Bits & pieces - special Interesting bits and pieces that I’ve seen this week at CLSA - 28 September 2012 «Lessons learnt Part 1. A lot has been learnt by market pundits since what is widely acknowledged as the being the world’s first stock exchange commenced business in 1602 in Amsterdam. This week I’ve aggregated the thoughts, rules and principles of a number of the world’s most decorated investors and traders (and some bloggers) - past and present. There are too many to include in one edition so look out for the next installment in the not too distant future (if you have any suggestions please let me know). As you might expect there are numerous divergences in the views of these financial practitioners but there are also more than a few overlaps. Hopefully you will find a couple of additional financial mantras to work by as I did. “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 which the crowd finds objectionable.” Dennis Gartman “The only way to win Is to work, work, work, work, and hope to have a few insights.” Charlie Munger "When all the experts and forecast agree - something else /s going to happen.” Bob Farrell “If you cannot resist temptation, you absolutely MUST NOT manage your own money” Jeremy Grantham "When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.” Howard Marks “I do not think it is logical to try and outsmart the smartest people. Instead, my weapons are irony and paradox. The joy of life is partly the strange and unexpected. It is the constant exclamation “Who would have thought it. Hugh Hendry “The best stock to buy may be the one you already own”. Peter Lynch “The worse a situation becomes the less it takes to turn it around, the bigger the upside” George Soros “The key to investing is found in this rule: buy a share as though you were buying the whole company”. Warren Buffett “alcohol does not solve any problems, but then again, neither does milk” Anon “Try to buy assets at a discount 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.” Walter Schloss. “Adjust your stock allocation as you get older - the percentage of bonds you own should roughly match your age ..... (and) Don’t invest based on last year’s returns.” Jack Bogle "Keep human! See people, go places, drink if you feel like it” Writer Henry Miller “One of the hardest things to do in investing /s to reverse your thinking. It is even more difficult to do after a specific approach has been profitable for a long time. The longer the period of successful thinking, the more important the reversal will be” Barry Ritholtz + Plus + More rules and principles from other investors and traders «The last word ~ The amazing pig Damian Kestel Aussie mobile: (+614) 01362629 Singapore mobile: (65) 9199 9231Of 21 eorpcunes The 22 Rules of Trading - Dennis Gartman |7 2 2«@z2) 1. Never, under any circumstance ad to 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 verities: 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/b to 2 centib and seemed “cheap” many times along the way. 5. In bull markets we can only be fong or neutral, and in bear markets we can only be short or neutral. That may seem setf- evident; itis not, and itis @ lesson leamed too late by fer too many. 6, "Markets can remain iogical longer than you or | can remain solvent,” according to our good friend, Dr. A. Gary Shiling. Wogic offen reigns and markets are enormously inefficient despite what the academics believe, Get 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 shail lesser ones. 8. Try to trade the fist day of a gap, for gaps usually indicate violent new action. We have come to respect "gars" in our nearly thity years of watching markets; when they happen (especially in stocks) they are usually very important, 8. Trading runs in cycles: some good; most bad. Trade large and ere trading well, trade small and modestly \when trading poorly. in “good times," even errors are profitable; n “bad times” even the most well researched trades co ‘awry. This is the nature of trading; accent it. 10. To trade successfully, think like a fundamentalist; trade lke a technician. itis imperative that we understand the fundamentals driving a trade, but ais that we understand the market's technicals. When we do, then, and only ten; can we ‘or should we, trade. 11. Respect “outside reversals" after extended bull or bear runs. Reversaldays on the charts signal the final exhaustion of the bulish or bearish forces that drove the market previously. Respect them, and respect even more “weekiy" and "monthly," reversals, 12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance. 18. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. I @ 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. understanding of mass psychology is often more important than an understanding of economics. Markets are driven ‘human beings making human errors and also making super-human insights. 18. 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 ‘etracements, 16. Bear markets are more violent than are bull markets and so also are their retracements. 47. Be patient with winning trades; be enormously impatient with losing trades, Remember itis 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. ifwe lea nothing more than this we've leamed 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, Te hard rade isthe iat rade: it's eany to sl, dont and tis easy to buy, dont. Do the trad that is hard todo and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty fve years ago and it holds truer now than th 21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell. 22. All ules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked! —rweeerr——~r———_EASEE— rorAn Investing Principles Checklist CHARLIE “News ple no matt how pt hi lent andere fil i chen” fi “ MUNGER ‘We have now examined Charlie's approach to thinking in general and to investing in particular. In keeping with our intent to observe “how he seems todo WARREN/4 S185 ~/Kick 'it” we will recap his approach by us ig the “checklist” methodology he advocates. (For Chatlic’s own words of wisdom on the value and importance of checklists, see Talk Five and page 320.) Note, however, that the following principles are ‘most certainly not employed by Charlie in a one-by-one or one-time fashion as the ‘checklist format might seem to imply. Nor can they necessarily be prioritized in cerms of any apparent or relative importance. Rather, each must be considered as part of the complex whole or gestalt of the investment analysis process, in much the same way that an individual tile is integral to the larger mosaic in which ic appears. 1 (RisG-AUl investment evaluations should begin by measuring risk, ‘especially reputational “you took ou top fifeen decisions + Incorporate an appropriate margin of safety ca * Avoid dealing with people of questionable character Tee eee Lerrlairacae @ Insist upon proper compensation for tisk assumed you pounced on them with vigor” + Always beware of inflation and interest rate exposures ea * Avoid big mistakes; shun permanent capital Loss sting, Immonen mck mm (Tndependence}“Only in fairytales are emperors told they are naked” back” "Menge + Objectivity and rationality require independence of thought ‘+ Remember that just because other people agree or disagree with you doesn’t make you right or wrong—the only thing that matters is the correctness of your analysis and judgment ‘+ Mimicking the herd invites regression to the mean (merely average performance) & Gilocation} Proper allocation of capital is an investor's number one job ‘+ Remember that highest and best use is always measured by the next best use (opportunity cost) * Good ideas are rare—when the odds are greatly in your favor, bet @&) (allocate) heavily * Don't “fall in love” with an investment—be situation-dependent and Vi ‘opportunity-driven Venn