1) Buy low, sell high – Although there are many famous value investors that buy low and wait for many months if not years for incredible gains, we think differently. We like to buy high, and sell much higher. Buy and hold strength because history shows what looks high, usually goes higher. Think about the great stocks of the last 100 years, Texas Instruments, Cisco, Microsoft, and Apple. Had you thought the price was too high and failed to get in, it just went higher without you.
2) We invest for the long haul – 70% of all volume is computerized algorithmic trading with computers trading with each other back and forth. One computerized trading CEO was upset that their average holding period was up to around 13 seconds. We want to make money over the long haul. If we get in, have a bad feeling about it, we get out. If it reverses and goes back up, we can always get right back in. Commissions are very low these days at a half penny per share through IB.
3) It is un-American to go short – No, it is un-American to lose money on any business deal whether opening a coffee stand or buying a stock.
4) You can’t time the market – Your correct in that you can’t know in advance what the market’s direction will be tomorrow, next week, next month, next year. The person who has a crystal ball will never share it. All we can do is interpret what the market tells us on a daily basis. Wall Street has pitched the myth because they make their “management fees” via mutual funds no matter what direction the market goes. For them, they just need to keep your assets under “management” and sit back and collect their 1-2% per year with no hard work and incredible volatility.
5) You need to be diversified with no more than 5% in any one stock – Then you should just buy the SPY and get the market’s return with the market’s volatility. We put up to 1/3 in one stock or etf as long as the trend is defined and with a pre-defined stop-loss point. Had you just put 5% in Apple, you got little benefit from your hard work and research.
6) You have to always be “in the market” because if you miss the 4 or 5 best days your return will lag significantly – We know some of the best traders that have made millions are only in the market around ½ of the time. Nothing says you can’t sit in cash when there is no defined trend. Read Market Wizards by Jack Schwager.
7) Technical analysis doesn’t work – Yea right, then go listen to analysts with their buy and sell recommendations. Fundamental analysis does not tell you WHEN to buy, sell or take your loss. Analysts are always late because the news is ALWAYS great right at the top. Technical analysts can be out in an instant on breaks of the 10, 20 or 50 day moving average and usually the news will follow soon after in the direction of the trend with a gap down (or up).
8) The market always goes up the long run – look at 1968 to 1982, you made around 0% per year for 20 years. Look at 2000 to now, you have lost money and had to sit through incredible volatility.
9) You need to be in 60% stocks and 40% bonds – That was a great strategy from 1982 until present day. Your bonds went up for nearly 30 years. Your stocks went up from 1982 until March 2000. Stocks sure ended in a euphoric bang! You can do the math on what will happen to your 30 year bond paying out $40 per year per thousand principal were there ever to be a higher discounted rate. Remember they always fall much harder than they gain. Years of bond fund gains could be wiped out in a few short weeks or months.