Contents

Use Both Fundamentals and Technicals ....................................................................................................... 4

Technical analysis tracks the past, it does not predict the future ............................................................ 5
If very important news cannot move stock price, re-evaluate your investment thesis. .......................... 5
When a market makes a historic high, something has changed .............................................................. 5
Better to avoid catching falling knife. Wait for price to consolidate ........................................................ 5
When share price makes one day big move on some important news.................................................... 6
In bear markets, stocks fall drastically on negative news and might react modestly to positive news ... 6
Watchout for 200 day moving average .................................................................................................... 6
Buy on extreme weakness ........................................................................................................................ 6
Better to execute orders at market prices than limit orders .................................................................... 6
Good to buy contrarian bets near their support level .............................................................................. 6
Think twice before selling a stock near its all-time high, unless fundamentals are bad .......................... 7
If it’s difficult to execute trade at your price, its good ............................................................................. 8
Something is going right for stocks which rebound first after deep correction in markets ..................... 8
If stock price is top 2% of relative performance and fundamentals remains bad, even then study the
company closely ........................................................................................................................................ 8
Stock at all time high means all unhappy investors are already out ........................................................ 8
All time high signal more relevant in early stages of bull market and not in late stage of bull market ... 8
If you buy a stock post earnings surprise, you might be buying at its peak price .................................... 8
Enough people believe in technical analysis to have impact on markets ................................................ 9
Market direction, industry and company fundamentals impact the share price equally ........................ 9
Bull market top is highly unpredictable and not dependent on valuations. Better to exit on way down
than way up .............................................................................................................................................. 9
If riding bubble market, ride it in highly liquid stocks........................................................................... 9
Another way to ride bubble markets is to buy long options ................................................................ 9
Don’t expect bull market to end in rational fashion ........................................................................... 10
Bull market ends when everyone in the world is talking about stocks .............................................. 10
Bull market to bear market transition very slow ................................................................................ 10
When bubble burst and market corrects by 20% or more many people might still be buying because
its 20% cheap ...................................................................................................................................... 10
End of bear markets, when economy stop getting worse and markets start going up.......................... 10
Be an early convert in bubble and avoid late conversion ....................................................................... 11

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 Many times stock prices moves first and reasons come later ................................................................ 11
Real money is made is understanding trend of bull market ................................................................... 11
Momentum investing [Buy high sell higher] ............................................................................................... 12
Don’t pay more than 2x index PE for any growth stock ......................................................................... 12
If during bull phase, the leaders start losing its red signal ..................................................................... 13
High volumes during consolidation phase is red signal .......................................................................... 13
Richard Driehaus investment philosophy ............................................................................................... 13
When to sell ................................................................................................................................................ 14
When confused about a position, better to sell and enter when sure................................................... 14
High valuation and deteriorating fundamentals and share price flat for some time ............................. 14
Have a broad idea of what will make you to sell .................................................................................... 14
Investment Process ..................................................................................................................................... 14
Nothing wrong in setting returns target. With no benchmark to measure your performance you might
lose discipline to work hard .................................................................................................................... 14
Find an approach that fits your personality, every style has plus and minuses ..................................... 15
Don’t adopt contrary investing styles. You cannot be both day trader and long term investor ........ 16
Investing cannot be taught it has to be learned ................................................................................. 16
Focus on those critical factors which makes stock prices to move up and down .................................. 16
Approach investing as Vocation not as HOBBY and learn from your failures ........................................ 17
It takes 3-5Y of hard work working 12 hours a day and losing some money to learn investing ............ 17
Willing to make mistakes ........................................................................................................................ 17
Study correlation among your positions................................................................................................. 17
Your investment process must be compatible with your investment style. .......................................... 17
Gut feel is important. At the same time be aware of intuition and wishing .......................................... 18
Don’t watch stock prices throughout the day ........................................................................................ 18
Everybody gets what they want out of the market. Visualization and goal setting is very important to
increase profits ....................................................................................................................................... 18
Have an investment process and follow it religiously. Sticking to your investment process during
temporary phase of underperformance is most important ................................................................... 19
Have a variant perception....................................................................................................................... 19
Better to buy early if you have variant perception................................................................................. 20
Conviction to follow your ideas and the flexibility to recognize when you have made a mistake. ....... 20
Write down the reasons for your investment or sale............................................................................. 20
Don’t fear changing your opinion ........................................................................................................... 20

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 Focus on process and not outcome ........................................................................................................ 20
Focus only on asymmetrical strategies [5x-10x in 5-10 years] ............................................................... 21
What happens when you sell a stock with the intention of re-entering at lower price? ....................... 21
When odds are in your favor, bet heavily............................................................................................... 21
On Average better to work alone without assistants & contra opinion ................................................. 21
One should build a team ..................................................................................................................... 21
On average not much use of travelling extensively to do lot of management meetings....................... 22
Contra opinion on management meeting .............................................................................................. 22
What to look for when you hire an analyst ............................................................................................ 22
Even after exiting a stock keep it on your watchlist ............................................................................... 22
Keep studying past winners and refine your stock selection criteria ..................................................... 22
Write down your investment philosophy, it will help clarify your thoughts .......................................... 22
Maintain a investing journal and record your observations............................................................... 23
If you are right more than 50% of the time and let your winners run you will make lots of money ..... 23
Fundamentals prevails over politics ....................................................................................................... 23
If any company is reporting smooth quarterly numbers despite volatility in business environment,
possibility of numbers manipulation ...................................................................................................... 24
Many times credit markets gives early warning signal of problems in economy................................... 24
Fundamental analysis is not about forecasting the weather for tomorrow, but rather noticing that it is
raining today. .......................................................................................................................................... 24
Investing and Life ........................................................................................................................................ 25
Have balanced life and hobbies outside investment .............................................................................. 25
Characteristics of a losing investor ......................................................................................................... 25
It’s OK to lose .......................................................................................................................................... 25
Fruits for all season ..................................................................................................................................... 25
Investment style should cover stocks with both short term [2-5 Y] and long term [10Y] ...................... 25
As number of people following a particular style increases, these styles might become unprofitable. 26
In investing or trading fixed approaches will be doomed to failure sooner or later. ............................. 27
If too many people follow an approach, it won’t work .......................................................................... 27
It takes lot of time to perfect one style [but you may need to change your process], so stick to it
through thick and thin ............................................................................................................................ 27
Markets change, good investors adapt................................................................................................... 27
Good investors need to adapt as per market situations ........................................................................ 28
Mistakes of omission cost more than mistakes of commission ................................................................. 28

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Successful Trading rules .............................................................................................................................. 28
Ability to admit mistakes more important than intelligence.................................................................. 28
Successful traders are unemotional, hardworking, and disciplined ....................................................... 28
Good trading rules from Stuart Walton which are equally applicable for investment .......................... 29
Discipline and hardwork is most important trait of most successful traders ......................................... 29
Hardwork ............................................................................................................................................ 29
No single path to success ........................................................................................................................ 29
Be aware of your weakness .................................................................................................................... 29
View Personal Problems as a Major Cautionary Flag to Your Trading Health problems or emotional
stress can sometimes decimate a trader’s performance. ...................................................................... 30
Biggest losses after great wins .................................................................................................................... 30
Avoid annual target, instead have 5Y targets ......................................................................................... 30
On networking with investors..................................................................................................................... 30
Communicate with other investors for information not for opinion ..................................................... 30
Be careful in expanding your network of investor friends and clients. They have subtle impact on your
behavior .................................................................................................................................................. 30
Let your winners run and cut down your losses ......................................................................................... 31
To ride winners you need to have strategies for various contingencies ................................................ 31
Cut your losses ........................................................................................................................................ 31
50% success rate is enough to make good returns, if you cut down your losses early .......................... 32
Control risk .................................................................................................................................................. 32
Know when to follow rules and when to break rules. If not able to follow rules, take vacation from
market for sometime .................................................................................................................................. 32
Gold ............................................................................................................................................................. 32

Use Both Fundamentals and Technicals

The best trades are the ones in which you have all three things going for you: fundamentals, technicals,
and market tone. First, the fundamentals should suggest that there is an imbalance of supply and
demand, which could result in a major move. Second, the chart must show that the market is moving in
the direction that the fundamentals suggest. Third, when news comes out, the market should act in a
way that reflects the right psychological tone. For example, a bull market should shrug off bearish news
and respond vigorously to bullish news. If you can restrict your activity to only those types of trades, you
have to make money, in any market, under any circumstances.

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When an important fundamental development occurs, the initial direction of the market move is often a
good tip-off of the longer-term trend? Exactly. The market usually leads because there are people who
know more than you do.

Technical analysis tracks the past, it does not predict the future
There is a great deal of hype attached to technical analysis by some technicians who claim that it
predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use
your own intelligence to draw conclusions about what the past activity of some traders may say about
the future activity of other traders. For me, technical analysis is like a thermometer. Fundamentalists
who say they are not going to pay any attention to the charts are like a doctor who says he’s not going
to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible
participant in the market, you always want to know where the market is— whether it is hot and
excitable, or cold and stagnant. You want to know everything you can about the market to give you an
edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual
behavior. By definition, anything that creates a new chart pattern is something unusual. It is very
important for me to study the details of price action to see if I can observe something about how
everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and
potential changes.

If very important news cannot move stock price, re-evaluate your investment thesis.
Although I don’t really trade off of them, there are two that come to mind. First, if a market doesn’t
respond to important news in the way that it should, it is telling you something very important. For
example, when the news of the Iran/ Iraq war first came out over the newswire, gold was only able to
move up $ 1. I said to myself, “A Middle East war has just broken out and the best the gold market can
do is go up $ 1; it has to be a great sale.” [Lary Hite]

So you wouldn’t care if the market didn’t react to the news the way it should have, as long as you felt
the main reason for being short was still valid. Yes, but if the news was terrible and the stocks were up, I
would try to understand why. Sometimes the market has more information and the variant action is
really telling you something. [Michael Steinhardt]

I want to see a stock move higher on good news, such as a favorable earnings report or the
announcement of a new product, and not give much ground on negative news. If the stock responds
poorly to negative news then it hasn’t been blessed.

When a market makes a historic high, something has changed

The second item is something that Ed Seykota taught me. When a market makes a historic high, it is
telling you something. No matter how many people tell you why the market shouldn’t be that high, or
why nothing has changed, the mere fact that the price is at a new high tells you something has changed.

Better to avoid catching falling knife. Wait for price to consolidate

Absolutely. I won’t buy a stock when it’s dropping even if I like the fundamentals. I have to see some
stability in the price action before I buy the stock. Conversely, I might also use a stock’s chart to trigger
the sale of a current holding. Again, the charts are a very unemotional way to view a stock’s behavior
and potential.

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When share price makes one day big move on some important news
Is it generally true that stocks that witness a huge, one-day move tend to keep going in the same
direction over the near term? That has been my observation over the years. If there’s a large move on
significant news, either favorable or unfavorable, the stock will usually continue to move in that
direction.

In bear markets, stocks fall drastically on negative news and might react modestly to
positive news
Not appreciating how drastically a bear market can change the balance between return and risk. For
example, say you like a pharmaceutical company because you have done thorough research that leads
you to believe there is an 80 percent probability that the FDA will approve their drug application. In the
current bear market environment, even if you are right about the odds, the trade may be a bad bet
because the stock might go up only 5 percent with a favorable ruling, but go down 50 percent with an
unfavorable ruling.

The symmetry between the euphoric bull market of 1999 and this year’s unrelenting bear market is
quite amazing. In 1999, a company announcement that it was expanding its business to the Internet
would be sufficient to propel its stock price $20 higher overnight. This year, a Wall Street Journal story
about a company’s accounting is enough to trigger a near instantaneous $20 decline in the stock price.
So you are seeing the same type of crazy price moves, except they are on the downside instead of the
upside. The fear in 2002 is just as intense as the greed in 1999. The analogy is that long positions are
now subject to the same type of sudden large irrational adverse price moves as short positions were in
the 1999 bull market. However, just as in 1999, I believe the current situation will be temporary.

Watchout for 200 day moving average

I use them as a secondary type of input. In the stock market, the one indicator I give the greatest weight
is the two-hundred-day moving average. I wouldn’t recommend this indicator as a sole input for making
trading decisions, but it does add a bit of useful information to supplement other methods and forms of
analysis. In fact, one study I saw demonstrated that by simply using the two-hundred-day moving
average on the Dow Jones stocks, an investor could have earned an average annual return of 18 percent
over the fifty-year survey period— approximately double the return that would have been realized by a
straight buy-and-hold method.

Buy on extreme weakness

Buy on extreme weakness and sell on extreme strength. The only way to identify extremes is to get a
feel for the sentiment, whether it is euphoria or pessimism. Then you have to act on it quickly, because
there are often abrupt peaks and bottoms.

Better to execute orders at market prices than limit orders

I always buy and sell at the market. I never mess around trying to get the best fill. I’m a broker’s dream.

Good to buy contrarian bets near their support level

I use them for market timing. I think that is one of the things that has saved me over the years. If, for
example, the stock I am short collapses to support, I will probably get out. How do you to define
support? Price areas that have witnessed a lot of buying in the past—points at which prices consolidated
before moving higher. Some dedicated shorts will still hold on to their positions, but I will usually cover.

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I’ll figure the market has already gone down 50 percent. Maybe it will go down another 10 or 20
percent, but that is not my game. I look for stocks that are high relative to their value.

Think twice before selling a stock near its all-time high, unless fundamentals are bad
I am only concerned about stocks making new all-time highs.

I won’t short a stock that is moving straight up. The stock has to show signs of weakening or at least
stalling. [Short seller Dane Galante]

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If it’s difficult to execute trade at your price, its good
A good fill is a death blow. The average investor who puts in a buy order when the market is at 27 is
thrilled if he gets a fill at 26¾. I would probably just turn around and get out of the position. Stocks that
are ready to blast off are usually very difficult to buy without pushing the market higher. If I put in an
order for ten thousand at 27 and the floor comes back to me and says, “We can only do three thousand
at 27. The market is at 27¼. What do you want to do now?” it reinforces my belief that the timing of the
trade is right.

Something is going right for stocks which rebound first after deep correction in markets
One way to use relative strength is to look for stocks that hold up well during a market correction and
are the first to rebound after the market comes off a relative low; these stocks are the market leaders.

If stock price is top 2% of relative performance and fundamentals remains bad, even then
study the company closely
Roughly speaking, I would say my weighting is fifty-fifty. But there is an important distinction between
the relative importance I assign to price action versus fundamentals. Although I would never bet on my
fundamental ideas without some confirming price action, I might consider buying a stock with apparent
negative fundamentals if its relative price performance is in the top 2 percent of the market. Why is
that? Because the price action may be telling you that the stock is discounting a potential change in the
fundamentals that is not yet evident. The combination of strong price action and weak current
fundamentals often occurs in turnaround companies or companies with a new technology whose
potential is not yet widely understood.

Stock at all time high means all unhappy investors are already out
No, a stock going to a new high is typically a bullish event because the market has eliminated the supply
of all previous buyers who had a loss and were waiting to get out at even. That’s why stocks often run
up very rapidly once they hit new high ground—at that point, there are only happy investors; all the
miserable people are out.

All time high signal more relevant in early stages of bull market and not in late stage of
bull market
That usually doesn’t happen if you buy breakouts to new highs after a correction to the first leg in a bull
trend. In that case, stocks usually take off like a rocket after they break out to new highs. Less skilled
traders wait to buy the stock on the pullback, which never comes. When do you get breakouts that fail?
In the latter stages of a bull market after the stock has already run up dramatically. Chart patterns are
only useful if you know when to apply them; otherwise, you might as well be throwing darts.

If you buy a stock post earnings surprise, you might be buying at its peak price
There have been lots of academic studies to show that stocks with positive earnings surprises tend to
outperform the market, but the margin of improvement is relatively moderate. Frequently, you may find
that when you buy a stock after a positive earnings surprise, you are buying it near a price peak because
the earnings surprise was already discounted. We are talking about two different things. An “earnings
surprise” is defined by academics and Wall Street as a number that is above or below the consensus
estimate by some minimum margin. Whether an earnings surprise is discounted or not, however,
depends on the price trend before the report’s release. For example, if a stock goes up 10 points in a flat

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premiums being very low was that option prices were generally too cheap. I like buying options when
they are cheap. It was a low-volatility bubble, which meant that options worked. That’s not always the
case.

First, it is important to initiate a trade early in the bubble phase. Second, since bubbles are prone to
abrupt, sharp downside reversals, it is critical that the long-biased position is structured so that the
worst-case loss is limited. For this reason, O’Shea would never be outright long in a bubble market, but
instead would express a bullish posture through a position such as a long call, a trade in which the
maximum risk is defined by the premium paid for the option. Low volatility bubble markets are
especially well attuned to being traded via long calls.

Don’t expect bull market to end in rational fashion

Equity markets would eventually notice, but being short equities is a hard trade because they might still
keep going up for a long time. After a bull market that goes on for years, who is managing most of the
money? The bears are all unemployed; they’re not managing any money at all. You have a few very
flexible smart people, but they run relatively small amounts of money; so they don’t matter, either. The
managers who are relentlessly bullish and who buy more every time the market goes down will be the
ones who end up managing most of the money. So, you shouldn’t expect a big bull market to end in any
rational fashion.

Bull market ends when everyone in the world is talking about stocks
It’s going to end badly; it always ends badly. Everybody in the world is talking stocks now. Everybody
wants to be a trader. To me that is the sign of something ending, not something beginning. You can’t
have everybody on one side of the fence. The world doesn’t work that way.

Bull market to bear market transition very slow

Because the bulls control most of the money, you should expect the transition to a bear market to be
quite slow, but then for the move to be enormous when the turn does happen. Then the bulls will say,
“This makes no sense. This was unforeseeable.” Well, it clearly wasn’t unforeseeable.

When bubble burst and market corrects by 20% or more many people might still be buying
because its 20% cheap
When you have tremendous fundamental imbalances, the change can occur anywhere along the way.
Nasdaq topped above 5,000, but it could just as well have been 3,000 or 7,000. It just happened to top
above 5,000. Predicting the top of a bubble is like trying to predict the weather one year out— the same
set of conditions can lead to wildly different outcomes if replayed multiple times. Absolutely right, and I
can’t predict that turnaround. It’s very difficult. But you can notice when things have changed. Most
people, though, don’t. When Nasdaq is at 4,000 after having been at 5,000, there are lots of people
buying it because it is cheap. They reason, “It used to be 5,000. Now it’s only 4,000. I am getting a
bargain.” People are very poorly attuned to making decisions when there is uncertainty. Do you know
the difference between risk and uncertainty?

End of bear markets, when economy stop getting worse and markets start going up
Two things changed: The economy stopped getting worse, and markets started going up. The underlying
problems had not gone away, but that isn’t the market driver. The fact that the economy was improving,
even though it was still in bad shape, meant that the optimists could come back. Never underestimate

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the ability of people to be optimistic and believe that everything is going to be okay. Historically, what is
important to the market is not whether growth is good or bad, but whether it is getting better or worse.
Growth started getting less negative, and less negative is good news. Asia started going up. The
Australian dollar started going up. The S& P was actually one of the last markets to turn higher in March
2009. By March to April, you were seeing a broad-based recovery in global markets.

Be an early convert in bubble and avoid late conversion

That’s when you don’t get involved. Actually what I’ve learned is that bubbles last a long time, and that
there’s money to be made out of bubbles The main thing about bubbles is that you need to be early. The
worst thing you can do in a bubble is to be stubborn and then late to convert. I have avoided late
conversions.

O’Shea emphasizes that his edge is not forecasting what will happen, but rather recognizing what has
happened. O’Shea believes that it is very difficult to pick a major turning point, such as where a market
bubble will top, and that trying to do so is a losing strategy. Instead, he waits until events occur that
confirm a trading hypothesis. For example, he thought that excessive risk-taking during 2005 to 2007
had inflated various markets beyond reasonable levels and left the financial markets vulnerable to a
major selloff. Nevertheless, insofar as he sees his role as trading in response to the prevailing market
facts, rather than forecasting turning points, he actually had bullish positions on during this time. He did
not switch to a bearish posture until an event occurred that he saw as a confirmation that the markets
were in the process of rolling over— the drying up of liquidity in the money markets in August 2007. He

Many times stock prices moves first and reasons come later
At the start of the 1998 crisis, there was nothing about LTCM in the press, either. I had no idea of any
reason for what was going on in the markets, and I had no way of finding out. All I knew was that T-bond
futures were going up limit every day. That told me there was something going on. I didn’t need to know
why. Once you realize something is happening, you can trade accordingly. Trades don’t have to start
based on fundamentals. If you wait until you can find out the reason for the price move, it can be too
late. A great Soros quote is “Invest first; investigate later.” You don’t want to get fixated on always
needing a nice story for the trade. I am an empiricist at heart. The unfolding reality trumps everything. I
believe in hypothesis testing. The hypothesis is that something big is happening. I don’t know what it is,
but it is so powerful that it will carry on for a long time. I should participate in this. But I will do it in a
way that is liquid so that if it turns around again, I can get out quickly. If I am wrong, I will have a limited
loss. If I am right, who knows what could happen.

In April 2009, O’Shea was very pessimistic about the financial outlook, but the market behavior was
telling him he was wrong. Since his bearish hypothesis was inconsistent with the market price action, he
formulated an entirely different hypothesis that seemed to fit what was happening— that is, the
markets were seeing the beginning of an Asia-led economic recovery.

Real money is made is understanding trend of bull market

I think it was a long step forward in my education when I realized at last that when old Mr. Partridge
kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them

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that the big money was not in the individual fluctuations but in the main movement— that is, not in
reading the tape but in sizing up the entire market and its trend.

Momentum investing [Buy high sell higher]

I use the easy-to-remember acronym CANSLIM. Each letter of this name represents one of the seven
chief characteristics of the all-time great winning stocks during their early developing stages, just before
they made huge advances. The “C” stands for current earnings per share. The best performing stocks
showed a 70 percent average increase in earnings for the current quarter over the same quarter in the
prior year before they began their major advance. I am continually amazed by how many individual
investors, and even pension fund managers, buy common stocks with unchanged or lower current
quarter earnings.

The “A” in our formula stands for annual earnings per share. In our studies, the prior five-year average
annual compounded earnings growth rate of outstanding performing stocks at their early emerging
stage was 24 percent. An EPS rank of 95 means that a company’s current and five-year historical
earnings have outperformed 95 percent of all other companies.

The “N” in our formula stands for something new. The “new” can be a new product or service, a change
in the industry, or new management. In our research we found that 95 percent of the greatest winners
had something new that fell within these categories. The “new” also refers to a new high price for the
stock. In our seminars we find that 98 percent of investors are unwilling to buy a stock at a new high.
Yet, it is one of the great paradoxes of the stock market that what seems too high usually goes higher
and what seems too low usually goes lower.

The “L” in our formula stands for leader or laggard. The 500 best-performing stocks during the 1953–
1985 period had an average relative strength of 87 before their major price increase actually began.
[The relative strength measures a stock’s price performance during the past twelve months compared to
all other stocks. For example, a relative strength of 80 would mean that the given stock outperformed
80 percent of all other stocks during the past year.] So, another basic rule in stock selection is to pick the
leading stocks— the ones with the high relative strength values— and avoid the laggard stocks. I tend to
restrict purchases to companies with relative strength ranks above 80.

I guess over the years, about two-thirds of my stock purchases were actually closed at a profit. However,
I have found that only one or two stocks of every ten I have bought have turned out to be truly
outstanding.

I also made the mistake of buying stocks that were overextended. By that I mean I was buying stocks
that had already moved 15 to 20 percent above their price bases. You should only buy stocks that are
within a few percent of their base; otherwise, the risk is too great. [David Ryan]

Don’t pay more than 2x index PE for any growth stock

Yes, I learned that most of our greatest winning recommendations started off with prices under thirty
times earnings. O’Neil says the P/ E [price/ earnings] ratio is not important. I think it is, in that your
success ratio is a lot higher on lower P/ E ratio stocks. But I guess not too low P/ E ratios? When I’m
talking about lower P/ E ratio stocks, I mean stocks that have a P/ E ratio that is between even and up to

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two times the S& P 500 P/ E ratio. So if the S& P 500 is at fifteen times earnings, you should try to buy
stocks with P/ E ratios between 15 and 30. Once you start going much beyond double the S& P 500 P/ E
ratio level, your timing has to be more exact. You are bound to make a few more mistakes on higher P/ E
ratio stocks.

Do you therefore avoid high P/ E ratio stocks? Yes, in many cases I do. The most profitable situation is
when you find a stock with a strong earnings trend that is trading at a P/ E ratio in line with the broad
market ratio. [David Ryan]

If during bull phase, the leaders start losing its red signal
By how well my individual stocks are doing. If, during the bull phase, the leaders start losing, it indicates
that a bear market is developing. If I have five or six stocks in a row that get stopped out, a caution flag
goes up.

High volumes during consolidation phase is red signal

So, in the consolidation phase, decreasing volume is good. If you continue to see very high volume, do
you start thinking potential top? Yes, because that shows that a lot of people are getting out of the
stock. You want an increase in volume when the stock breaks out, but you want a decrease in volume as
the stock consolidates.

Richard Driehaus investment philosophy

Driehaus’s basic philosophy is that price follows growth and that the key to superb performance in the
stock market is picking the companies with the best potential earnings growth. Everything else is
secondary. Interestingly, the high growth stocks that meet Driehaus’s criteria often sell at extremely
high P/ E ratios. Driehaus contends that the so-called prudent approach of buying only stocks with
average to below-average P/ Es will automatically eliminate many of the best performers. The stocks
that Driehaus tends to buy are also often companies that are not followed by, or only lightly followed
by, industry analysts, a characteristic that Driehaus believes leads to greater inefficiencies and hence
greater profit opportunities. Driehaus’s stock selection ideas are fundamentally based. However, to
confirm his selection and to aid in the timing of purchases, Driehaus is a great believer in technical
analysis. With rare exception, before he buys a stock, Driehaus wants to see its price rising and high
relative strength (i.e., a stock that is performing significantly stronger than the broad market). These
technical characteristics mean that when Driehaus buys a stock, it is frequently near its recent high. He
believes that fortunes are made by jumping on board the strongest fundamental and technical
performers, not by picking bargains. Another example in which Driehaus’s ability to do what is
uncomfortable enhances his profitability is his willingness to buy a stock on extreme strength following a
significant bullish news item. In such situations, most investors will wait for a reaction that never comes,
or at the very least will place a price limit on their buy order. Driehaus realizes that if the news is
sufficiently significant, the only way to buy the stock is to buy the stock. Any more cautious approach is
likely to result in missing the move. In similar fashion, Driehaus is also willing to immediately liquidate a
holding, even on a sharp one-day decline, if he feels a negative news item has changed the outlook for
the stock. The rule is: Do what is right, not what is comfortable. Another important point to emphasize is

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that a small percentage of huge winners account for the bulk of Driehaus’s superior performance. You
don’t have to be right the majority of the time, but you do have to take advantage of the situations
when you are right. Achieving this dictate requires two essential elements: taking larger positions when
one has a high degree of confidence (e.g., Home Shopping Network was Driehaus’s largest position ever)
and holding such positions long enough to realize most of the potential.

When to sell
When confused about a position, better to sell and enter when sure
Yes, exactly. If you become unsure about a position, and you don’t know what to do, just get out. You
can always come back in. When in doubt, get out and get a good night’s sleep. I’ve done that lots of
times and the next day everything was clear. Do you sometimes go back in right after you get out? Yes,
often the next day. While you are in, you can’t think. When you get out, then you can think clearly again.

High valuation and deteriorating fundamentals and share price flat for some time
I look for growth companies that are overvalued—stocks with high P/E [price/earnings] ratios—but that
by itself is not enough. There also has to be a catalyst. An expectation that the company is going to
experience a deterioration in earnings. One thing I look for is companies with slowing revenue growth
who have kept their earnings looking good by cutting expenses. Usually, it’s only a matter of time before
their earnings growth slows as well. Another thing I look for is a company that is doing great but has a
competitor creeping up that no one is paying attention to. The key is anticipating what is going to affect
future earnings relative to market expectations.

I make sure that the fundamentals are broken before I go short. Even if Schwab today were trading at a
hundred times earning, I wouldn’t short it as long as the trend in the fundamentals was still improving. I
would wait for the fundamentals to start deteriorating.

Have a broad idea of what will make you to sell

Know how you will get into a trade, and know how you will get out of the trade. Many investors make
the mistake of only focusing on the former of these two requirements. Masters not only has a specific
method for selecting and entering trades, but he also has a plan for liquidating trades.

Investment Process

Nothing wrong in setting returns target. With no benchmark to measure your

performance you might lose discipline to work hard
The objective of setting a target is not necessarily to reach it, but rather to establish a standard against
which to measure your performance. If you are not reaching your target, it forces you to focus on what
you are doing wrong or what you may not be doing that you should. The target holds you to a higher
standard of performance.

Sometimes when people reach their target and nothing happens, they stop paying attention to
whatever the commitment was to get there. This explains why some people begin to lose after they

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succeed. They can’t sustain the effort. When someone achieves his goal, the question is often, “What
now?” My answer, which is based on comparing athletes who have won gold medals with those who
haven’t, is to set up another target that will provide a challenge. The gold medal winners are always
stretching for a goal that is uncertain. Failing to redefine the goal can limit success. For example, one ski
jumper prepared for the Olympic trials for years by visualizing himself doing perfect jumps over and
over. He came to the trials, made the perfect jump, and achieved his goal of making the Olympic team.
The problem was that the qualifying jumps ended up being his best performance because he hadn’t
visualized or mentally prepared himself for going beyond the trials. Some traders have trouble
maintaining the discipline that made them successful once they get ahead by a certain amount. One
trader I worked with did well at the beginning of each month, but whenever he got ahead by $300,000,
he would revert to bad habits. When I pressed him to explain the reasons for the deterioration in his
performance during the latter part of each month, he said, “I begin trading each month from the
perspective that I am flat. Therefore, I am very selective about my trades and use strict risk control.
Once there is money in the till, I get lax. I become overconfident. I stop having respect for the market.”

Dr. Kiev’s advice regarding goal achievement in general and trading success in particular can be
summarized as follows: Believing makes it possible. To achieve a goal, you not only have to believe it is
possible, but you also have to commit to achieving it. A commitment that promises the goal to others is
more powerful than a commitment made to oneself. Extraordinary performers—Olympic gold medal
winners, super-traders—continually redefine their goals so they are a stretch. Maintaining exceptional
performance requires leaving the comfort zone. After setting a goal, the trader or athlete needs to
define a strategy that is consistent with the target. Traders, athletes, and other goal-oriented individuals
need to monitor their performance to make sure they are on track with their target and to diagnose
what is holding them back if they are not.

Find an approach that fits your personality, every style has plus and minuses
Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally
important. If you don’t stay with your winners, you are not going to be able to pay for the losers. You
also have to follow your own light. Because I have so many friends who are talented traders, I often
have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader
has strengths and weaknesses. Some are good holders of winners, but may hold their losers a little too
long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to
your own style, you get the good and bad in your own approach. When you try to incorporate someone
else’s style, you often wind up with the worst of both styles. I’ve done that a lot.

There is no single true path to trading success. On the contrary, the trading methodologies employed by
the Market Wizards are extraordinarily varied. The trading approaches used are not merely different,
but, as in the case of one trader I interviewed for a book in progress, the trading methodology may even
be closer to being a mirror opposite of what other traders do than bearing any similarity. Aspiring
traders need to understand that the quest is not a matter of finding that one approach that unlocks the
secrets of market success, but rather of finding an approach that fits their personality. All the Market

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Wizards found an approach that worked for them because it fit their personality. The approach of any
given trader, even a Market Wizard, can be disastrous for other traders who have very different comfort
levels in trading style.

What markets are you going to trade? You need to select a market that fits your personality because a
market is a reflection of the people who trade it. People who trade Internet stocks are definitely
different from people who trade utility stocks. [Mark D Cook]

People always want to know what’s in my computer model. I think that is the least relevant issue to
successful trading. Of course you need an edge, but there are a thousand ways to get an edge. Some
people use strategies that are completely opposite mine, yet we can both be very profitable. Developing
your own strategy is what is important, not knowing my strategy, which I have designed to fit my
personality. Understanding my trading philosophy, my principles, and my money management
techniques, that may be valuable. Besides, I think most people overemphasize stock selection. [Mark
Mintivini]

Don’t adopt contrary investing styles. You cannot be both day trader and long term investor
Cohen emphasizes that it is critical to trade a style that matches your personality. There is no single right
way to trade the markets; you have to know who you are. For example, don’t try to be both an investor
and a day trader. Choose an approach that is comfortable for you. Minervini offers similar advice:
“Concentrate on mastering one style that suits your personality, which is a lifetime process.”

Investing cannot be taught it has to be learned

My natural trade time horizon is one to three months, but that doesn’t mean it would be right for you.
Since I don’t know you, I can’t tell you what your trading style should be. But if you are willing to put in
the effort, you can learn what that style should be. If I try to teach you what I do, you will fail because
you are not me. If you hang around me, you will observe what I do, and you may pick up some good
habits. But there are a lot of things you will want to do differently. A good friend of mine, who sat next
to me for several years, is now managing lots of money at another hedge fund and doing very well. But
he is not the same as me. What he learned was not to become me. He became something else. He
became him. [Colm O’Shea, Hedge Fund Market Wizards: How Winning Traders Win]

Focus on those critical factors which makes stock prices to move up and down
What makes the stock go up and down?” That comment acted as a spur. Thereafter, I focused my
analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement as
opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what
makes their particular stocks go up and down. What did you find was the answer? Very often the key
factor is related to earnings. This is particularly true of the bank stocks. Chemical stocks, however,
behave quite differently. In this industry, the key factor seems to be capacity. The ideal time to buy the
chemical stocks is after a lot of capacity has left the industry and there’s a catalyst that you believe will
trigger an increase in demand. Conversely, the ideal time to sell these stocks is when there are lots of
announcements for new plants, not when the earnings turn down. The reason for this behavioral
pattern is that expansion plans mean that earnings will go down in two to three years, and the stock
market tends to anticipate such developments.

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Approach investing as Vocation not as HOBBY and learn from your failures
Approach trading as a vocation, not a hobby. I periodically give seminars for traders. I once had a tennis
pro who attended my four-day seminar. On the third day, I asked people what they had learned so far
and how they were going to apply it. When it was his turn, he said, “I’m not going to give up my tennis
career. I give lessons on Tuesdays and Thursdays, so I’m going to trade on Mondays, Wednesdays, and
Fridays.” “If you do that,” I told him, “I guarantee that Tuesdays and Thursdays will be the days when
you will need to be watching the market. You’ll be making a hundred dollars giving a lesson and losing a
thousand dollars in the market.” “I’m not going to have that problem,” he said, “because I’m going to
close out my positions every day.” Six months later, he gave up trading. He did two things wrong: First,
his primary passion was tennis. Second, trading wasn’t a vocation to him; it was a hobby, and hobbies
cost you money.

Many people approach investing too casually. They treat investing as a hobby instead of like a business;
hobbies cost money. They also don’t take the time to do a post-trade analysis on their trades,
eliminating the best teacher: their results. Most people prefer to forget about their failures instead of
learning from them, which is a big mistake.

Schwager, Jack D.. Stock Market Wizards: Interviews with America's Top Stock Traders (p. 223).
HarperCollins. Kindle Edition.

It takes 3-5Y of hard work working 12 hours a day and losing some money to learn
investing
But you have to be willing to work hard and pay your tuition, which is the money you lose while you’re
learning how to trade. People ask me all the time, “How long do you think it will take for me to
succeed?” I tell them, “three to five years of twelve-hour days and losing money.”

Willing to make mistakes

You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me
about making your best judgment, being wrong, making your next best judgment, being wrong, making
your third best judgment, and then doubling your money.

Study correlation among your positions

I study the correlation of my trades to reduce my exposure. We do a daily computer analysis to see how
correlated our positions are. Through bitter experience, I have learned that a mistake in position
correlation is the root of some of the most serious problems in trading. If you have eight highly
correlated positions, then you are really trading one position that is eight times as large.

Your investment process must be compatible with your investment style.

My original system was very simple with hard-and-fast rules that didn’t allow for any deviations. I found
it difficult to stay with the system while disregarding my own feelings. I kept jumping on and off— often
at just the wrong time. I thought I knew better than the system. At the time, I didn’t really trust that
trend-following systems would work. There is plenty of literature “proving” they don’t. Also, it seemed a
waste of my intellect and MIT education to just sit there and not try to figure out the markets.

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Eventually, as I became more confident of trading with the trend, and more able to ignore the news, I
became more comfortable with the approach. Also, as I continued to incorporate more “expert trader
rules,” my system became more compatible with my trading style. [Ed Seykota]

I seem to have a gift. I think it is related to my overall philosophy, which has a lot to do with loving the
markets and maintaining an optimistic attitude. Also, as I keep trading and learning, my system (that is
the mechanical computer version of what I do) keeps evolving. I would add that I consider myself and
how I do things as a kind of system which, by definition, I always follow. Sometimes I trade entirely off
the mechanical part, sometimes I override the signals based on strong feelings, and sometimes I just
quit altogether. The immediate trading result of this jumping around is probably breakeven to
somewhat negative. However, if I didn’t allow myself the freedom to discharge my creative side, it might
build up to some kind of blowout. Striking a workable ecology seems to promote trading longevity,
which is one key to success. [Ed Seykota]

Gut feel is important. At the same time be aware of intuition and wishing
Gut feel is important. If ignored, it may come out in subtle ways by coloring your logic. It can be dealt
with through meditation and reflection to determine what’s behind it. If it persists, then it might be a
valuable subconscious analysis of some subtle information. Otherwise, it might be a dangerous
sublimation of an inner desire for excitement and not reflect market conditions. Be sensitive to the
subtle differences

Normal human tendencies are traits that cause you to do poorly. Therefore, to be successful as a trader
you need to condition abnormal responses. You hear many traders say that you have to do the opposite
of your gut response—when you feel good about a position, you should sell, and when you feel terrible
about it, you should buy more. In the beginning that’s true, but as you condition yourself for abnormal
responses, somewhere along the line you become skilled. Then your gut becomes right. When you feel
good, you actually should go long, and when you fell bad, you should sell. That’s the point when you
know you have reached competency as a trader.

Don’t watch stock prices throughout the day

Having a quote machine is like having a slot machine on your desk— you end up feeding it all day long. I
get my price data after the close each day. [Ed Seykota]

Everybody gets what they want out of the market. Visualization and goal setting is very
important to increase profits
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so
they win by losing money. I think that if people look deeply enough into their trading patterns, they find
that, on balance, including all their goals, they are really getting what they want, even though they may
not understand it or want to admit it.

One of the best ways to increase profits is to do goal setting and visualizations in order to align the
conscious and subconscious with making profits. I have worked with a number of traders in order to
examine their priorities and align their goals. I use a combination of hypnosis, breathing, pacing,
visualization, gestalt, massage, and so forth. The traders usually either (1) get much more successful, or
(2) realize they didn’t really want to be traders in the first place.

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Have an investment process and follow it religiously. Sticking to your investment process
during temporary phase of underperformance is most important
Because people develop systems and people will make mistakes. Some will alter their system or jump
from system to system as each one has a losing period. Others will be unable to resist second-guessing
the trading signals. Whenever I go to a money management conference and sit down with a group to
have some drinks at night, I always hear the same story. “My system worked great, but I just didn’t take
the gold trade, and that would have been my biggest winner. [Larry Hite]

He can’t understand how I can trade by following a computerized system religiously. We were playing
tennis one day and he asked me, “Larry, how can you trade the way you do; isn’t it boring?” I told him, “I
don’t trade for excitement; I trade to win.” It may be very dull, but it is also very lucrative. When I get
together with other traders and they start exchanging war stories about different trades, I have nothing
to say. To me, all our trades are the same. [Larry Hite]

For me, it’s important to be loyal to my system. When I’m not, which happens occasionally, then, win or
lose, I’ve made a mistake. I usually remember these for years. The lesson for me was that if you break a
discipline once, the next transgression becomes much easier. Breaking a diet provides an appropriate
analogy— once you do it, it becomes much easier to make further exceptions.

Having investment philosophy is simple, success depends on its execution without exceptions

Successful trading is essentially a two-stage process: 1. Develop an effective trading strategy and an
accompanying trading plan that addresses all contingencies. 2. Follow the plan without exception. (By
definition, any valid reason for an exception—for example, correcting an oversight—would become part
of the plan.) No matter how sound the trading strategy, its success will depend on this execution phase,
which requires absolute discipline.

Have a variant perception

My particular style is a bit different from that of most people. Concept number one is variant
perception. I try to develop perceptions that I believe are at variance with the general market view. I will
play those variant perceptions until I feel they are no longer so. I went short the tobacco stocks about a
month ago. My reasoning was that if the plaintiffs won the case, the stocks would go down a lot, but if
the plaintiffs lost, the stocks wouldn’t go up too much, since the tobacco companies had never lost a
case and winning another one wouldn’t really be news. That is an example of a variant perception.

I try to assume that the guy on the other side of a trade knows at least as much as I do. Let’s say I buy
Texaco at $ 52 and it suddenly goes down to $ 50. Whoever sold Texaco at $ 52 had a perception that
was dramatically different from mine. It is incumbent on me to find out what his perception was. What if
you can’t explain it? The explanation might be superficial or serious, but you can usually get something.

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[Michael Steinhardt ]

Better to buy early if you have variant perception

My attitude has always been that to make money in the markets, you have to be willing to get in the
way of danger. I have always tended to short stocks that were favorites and backed by a great deal of
institutional enthusiasm. Generally speaking, I have tended to short too early and, therefore, have
usually started off with losses in my short positions. If I short a stock and it goes up a lot, it may skew my
exposure a bit, but as long as my variant perception is unchanged, I’ll stay short. If I’m wrong, I’m wrong.

Conviction to follow your ideas and the flexibility to recognize when you have made a
mistake.
Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to
recognize when you have made a mistake. You need to believe in something, but at the same time, you
are going to be wrong a considerable number of times. The balance between confidence and humility is
best learned through extensive experience and mistakes. There should be a respect for the person on
the other side of the trade. Always ask yourself: Why does he want to sell? What does he know that I
don’t? Finally, you have to be intellectually honest with yourself and others. In my judgment, all great
traders are seekers of truth.

Write down the reasons for your investment or sale

All those books are good, but you learn the most from the market itself. Every time I buy a stock, I write
down the reasons why I bought it [he pulls out a binder containing annotated charts]. Doing this helps
cement in my mind the characteristics of a winning stock. Maybe even more important, it helps me
learn from my mistakes.

Don’t fear changing your opinion

“Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their
opinion and then immediately change it.

The ability to change one’s mind is probably a key characteristic of the successful trader. Dogmatic and
rigid personalities rarely, if ever, succeed in the markets. Another attribute that has allowed Blake to
excel is his adaptability. The markets are a dynamic process, and sustained trading success requires the
ability to modify and even change strategies as markets evolve.

Focus on process and not outcome

A losing trade that adheres to a profitable strategy is still a good trade because if repeated many times it
will win on balance. There is no way a trader can know a priori which individual trade is likely to be a
winner. Traders need to accept that a certain percentage of good trades will lose money. As long as a
profitable strategy is implemented according to plan, a trade loss does not imply a trading mistake. On
the flip side, a winning trade can still be a poor trading decision. For example, if someone went long
Internet stocks at the beginning of January 2000 and liquidated at the end of February 2000, in terms of
outcome, it would be a brilliant trade. But it would be a horrible trade in terms of making the same
trading decision over and over again under similar circumstances.

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Focus only on asymmetrical strategies [5x-10x in 5-10 years]
Some of the Market Wizards pursue highly asymmetrical strategies in which the maximum risk on trades
is well defined and contained, while the upside potential can be very large (e.g., long option strategies).
The more successful a positive asymmetrical approach, the greater the volatility because of large
gains— not a characteristic most investors would associate with risk or would consider undesirable.

I’ve learned many things from him, but perhaps the most significant is that it’s not whether you’re right
or wrong that’s important, but how much money you make when you’re right and how much you lose
when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a
market and didn’t maximize the opportunity.

Great track records are made by avoiding losing years and managing to score a few high-double-digit-or
triple-digit-gain years.

My results were transformed when I understood that what counts isn’t how often you’re right, but how
much you profit on your winning trades versus how much you lose on your losing trades. On average,
I’m only profitable about 50 percent of the time, but I make much more when I’m right than I lose when
I’m wrong.

What happens when you sell a stock with the intention of re-entering at lower price?
No, unfortunately, I didn’t. About a year later, I was on a business trip and I called my office to check on
my stocks. I found out that Bandag was up $ 5 that day, reaching a new high of $ 47. I decided to take
my profits, with the idea of buying the stock back later. Bandag then proceeded to continue to go
straight up to a high of $ 240 over the next year. That experience taught me that it’s not that easy to buy
back a good stock once you’ve sold it. It reinforced the idea that there’s great advantage and comfort to
being a long-term investor.

When odds are in your favor, bet heavily

Another somewhat related element behind Sperandeo’s success is that he varies his bet size
considerably. When he implements a position in a market that he perceives to be in the beginning
stages of a new trend and various indicators confirm the trade, he will tend to trade much larger than in
situations where these conditions are lacking. In this way, Sperandeo places his largest bet when he
estimates that the odds are most favorable.

On Average better to work alone without assistants & contra opinion

I found that having another opinion in the office was very destabilizing. My problem is that I am very
impressionable. If I have someone working for me every day, he may as well be running the money
because I’m no longer making my own decisions. I like quiet. I talk all day on the phone, and that’s
enough for me. I don’t need committees, group meetings, and hand-holding to rationalize why a stock is
going down. I even like the fact that my assistant only comes in every other day, so that every alternate
day I am completely on my own and can sit here and germinate.

One should build a team

I’m not a lone wolf. Many traders like to fight their own battles. I prefer to get a lot of support. The main
reason I am as successful as I am is that I’ve built an incredible team.

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On average not much use of travelling extensively to do lot of management meetings
I used to visit companies all the time when I was working for the investment advisory firm. Did it help at
all? Hardly at all. I found that either they told me what they had previously told everyone else, and it
was already factored into the price, or else they lied to me. Once in a blue moon you would learn
something valuable, but there was a huge opportunity cost traveling from company to company to get
that one piece of useful information. I might call a company’s management when its stock is very low
and no one is talking to them, because that is when they are usually desperate enough to talk to
anyone. My hope is that I might learn about some catalyst that could cause the stock to turn around.

Contra opinion on management meeting

Stock investing is not an exact science. The greater the number of useful things you can look at, the
greater you increase your odds. The odds are better that we will make correct investment decisions if
we talk to a company than if we don’t talk to them.

If you call, there’s at least a chance the person will talk to you. One of things I tell my analysts is, “Make
the calls. Maybe they won’t talk to you, but I guarantee that if you don’t call, they won’t talk to you.” In
this case, the manufacturer was very helpful at the start, but then they wised up to what we were doing
and stopped taking our calls. But by then, we had all the information we needed. What do you say when
you call a manufacturer in this type of situation? I tell him the truth. I tell him that I am a fund manager
and am doing research on the company and the industry. In some cases, when we call a company, we
ask them to provide us with the names of some of their top customers to help us evaluate their product.

What to look for when you hire an analyst

For a number of reasons, everyone I hire is in their twenties. First, they will work eighty to a hundred
hours a week. Second, they haven’t made so much money that they will sit back and relax. Third, they
won’t think twice about calling up a CFO, distributor, or customer. I also hire people who want to win.

Even after exiting a stock keep it on your watchlist

Early on, when I got stopped out of a position, that was it. I wiped it out of my mind and started looking
for another stock. I began to notice, however, that many times I would get stopped out of a stock, then
look at it a few months later and see that it had doubled or even tripled. I would exclaim to myself,
“God, I was in that stock!” I realized that I needed to develop a plan to get back on board after I was
stopped out of a position.

Keep studying past winners and refine your stock selection criteria
I analyze all the stocks that were the best performers in the preceding year to refine the fundamental
and technical profile I use to identify the stocks that are likely to be the biggest winners in the future.

Write down your investment philosophy, it will help clarify your thoughts
I believe that writing down your trading philosophy is a tremendously valuable exercise for any investor.
Writing down your trading ideas helps clarify your thought process. I can remember spending many
weekends at the library writing down my investment philosophy: what catalysts I was looking for; how I
expected them to affect a stock; and how I would interpret different price responses. I must have
accumulated over five hundred pages of trading philosophy. Frankly, it was a lot of drudge work, and I

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could only do it for so long in one sitting. But the process was invaluable in developing my trading
approach.

For any trade that is instructive (winner or loser), write down what you learned about the market from
that trade. It doesn’t make any difference whether you keep a trader’s diary or use the back of business
cards, as Masters does; the important thing is that you methodically record market lessons as they
occur.

Use your trading philosophy to develop a methodology for identifying high-probability trades. The idea
is to look for trades that exhibit several of the characteristics you have identified as having some
predictive value. Even if each condition provides only a marginal edge, the combination of several such
conditions can provide a trade with a significant edge.

Maintain a investing journal and record your observations.

Although the process of gaining experience can’t be rushed, it can be made much more efficient by
writing down market observations instead of depending on memory. Keeping a daily diary in which he
recorded the recurrent patterns he noticed in the market was instrumental to Cook’s transition from
failure to great success. All of the many trading strategies he uses grew out of these notes. Masters jots
down observations on the backs of his business cards. A compilation of these notes provided the basis
for his trading model.

If you are right more than 50% of the time and let your winners run you will make lots of
money
My best trader makes money only 63 percent of the time. Most traders make money only in the 50 to 55
percent range. That means you’re going to be wrong a lot. If that’s the case, you better make sure your
losses are as small as they can be, and that your winners are bigger.

Fundamentals prevails over politics

I had absolutely no comprehension of the power of markets versus politics. The policy makers didn’t
understand that either. I think, as is often the case, policy makers don’t understand that they are not in
control. It’s not that speculators are in control, either, but rather that fundamentals actually matter.
Fundamentally, the U.K. remaining in the ERM was untenable. [The Exchange Rate Mechanism (ERM),
which was operative in the decades prior to the implementation of the euro, linked the exchange rates of
European currencies within defined price bands. The U.K. was forced to withdraw from the ERM in 1992
when the pound declined below the low end of its band.]

The U.K. was in a recession with a greatly overvalued currency. Germany needed high interest rates to
constrain the high inflation of the postunification period with East Germany. Because the currencies
were linked, the U.K. was also forced to maintain a high interest rate, even though its ongoing recession
dictated a need for the exact opposite policy. All that Soros did was to recognize that the situation was
untenable. The Bank of England’s effort to support the pound was the equivalent of trying to fight
gravity. It made a huge impression. I learned that markets matter more than policy. You have to look at
real fundamentals, not at what policy makers want to happen. The willing disbelief of people can carry
on for a long time, but eventually it is overwhelmed by the market. The genius of Soros was recognizing
the turning point when things change— the ability to not only know that a position was right, but that it
was right now, and that now was the time to have a big risk on the trade.

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If any company is reporting smooth quarterly numbers despite volatility in business
environment, possibility of numbers manipulation
Yes. You know nothing beyond that. They may or may not have a good business, but you know they are
manipulating numbers. People love stable earnings. Isn’t that great? I hate stable earnings. It just tells
me the company is not being truthful.

Many times credit markets gives early warning signal of problems in economy
Fundamentally, housing prices started to go down in 2006, which didn’t start the crisis, but provided a
reason for one. The subprime credit indexes started going down in January 2007. Subprime credit is a
niche market, and the equity market was ignoring it. Then in July 2007, there was a broad selloff in the
credit markets, but it still was considered a contained credit market issue. Equity people tend to trace
the start of the financial crisis to the collapse of Bear Stearns in March 2008. For me, the true start of
the financial crisis was in August 2007 when money markets stopped working. Basically, banks didn’t
trust other banks. That was the month the world broke, and no one noticed. How did you see the money
markets breaking down? The most obvious way was that LIBOR rates spiked. [LIBOR is the rate at which
banks lend to other banks.] It was an indicator that the underlying assumption that money would flow
smoothly was no longer true. If you spoke to money market desks to find out what was going on, they
told you that liquidity had dried up. They had never seen anything like it. If a similar event happened in
any other market, it would be front-page news. But the fact that it happened in the most important
market— the money market, which is at the heart of capitalism— was largely ignored.

Fundamental analysis is not about forecasting the weather for tomorrow, but rather
noticing that it is raining today.
Fundamentals are not about forecasting the weather for tomorrow, but rather noticing that it is raining
today. The great trades don’t require predictions. The Soros trade of going short the pound in 1992 was
based on something that had already happened— an ongoing deep recession that made it inevitable
that the U.K. would not maintain the high interest rates required by remaining in the ERM. Afterward,
everyone said, “That was incredibly obvious.” Most of the great trades are incredibly obvious. It was the
same in late 2007. In my mind, it was clear that the financial system was imploding and that most
market participants hadn’t noticed.

Schwager, Jack D.. Hedge Fund Market Wizards: How Winning Traders Win (p. 19). Wiley. Kindle Edition.

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Investing and Life
Have balanced life and hobbies outside investment
If trading is your life, it is a torturous kind of excitement [working 13 hours a day]. But if you are keeping
your life in balance, then it is fun. All the successful traders I’ve seen that lasted in the business sooner
or later got to that point. They have a balanced life; they have fun outside of trading. You can’t sustain it
if you don’t have some other focus. Eventually, you wind up overtrading or getting excessively disturbed
about temporary failures.

It was certainly a wake-up [Heart attack] call that my lifestyle had degraded to a point where something
had to change. I realized that trading twenty hours a day and sleeping two hours during weekdays was
not a sustainable schedule. I also had a friend who was a trader and had just suffered a heart attack at
forty-one. Another very important influence was my growing involvement in preserving the Costa Rican
rain forest. I felt I wanted to devote my life to the preserve. All of these factors contributed to my
decision to quit trading.

Characteristics of a losing investor

The composite profile of a losing trader would be someone who is highly stressed and has little
protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/
her personality, and blames others when things go wrong. Such a person would not have a set of rules
to guide their behavior and would be more likely to be a crowd follower. In addition, losing traders tend
to be disorganized and impatient. They want action now. Most losing traders are not as bad as the
composite profile would suggest. They just have part of the losing profile.

It’s OK to lose
Most people become anxious about losses, yet successful speculators have learned that an essential
ingredient to winning is to make it OK to lose. Since most people in our culture are taught that only
winning is acceptable, most investors must change their beliefs about losses to become successful.

If I can’t get over the emotions of taking a loss in twenty-four hours, then I’m trading too large or doing
something else wrong. Also, the process of rehearsing potential losses and confronting actual losses
helps me adapt to increasing levels of risk over time.

Fruits for all season

You have to think about diversification. If you had one method, or one person, making all the decisions,
you couldn’t handle amounts that large. But if you use different strategies and have a diversity in
decision makers, you can handle several hundred

Investment style should cover stocks with both short term [2-5 Y] and long term [10Y]
The third thing we do to reduce risk is diversify. We diversify in two ways. First, we probably trade more
markets worldwide than any other money manager. Second, we don’t just use a single best system. To
provide balance, we use lots of different systems ranging from short term to long term. Some of these

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systems may not be that good by themselves, but we really don’t care; that is not what they are there
for.

Mint carries diversification to an extreme. First, their system is really a combination of many different
systems, selected not only for their individual performance, but also for their degree of lack of
correlation with other selected systems. Second, Mint trades in an extraordinarily wide spectrum of
markets (nearly sixty in all), encompassing exchanges in the U.S. and five foreign countries and diverse
market groups including stock indexes, interest rates, currencies, raw industrial goods, and agricultural
commodities. [Lary Hite]

Markets can be predicted only to a very limited extent, and any single strategy cannot provide an
attractive return-to-risk ratio. If you combine enough strategies, however, you can create a trading
model that has a meaningful edge.

As number of people following a particular style increases, these styles might become
unprofitable
The profitability of trading systems seems to move in cycles. Periods during which trend-following
systems are highly successful will lead to their increased popularity. As the number of system users
increases, and the markets shift from trending to directionless price action, these systems become
unprofitable, and undercapitalized and inexperienced traders will get shaken out. Longevity is the key to
success. [Ed Seykota]

I think it’s because eventually enough people figure it out. When too many people jump on the
bandwagon, the market takes it away. That’s why I would be very skeptical about anyone being able to
buy a trading system that worked—that is, a system that made money with an acceptable level of risk. If
you develop a system that you have thoroughly tested and truly believe works, don’t tell anyone about
it. Use it, because it’s going to go away at some point in time. Understand that it won’t last forever, and
work on coming up with something different for when that happens. I’m always concerned about
people figuring out what I do, because I know if that happens, it’s going to stop working. For example,
the “January effect” is gone. [The January effect is the tendency for small capitalization stocks to
outperform large capitalization stocks during January—a pattern that until 1993 had repeated in over 90
percent of all years since the mid-1920s. Then the pattern failed six years in a row. Lescarbeau is
implying, quite plausibly, that the January effect’s increasing publicity triggered its own demise.

Having said that, though, I find that the systems that have done the best in the most recent past also
tend to do the best in the immediate future. Therefore I tend to lean on the systems that have done the
best very recently.

Markets are dynamic. Approaches that work in one period may cease to work in another. Success in the
markets requires the ability to adapt to changing conditions and altered realities.

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In investing or trading fixed approaches will be doomed to failure sooner or later.
Steinhardt also stresses that there are no absolute formulae or fixed patterns. The markets are always
changing, and the successful trader needs to adapt to these changes. In Steinhardt’s view, traders who
try to find fixed approaches will be doomed to failure sooner or later.

If too many people follow an approach, it won’t work

Too many people use charts. If too many people are using an approach, I feel that I can’t get a
competitive edge.

It takes lot of time to perfect one style [but you may need to change your process], so
stick to it through thick and thin
First and foremost, understand that you will always make mistakes. The only way to prevent mistakes
from turning into disasters is to accept losses while they are small and then move on. Concentrate on
mastering one style that suits your personality, which is a lifetime process. Most people just cannot
weather the learning curve. As soon as it gets difficult, and their approach isn’t working up to their
expectations, they begin to look for something else. As a result, they become slightly efficient in many
areas without ever becoming very good in any single methodology. The reality is that it takes a very long
time to develop a superior approach, and along the way, you are going to go through periods when you
do poorly. Ironically, those are the periods that give you the most valuable information.

Markets change, good investors adapt

Markets change and good traders adapt. As hedge fund manager Colm O’Shea states in his interview,
“Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years
later, they will have broken those rules. Why? Because the world changed.” Part of that change has
been brought about by the increasing prominence of hedge funds themselves.

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Good investors need to adapt as per market situations
I don’t believe in rules in that way. Traders who are successful over the long run adapt. If they do use
rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world
changed. Rules are only applicable to a market at a specific time. Traders who fail may have great rules
that work, but then stop working. They stick to the rules because the rules used to work, and they are
quite annoyed that they are losing even though they are still doing what they used to do. They don’t
realize that the world has moved on without them.

Mistakes of omission cost more than mistakes of commission

Dennis believes that one of the worst mistakes a trader can make is to miss a major profit opportunity.
According to his own estimate, 95 percent of his profits have come from only 5 percent of his trades.
Missing only a few such profit opportunities could have a dramatic negative impact on performance. As
a corollary, you need to guard against holding too rigid an opinion on a market, since such an opinion
could easily lead to missing a major trend.

One of the traders I recently interviewed makes the insightful point that many traders fail not so much
because of the trades they make when they are wrong, but rather because of the trades they don’t
make when they are right. It is quite common for traders to be right on their market call, but to fail to
implement a position and profit from their market assessment. It is not enough being right; you have to
make sure that you make money when you are right. Often this may require doing a trade that feels
uncomfortable.

Successful Trading rules

Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your
volume when you are trading well. Never trade in situations where you don’t have control. For example,
I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading. If
you have a losing position that is making you uncomfortable, the solution is very simple: Get out,
because you can always get back in. There is nothing better than a fresh start.

There are five basic steps to becoming a successful trader. First, focus on trading vehicles, strategies,
and time horizons that suit your personality. Second, identify nonrandom price behavior, while
recognizing that markets are random most of the time. Third, absolutely convince yourself that what
you have found is statistically valid. Fourth, set up trading rules. Fifth, follow the rules. In a nutshell, it all
comes down to: Do your own thing (independence); and do the right thing (discipline).

Ability to admit mistakes more important than intelligence

Based on his experience in training thirty-eight traders, Sperandeo concluded that intelligence was
virtually irrelevant in predicting success. A far more important trait to winning as a trader, he says, is the
ability to admit mistakes. He points out that people who tie their self-esteem to being right in the
markets will find it very difficult to take losses when the market action indicates that they are wrong.

Successful traders are unemotional, hardworking, and disciplined

I think a lot of successful traders are unemotional, hardworking, and disciplined. Ironically, I find myself
lacking on each of those counts. I get very emotional; I really don’t work that hard; and I’m not as

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disciplined as I should be. I would attribute my own success to having both conviction about my gut
feelings and the ability to act on them quickly. That is so critical.

Good trading rules from Stuart Walton which are equally applicable for investment
 Be patient—wait for the opportunity. Trade on your own ideas and style.
 Never trade impulsively, especially on other people’s advice.
 Don’t risk too much on one event or company.
 Stay focused, especially when the markets are moving.
 Listen to the market, not outside opinions.
 If you are unsure about a position, just get out.
 Prices move before fundamentals.
 You will be wrong often; recognize winners and losers fast.
 Adding to losers is easy but usually wrong.
 Remain confident—the opportunities never stop.

Discipline and hardwork is most important trait of most successful traders

Is there any single trait that is shared by all great traders? Yes, discipline. Lescarbeau’s unfailing sense of
discipline is clear in all his actions. He has never decided to hold a position once he gets a sell signal.

Hardwork

The irony is that so many people are drawn to the markets because it seems like an easy way to make a
lot of money, yet those who excel tend to be extraordinarily hard workers—almost to a fault.
Lescarbeau continues to spend long hours doing computer research even though his systems, which
require very little time to run, are performing spectacularly well. He continues to work as if these
systems were about to become ineffective tomorrow. There is often a fine line between hard work and
obsession, a line that is frequently crossed by the market wizards. Certainly some of the examples just
cited contain elements of obsession. It may well be that a tendency toward obsessiveness in respect to
the markets, and often other endeavors as well, is simply a trait associated with success.

No single path to success

There is no single true path for succeeding in the markets. The methods employed by great traders are
extraordinarily diverse.

Be aware of your weakness

Each trader must be aware of personal weaknesses that may impede trading success and make the
appropriate adjustments. For example, Walton ultimately realized his weakness was listening to other
people’s opinions. His awareness of this personal flaw compelled him to make sure that he worked
alone, even when the level of assets under management would seem to dictate the need for a staff. In
addition, to safely vent his tip-following, gambling urges, he set aside a small amount of capital—too
small to do any damage—to be used for such trades.

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View Personal Problems as a Major Cautionary Flag to Your Trading Health problems or
emotional stress can sometimes decimate a trader’s performance.
For example, all of Cook’s losing periods (after he became a consistent winning trader) coincided with
times of personal difficulties (e.g., a painful injury, his father’s heart attack). It is a sign of Walton’s
maturity as a trader that he decided to take a trading hiatus when an impending divorce coincided with
a rare losing period. The morale is: Be extremely vigilant to signs of deteriorating trading performance if
you are experiencing health problems or other personal difficulties. During such times, it is probably a
good idea to cut trading size and to be prepared to stop trading altogether at the first sign of trouble.

Schwager, Jack D.. Stock Market Wizards: Interviews with America's Top Stock Traders (p. 392).
HarperCollins. Kindle Edition.

Biggest losses after great wins

I know that to be successful, I have to be frightened. My biggest hits have always come after I have had
a great period and I started to think that I knew something.

The worst drawdowns often come suddenly right on the heels of periods when just about everything
seems to be working as well as if it had been optimistically scripted. Why is there a tendency for the
worst losses to follow the best performance? One possible explanation is that when everything seems
to be going perfectly, a trader will be most susceptible to being lulled into complacency.

Avoid annual target, instead have 5Y targets

Avoid annual return targets. Trades should be determined by opportunities, not an artificial goal set by
the trader. An annual return expectation will lead a trader to trade too small when opportunities are
exceptionally favorable and too large when opportunities are absent. Caution against trading out of a
desire to make money. Pushing to reach a minimum annual return target will encourage taking marginal
trades that would not have been done otherwise, which can easily result in falling further short of the
target.

On networking with investors

Communicate with other investors for information not for opinion
Do you still talk to other traders about markets? Not too much. Over the years, it has mostly cost me
money. When I talk to other traders, I try to keep very conscious of the idea that I have to listen to
myself. I try to take their

Be careful in expanding your network of investor friends and clients. They have subtle
impact on your behavior
I do receive requests, but I very rarely accept new accounts. If I do, it is only after considerable
interviewing and screening to determine the motivations and attitudes of the client. I have found that
the people I associate with have subtle, yet very important, effects on my performance. If, for example,
they are able to support me and my methods over the long term, then they tend to help me. If,

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however, they get too concerned with the short-term ups and downs of their account, they can be a
hindrance.

Let your winners run and cut down your losses

I found it particularly interesting that, despite a number of painful trading losses, Marcus’ most
devastating experience was actually a profitable trade in which he got out prematurely. Taking
advantage of potential major winning trades is not only important to the mental health of the trader,
but is also critical to winning. In the interview, Marcus stressed that letting winners ride is every bit as
important as cutting losses short. In his own words, “If you don’t stay with your winners, you are not
going to be able to pay for the losers.”

The most important thing is to have a method for staying with your winners and getting rid of your
losers.

Containing your losses is 90 percent of the battle, regardless of the strategy. In addition, if you put
yourself in a position to buy stocks that have the potential to go up a lot, your odds will be better. [Mark
Mintivini]

To ride winners you need to have strategies for various contingencies

The best way I know to learn discipline and patience is to think through a trade thoroughly before
putting it on. You need to develop a plan of your strategies for various contingencies. That way, you
won’t get swayed by every news item that hits the market and causes prices to move up or down. Also,
it helps greatly to have a long-term objective that you have derived by really doing your homework. You
combine that long-term objective with a protective stop that you move as the position goes your way.
Alternatively, you could use a trend-following system to signal when you should get out of the trade. By
having thought out your objective and having a strategy for getting out in case the market trend
changes, you greatly increase the potential for staying in your winning positions.

Cut your losses

The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can
follow these three rules, you may have a chance. [Ed Seykota]

Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a
trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily
walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re
extremely confident, taking a loss doesn’t bother you.

I know this will sound like a cliché, but the single most important reason that people lose money in the
financial markets is that they don’t cut their losses short. It is a curiosity of human nature that no matter
how many books talk about this rule, and no matter how many experts offer this advice, people still
keep making the same mistake.

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50% success rate is enough to make good returns, if you cut down your losses early
he is wrong on at least 50 percent of his trades. However, he never lets a mistake get remotely close to
the point where it would provide a good story. Large trading losses are simply incompatible with his
methodology.

Control risk
First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you.
Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is
that, while you can’t quantify reward, you can quantify risk.

I have two basic rules about winning in trading as well as in life: (1) If you don’t bet, you can’t win. (2) If
you lose all your chips, you can’t bet. [Lary Hite]

Know when to follow rules and when to break rules. If not able to follow
rules, take vacation from market for sometime
I believe both. Mostly I follow the rules. As I keep studying the markets, I sometimes find a new rule
which breaks and then replaces a previous rule. Sometimes I get to a personal breakpoint. When that
happens, I just get out of the markets altogether and take a vacation until I feel that I am ready to follow
the rules again. Perhaps some day, I will have a more explicit rule for breaking rules. I don’t think traders
can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is
reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be
part of the process of evolution and growth of a trader. [Ed Seykota]

Virtually all traders experience periods when they are out of sync with the markets. When you are in a
losing streak, you can’t turn the situation around by trying harder. When trading is going badly, often
the best solution is to liquidate all your positions (or protect them with stops that do not require
decisions) and stop trading. Take a break for a few days or longer. Liquidating positions will allow you to
regain objectivity. You can’t be objective if you are in the market. Taking a physical break will interrupt
the negative downward spiral that can develop in a losing streak, as each loss further diminishes
confidence. When you restart trading, trade smaller until you have regained confidence.

When I get into a losing streak, I like to read a nonfiction book to learn something new. That action
accomplishes two things. First, it takes my mind off of trading; second, by enhancing my knowledge, I
help improve my self-esteem. The key is to do something positive.

Gold
The thing about gold is that if you told me gold has a price of $ 100, that’s fine. If you told me it’s $
10,000, that’s fine as well. It can be any price. Gold is worth exactly what people think it’s worth. Gold is
the only commodity where the amount of supply is literally about 100 times as much as the amount
physically used in any year. That is not true of any other commodity, such as wheat or copper, where
total supply and annual consumption are much closer in balance, and true shortages can develop. There

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is never any shortage of gold. So gold’s value is entirely dependent on psychology or those fundamentals
that drive psychology. Many years ago, when I was a commodity research director, I would totally ignore
gold production and consumption in analyzing the market. I would base any price expectation entirely
on such factors as inflation and the value of the dollar because those are the factors that drive
psychology. I always found it ridiculous when other analysts would write lengthy reports on gold
analyzing such things as annual production prospects and jewelry usage. Annual production and
consumption of gold are always a tiny fraction of supply, maybe around 1 percent, so who cares how
much they change. It has nothing to with the price. [Colm O’Shea, Hedge Fund Market Wizards: How
Winning Traders Win]

Schwager, Jack D.. (p. 3). Wiley. Kindle Edition.

Schwager, Jack D.. Hedge Fund Market Wizards: How Winning Traders Win (pp. 35-36). Wiley. Kindle
Edition.

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