The Investors Bible

excalibur · 23 May 2005

The Investors Bible is an accumulation of simple thoughts of behaviour in trading, based upon personal experiences.
It is and should serve as a help to your own understanding of trading psychology.
I have a long series of thoughts based upon personal and other experiences were I would like to gradually contribute and share with you. I would like to invite you as well to discuss, argue or comment upon them. Please feel free to contribute as well to the thread. Your personal experiences are welcome.

excalibur · 23 May 2005

Here is my first contribution to start:
Trading is similar to a game of bridge. The investor must have a combination of decisions that should accord to the continuous changing of situations, just like a player with cards in his hands. The events could turn out positive or negative; just like the distribution of the cards. A good investor pools himself out of the deal just like a good card player. With good cards he wins much, with bad cards he looses less.

ob1kenobi · 24 May 2005

Every form of investment has a risk attached to it. There a three variable that need to be kept in check. You might have the right time, the right amount of money but the wrong investment. You might have the right amount of money, the right investment but the wrong time. You might have the right investment, the right time but the wrong amount of money. The name of the game has to be to do your own thorough research and move in or out of a trade when your research indicates that it is appropriate to do so. Having a trading plan helps a lot in this regard.
---------------
This is merely my opinion and does not constitute financial advice. When considering your financial objectives, please consult a suitably qualified and licenced professional.

It's Snake Pliskin · 24 May 2005

Good thread!

The first stock I bought taught me a lot. I bought looking at the upside only; not the downside. I was encouraged when it rose almost immediately, only blinding me further. When it dropped I hadn't considered where it might have gone. At this time I felt as blind as a bat!

Human nature is too look at the good aspects of something even if they are not clear. Hope is prevalent and strong.

Learned: Use a trading / investing plan and numb the emotions. :goodnight

excalibur · 24 May 2005

Thank you Obi1kenobi and Tinunderthebridge

I am happy that the thread is a success
So I continue:

Before a “buy or sell decisions”: more important is the analysis of the market than that of the security. The general trading sentiment is mainly important for all investments. A good stock won’t climb or will at least have difficulty to do so, by a bearing market. On the other hand, it will pull all the bad stocks up in the sky by a bullish market, sometimes more than the good ones.

excalibur · 24 May 2005

I never judge my stocks by the price that I bought them other than the actual price. What it once costed, belongs to the past and will not help to judge its future development.

DTM · 24 May 2005

excalibur said:
Thank you Obi1kenobi and Tinunderthebridge

I am happy that the thread is a success
So I continue:

Before a “buy or sell decisions”: more important is the analysis of the market than that of the security. The general trading sentiment is mainly important for all investments. A good stock won’t climb or will at least have difficulty to do so, by a bearing market. On the other hand, it will pull all the bad stocks up in the sky by a bullish market, sometimes more than the good ones.

I agree with you totally. I always check the market direction/sentiment before making a trade. I then check the index that they belong to make sure that I don't buy into a sector that will be/is going down hill fast. eg I will always check the XJO first, then check the sector that the share belongs to. eg I will check the XJM for resource stocks, XXJ for banking etc. I even make a check on the US markets for some guidance and may be the USD if looking at resource stocks like BHP and RIO (financial reports are in USD)

excalibur said:
I never judge my stocks by the price that I bought them other than the actual price. What it once costed, belongs to the past and will not help to judge its future development.

I'm a short term trader so I get out when it gets too uncomfortable, but yes, judgement not made based on price paid for but on expected outcome. Will allow some leeway, as long as I'm still within my comfort zone. Been burnt in the past because of emotional attachments, or otherwise convinced myself that I'm right even when things have gone terribly wrong.

Hope this makes sense.

excalibur · 24 May 2005

Yes DTM, emotionaliality is a weakness of investors.
But I would judge that being stubborn or undecisive in an initiative (be it buying or selling) are farther more dangerous than being emotional.
To emotions belong a bit of fantasy. And that is to my opinion an ingredient to a successful investor. Together with awarness of the market and trading sentiment.

excalibur · 25 May 2005

Seen on a short term aspect, is the economical sentiment, not a major influence for the stock price, interest rate or market tendencies, even if many speculators calculate them for future investments.
Please note:
The price rises when the buyers are much more under pressure than the sellers. (And vice versa)
The psychology and the technical condition of the market influences: “Buying and Selling”, consequentially and unrestrained.

DTM · 25 May 2005

excalibur said:
Yes DTM, emotionaliality is a weakness of investors.
But I would judge that being stubborn or undecisive in an initiative (be it buying or selling) are farther more dangerous than being emotional.

Amen to that. I had to learn from my mistakes ie stubborness and indecision.

Cost me lots of money, but no more.

Investor · 25 May 2005

excalibur said:
..... Trading is similar to a game of bridge. The investor must have a combination of decisions that should accord to the continuous changing of situations, ....

Warren Buffett plays bridge (one of his favourite games) with Bill Gates over the internet.

Investor · 25 May 2005

excalibur said:
.... Before a “buy or sell decisions”: more important is the analysis of the market than that of the security. .....

I disagree. Analysis of the security is critical. I will explain later. It will take time.

A SP can be underpriced (to varying degrees of severity) in any bull or bear market. This is the Warren Buffett way. Usage of this method beats the market return each year, every year.

I was going to get to that in the thread that I have dedicated to Buffett, but it takes time.

It's Snake Pliskin · 25 May 2005

Investor said:
I disagree. Analysis of the security is critical. I will explain later. It will take time.

A SP can be underpriced (to varying degrees of severity) in any bull or bear market. This is the Warren Buffett way. Usage of this method beats the market return each year, every year.

I was going to get to that in the thread that I have dedicated to Buffett, but it takes time.

I also agree that anlaysis of the stock is critical. Regardless of the market, a stock could be a good buy. The psychology of the market is important though.

Enjoy!

ob1kenobi · 26 May 2005

I agree, analysis of the stock is critical. I find it is also critical to take a holistic or macro perspective as well.

excalibur · 26 May 2005

The interest rate or liquidity of the capital-market, decides what is stronger:
“Supply or Demand”.
The interest rate has a direct influence on the credit market. When creditor earnings diminishes, liquidity on the stock market will increment. The reaction of the interest rate change takes place after a certain period of time. (Mid-term)

excalibur · 26 May 2005

Psychology is on a long term investment; worthless.
Do you know someone who can foresee the hopes, worries and prejudices of the future?
The general economic situation and branch tendencies decide upon quality and future earnings of a security. He, who is able to predict how a branch will develop in the next years to come, will gain great profit.

It's Snake Pliskin · 26 May 2005

Yeh,

Looking at psychology is for short term trading only. Long term, you need to be a fundamental guy.

I recommend anybody read Dr Alexander Elder's book Trading for a Living. It covers the psychology of trading. I have it on CD, which is better. The effect of his voice drills it into your brain what he is saying.

tech/a · 26 May 2005

excalibur said:
Psychology is on a long term investment,worthless

Well I dont agree.

There was great discussion on Reefcap back a year or so ago with regard to a trade we had taken in our exercise with techtrader.

It was CTX there were a few of us who also had the stock.
If memory serves me correct we had bought it at around $3.20 ish and it was now at $5.80 ish
Darryl who held it and records the weekly portfolio results commented

"There is near enough to 100% in this trade so why give back that sort of profit?"

As CTX was coming off that was a fair comment.
Darrel was being affected by logic.---his psychology---or make up.
My comment was that I had no idea what CTX's price could go to.
All I knew was the method being traded said if you stuck to the rules then over 20000 portfolio's tested youd return an average of 20% un leveraged.

As thats what was being seen in the results and the method was being traded live so to the plan we stuck.

Darrel and I also held our positions---I eventually sold on exit triggered by the method at $8.85 and Darrel still holds as he was away when it triggered a sell and was above it when he returned----bloody luck!!

Its now $14.60-------Dont kid yourself that long term holds make the psychology of trading any easier.

WHEN to SELL is far more important than when to buy

excalibur · 27 May 2005

tech/a said:
Well I dont agree.

There was great discussion on Reefcap back a year or so ago with regard to a trade we had taken in our exercise with techtrader.

It was CTX there were a few of us who also had the stock.
If memory serves me correct we had bought it at around $3.20 ish and it was now at $5.80 ish
Darryl who held it and records the weekly portfolio results commented

"There is near enough to 100% in this trade so why give back that sort of profit?"

As CTX was coming off that was a fair comment.
Darrel was being affected by logic.---his psychology---or make up.
My comment was that I had no idea what CTX's price could go to.
All I knew was the method being traded said if you stuck to the rules then over 20000 portfolio's tested youd return an average of 20% un leveraged.

As thats what was being seen in the results and the method was being traded live so to the plan we stuck.

Darrel and I also held our positions---I eventually sold on exit triggered by the method at $8.85 and Darrel still holds as he was away when it triggered a sell and was above it when he returned----bloody luck!!

Its now $14.60-------Dont kid yourself that long term holds make the psychology of trading any easier.

WHEN to SELL is far more important than when to buy

I think you misunderstood me there tech. When I mention psychology, I don`t mean the feelings, opinion or behaviour of a certain or two persons, but that of the market.
Trading psychology : able to understand or better, to forsee how the traders will behave after a certain event or catastrophe.
That all won`t help me on a long term investment when I believe or I have proof that a certain security will preform well. There are other values that I mentioned before.

tech/a · 27 May 2005

Seems I did.

Psychology in my veiw is more a NOW thing.
Even in a long term veiw the Psychology of NOW will effect any commodity or Stock at the time.Although I agree we cannot predict future market sentiment as accuratley as we can in the NOW---we can look forward with some accuracy globally and determine where it is likely to head.

When is the big question.

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