp in movement and more dramatic.

10. To come out ahead you don’t have to be right all the time or even majority of the time.

11. Cut your losses short. 10 and 11 work together. You can’t expect to be ahead if you don’t cut your losses short.

12. When it comes to mutual funds, select a good one and stick with it for 10 or more years. Automatically reinvest the dividends. True especially in our market that has been positive for 9 years running.

13. Concentration is critical to superior performance. The greater the number of stocks you hold, the more market like your performance becomes.

14. Hold no more than 10 stocks because your top ten ideas will always perform better than your top 100. Another difficult to follow advice in our market especially with regard to banking stocks. I need to prune down my holdings in banks but which do I keep?

15. Never make a bet you can’t afford to loose. True. You will sleep much easier if you apply this.