Chapters XXIII-XXIV
“Difficult as profitable stock speculation always has been it is becoming even more difficult every day. It was not so long ago when a real trader could have a good working knowledge of practically ever stock on the list.”
Despite being written 100 years ago, this quote is as relevant today as it was then. The continued evolution of markets from a handful of single stocks to a global basket of tens of thousands of securities has made it impossible for a speculator operating on his own hook to stay abreast of individual movements. My solution to this has been to put the time in to learn the behavior of a smaller basket of offerings while knowing when to move into broader baskets outside my area of expertise. For example, if I specialize in technology but I become bearish on the sector, I may exit my individual positions and move into a broad basket of debt. In essence, I go from “stock picker” to “buy the instrument likely to do well.” This allows me to profit when my preferred markets are dull.
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“There are many thousands of people who buy and sell stocks speculatively but the number of those who speculate profitably is small. As the public always is “in” the market to some extent, it follows that there are losses by the public all the time. The speculator’s deadly enemies are: Ignorance, greed, fear and hope.”
This is precisely why trading and asset management is such a large industry. People cannot help but speculate at some point in their lives; but without the knowledge and experience of the professional, they inevitably get burned. Retail traders are a big reason market inefficiencies occur, and the professional will sniff them out. Sure, some will do well initially, but after one year roughly 90 to 95% are in the red. Trading without a methodology is gambling, and gambling eventually leads to losses.
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“In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done.”
I have heard it said before that a trader’s arc of progression should be this: aim for capital preservation in the beginning, followed by steady gains, followed by home runs. While I don’t believe this is a recipe for guaranteed success, aiming for capital preservation rather than immediate gains can help the novice trader master their emotions and psychology before big money is put into play. If you aren’t aiming for home runs, hope and greed become less of an issue. After time you begin to realize a style that works for you, after which you can aim higher with confidence.
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“The public always wants to be told. That is what makes tip-giving and tip-taking universal practices. It is proper that brokers should give their customers trading advice through the medium of their market letters as well as by word of mouth.”
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“Many of the so-called statements attributed to “insiders” or officials have no basis in fact. Sometimes the insiders are not even asked to make a statement, anonymous or signed. These stories are invented by somebody or other who has a large interest in the market.”
A key difference between the professional and the non-professional is often seen in the way decisions for making trades are made. The professional does his own research, reviews the tape, and acts accordingly. The non-professional watches financial news like CNBC, reads the newswire on TradingView, and/or prescribes to groups and gurus alike on Reddit and Twitter. They take what they read at face value without any additional thinking and then proceed to buy based on nothing more than what is being published for what I can only call entertainment value. The retail trader does not want to think, and for this reason they do not last long when active in the market.