A good friend of mine, let’s call him Mark, was kind enough to let me publish his trading rules here.
The basic rules are essentially the same, no matter what kind of an investor you are. Here’s his list of rules.
Do Not Speculate
Too many people jump into the markets as if they were at a casino in Las Vegas or Macau. They get in and out of the markets every time the market moves up a few points or down a few, without really knowing what to do. If you do this, you’ll be no better than the majority of gamblers at Luxor (for those of you who don’t know, Luxor is a pyramid-shaped casino in Vegas) – losers.
As long as you invest with sound judgement and don’t speculate, the markets will be more like a game of chess than a slot machine. The difference? Strategy and dedication makes all the difference.
Begin Each New Day With a Rehash Of Your Rules
I like to begin each new day with a stroll around the neighbourhood, but not for the sake of simply taking a walk. During my stroll, I rehash my 17 major trading rules – that way, those trading rules remain firmly seated in my brain each and every day. Much like the reason why soldiers need to go over the same simple military exercises every day, by rehashing my trading rules all the time I’m ensured that I won’t panic if something goes wrong.
Diversify
I don’t care how much investors like Warren Buffett say you should “put all of your eggs in one basket and guard it jealously”, there is always a chance that the asset will crash. Sooner or later, that probability is going to compound, and sure enough the day will come when it does crash. Spread your risks around.
Buy Undervalued Stocks
Never buy something based on a “foreseeable” market trend or an economic outlook. That could be wrong, and if it is wrong, you’ll have no margin of safety. By buying undervalued stocks (e.g. 70cents on the dollar), you have a margin of safety that acts as a buffer zone against real (not temporary monetary) losses.
Buy Undervalued Stocks That Are Great, Not Soggy Companies
But don’t just buy any undervalued stocks. Don’t buy the “soggy cigar companies” that Warren Buffett did in his early years – buy great companies that have become undervalued due to a “crisis” or a general market crash.
Stay Willing To Accept New Investment Vehicles
Too many investors are so stuck in their mindset that they’re unwilling to accept new and better ideas. For example, they’d be so used to investing in stocks that they don’t realize there are other potentially more profitable ways to invest in a stock market outlook (e.g. options). Stay opened to new ways of expressing your investment ideas.
Stay Calm & Composed At All Times
When the Chinese created the first professional army 2500 years ago, what was the key difference between theirs of those of others? The Chinese army was highly disciplined – they became so “machine-like” that even in a situation that would cause other armies to panic and be routed, they could maintain their composure and fight. On the other hand, armies that couldn’t maintain their composure would be pressed into “panic-mode”, and then they really would panic, flee, and get slaughtered off.
Only by being calm at all times can you exercise sound judgement and think logically.
great list. where did you hear that buffett doesn’t like undervalued companies?
He transitioned from undervalued to growth to multi-market (read his bio the Snowball).