Investing strategy

The market response to sell stocks now suggests a dose of nerves at the end of one of the best quarters for world stock market returns in history. It took the same nerves to go long and buy in March when everyone or at least most people were maximum bearish among widespread end-of-the-world sentiment.

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! Remember Citibank shares at US$55 less than two years ago, it fell to US$30, when our friends in Abu Dhabi tried to save them with a US$7.8 billion lifeline investment. Many thought Citi was cheap and 'averaged-in' only to see the once largest bank in the world slump to less than US$1. ( stocks only)

Trade with an open mind. Still too many people only buy stocks and hope they will rise. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

The same applies to emerging markets. While fundamentally a lot of the emerging markets offer great long-term potential, short-term several countries look over-bought. So in emerging markets, it seems 'Short-term SHORT, Longer-term LONG' might be the best tactical advise.

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, not to mention stress.

Advanced investing strategy

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'. Please remember Citibank. Nor can we know what price is 'high'. Always remember that sugar once fell from US$1.25/lb to two cent/lb and seemed 'cheap' many times along the way.

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. 'Markets can remain illogical longer than you or I can remain solvent,' according renowned British economist Maynard Keynes. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

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.

Try to trade the first day of a gap, for gaps usually indicate violent new action. I have come to respect 'gaps' in my nearly 25 years of watching markets; when they happen (especially in stocks), they are usually very important.

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.

** 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.



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.

Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds clarity. Respect and embrace the very normal 50-62 per cent 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.

Bear markets are more violent than are bull markets and so also are their retracements. 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 superhuman insights.

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 per cent of the time, as long as our losses are small and our profits are large.



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. 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.

The hard trade is often 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. In mid-march that trade was major bull. Now after the second half and a massive rally, common sense would indicate 'book profits' across the board and move into cash if not out-right short, if you are a tactical trader. In the words of a Chinese saying: 'Fortune favours the brave - and the prepared mind.'