Continued from Part 1. “Reminiscences of a Stock Operator” cheat sheet. Part 1
11) Quote: But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions or my prepossessions either to do any thinking for me. That is why I repeat that I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.
Remarks: Always keep your emotion in check when trading
12) Quote: Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. But in justice to myself I must remind you that up to then I had never had a big enough stake to speculate that way. A big swing will mean big money if your line is big, and to be able to swing a big line you need a big balance at your broker’s
Remarks: To cite William O'Neil of Investor's Business Daily, 3 out of 4 stocks follow the market's prevailing trend
13) Quote: It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop at the even figure but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you a profit. Timid people don’t like to buy a stock at a new high record. But I had the history of such movements to guide me.
Remarks: Once the stock breached the strong psychological resistance at round numbers, it is a BUY signal.
14) Quote: Without money they must sell what stocks they were carrying on margin-sell at any price they could get in a market where buyers were as scarce as money and just then there was not a dollar in sight.
Remarks: That explains the domino effect when money is scarce and everyone engages in panic selling
15) Quote: It does not take a reasonably young and normal man very long to lose the habit of being poor. It requires a little longer to forget that he used to be rich. I suppose that is because money creates needs or encourages their multiplication. I mean that after a man makes money in the stock market he very quickly loses the habit of not spending. But after he loses his money it takes him a long time to lose the habit of spending.
Remarks: Rather apt observation of human behavior
16) Quote: As a matter of fact, I would rather play commodities than stocks. There is no question about their greater legitimacy, as it were. It partakes more of the nature of a commercial venture than trading in stocks does.
Remarks: Studies have shown that commodity future serve as a good hedge against unexpected inflation than real estate or stock of commodity producers. Further, commodity prices and capital asset prices are negatively correlated, thus commodity provides additional diversification benefits to a portfolio.
17) Quote: In the long run commodity prices are governed but by one law-the economic law of demand and supply. The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective. He does not indulge in guesses about a dozen things as he does in stocks. It always appealed to me trading in commodities.
Remarks: Commodity prices change due to global supply and demand dynamics, thus the concept of international diversification is irrelevant. When you invest in stocks however, you are exposed to systematic and unsystematic risk, thus you will need to diversify your portfolio to hedge away the firm-specific (unsystematic) risk.
18) Quote: As a matter of fact, millions upon millions of dollars have been lost by men who bought stocks because they looked cheap or sold them because they looked dear.
The speculator is not an investor His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.
Remarks: Speculator will buy shares in a company because they are "in play". For example the speculator will buy once a stock reaches a new all-time high price breakout. On the contrary, value investors will buy when the stock drops below their intrinsic value or appears “cheap”.
19) Quote: And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.
Remarks: I should print this out and frame it on my wall. Fear is only as deep as the mind allows. On the flip side, see below illustration. Show me someone who is immune from greed, hope and fear and I will show you 95% of traders who lose money.
And last wisdom for you all to reflect on…
20) Quote: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It’s like the track. A man may beat a horse race, but he cannot beat horse racing.
Remarks: Read this article Debunking 5 Myths of Stock Investing
where I mentioned “Superstar hedge fund managers are ephemeral. What does that tell you about being invested in the market?”
I must admit that some of the wisdom provided in the book seems logical but to put into practice is indeed a challenge. I highly recommend that you read and reread the book to solidify the epiphany from arguably one of the history’s finest stock trader.
11) Quote: But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions or my prepossessions either to do any thinking for me. That is why I repeat that I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.
Remarks: Always keep your emotion in check when trading
12) Quote: Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. But in justice to myself I must remind you that up to then I had never had a big enough stake to speculate that way. A big swing will mean big money if your line is big, and to be able to swing a big line you need a big balance at your broker’s
Remarks: To cite William O'Neil of Investor's Business Daily, 3 out of 4 stocks follow the market's prevailing trend
13) Quote: It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop at the even figure but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you a profit. Timid people don’t like to buy a stock at a new high record. But I had the history of such movements to guide me.
Remarks: Once the stock breached the strong psychological resistance at round numbers, it is a BUY signal.
14) Quote: Without money they must sell what stocks they were carrying on margin-sell at any price they could get in a market where buyers were as scarce as money and just then there was not a dollar in sight.
Remarks: That explains the domino effect when money is scarce and everyone engages in panic selling
15) Quote: It does not take a reasonably young and normal man very long to lose the habit of being poor. It requires a little longer to forget that he used to be rich. I suppose that is because money creates needs or encourages their multiplication. I mean that after a man makes money in the stock market he very quickly loses the habit of not spending. But after he loses his money it takes him a long time to lose the habit of spending.
Remarks: Rather apt observation of human behavior
16) Quote: As a matter of fact, I would rather play commodities than stocks. There is no question about their greater legitimacy, as it were. It partakes more of the nature of a commercial venture than trading in stocks does.
Remarks: Studies have shown that commodity future serve as a good hedge against unexpected inflation than real estate or stock of commodity producers. Further, commodity prices and capital asset prices are negatively correlated, thus commodity provides additional diversification benefits to a portfolio.
17) Quote: In the long run commodity prices are governed but by one law-the economic law of demand and supply. The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective. He does not indulge in guesses about a dozen things as he does in stocks. It always appealed to me trading in commodities.
Remarks: Commodity prices change due to global supply and demand dynamics, thus the concept of international diversification is irrelevant. When you invest in stocks however, you are exposed to systematic and unsystematic risk, thus you will need to diversify your portfolio to hedge away the firm-specific (unsystematic) risk.
18) Quote: As a matter of fact, millions upon millions of dollars have been lost by men who bought stocks because they looked cheap or sold them because they looked dear.
The speculator is not an investor His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.
Remarks: Speculator will buy shares in a company because they are "in play". For example the speculator will buy once a stock reaches a new all-time high price breakout. On the contrary, value investors will buy when the stock drops below their intrinsic value or appears “cheap”.
19) Quote: And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.
Remarks: I should print this out and frame it on my wall. Fear is only as deep as the mind allows. On the flip side, see below illustration. Show me someone who is immune from greed, hope and fear and I will show you 95% of traders who lose money.
And last wisdom for you all to reflect on…
20) Quote: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It’s like the track. A man may beat a horse race, but he cannot beat horse racing.
Remarks: Read this article Debunking 5 Myths of Stock Investing
where I mentioned “Superstar hedge fund managers are ephemeral. What does that tell you about being invested in the market?”
I must admit that some of the wisdom provided in the book seems logical but to put into practice is indeed a challenge. I highly recommend that you read and reread the book to solidify the epiphany from arguably one of the history’s finest stock trader.
