Classic Strategies - Part 1(1).pdf - Forex Iiteratura - PanKaktus

Investment

Psychology

Explained

Classic Strategies to

Beat the Markets

Martin J. Pring

John Wiley & Sons, Inc.

New York • Chichester • Brisbane • Toronto • Singapore

Contents

Introduction

PART I

KNOWING YOURSELF

1. There Is No Holy Grau

2. How to Be Objective

3. Independent Thinking

4. Pride Goes Before a Loss

5. Patience Is a Profitable Virtuc

6. Staying the Course

PART II

THE WALL STREET HERD

7. A New Look at Contrary Opinion

8. When to Go Contrary

9. How to Profit from Newsbreaks

10. Dealing with Brokers and Money

Managers the Smart Way

107

109

134

154

167

PART III STAYING ONE STEP AHEAD

11. What Makes a Great Trader or Investor? 183

12. Nineteen Trading Rules for Greater Profits 205

13. Making a Plan and Sticking to It

181

224

14. Classic Trading Rules

244

Bibliography

267

Index

271

Introduction

x"or most of us, the task of beat-

ing the market is not difficult, it is the job of beating ourselves

that proves to be overwhelming. In this sense, "beating our-

selves" means mastering our emotions and attempting to think

independently, as well as not being swayed by those around us.

Decisions based on our natural instincts invariably turn out to

be the wrong course of action. All of us are comfortable buying

stocks when prices are high and rising and selling when they are

declining, but we need to develop an attitude that encourages us

to do the opposite.

Success based on an emotional response to market condi-

tions is the result of chance, and chance does not help us attain

consistent results. Objectivity is not easy to achieve because all

humans are subject to the vagaries of fear, greed, pride of opin-

ion, and all the other excitable states that prevent rational judg-

ment. We can read books on various approaches to the market

until our eyes are red and we can attend seminars given by ex-

perts, gurus, or anyone else who might promise us instant grati-

fication, but all the market knowledge in the world will be

useless without the ability to put this knowledge into action by

mastering our emotions. We spend too much time trying to beat

the market and too little time trying to overcome our frailties.

One reason you're reading this book is that you recognize

this imbalance, but even a complete mastery of the material in

these pages will not guarantee success. For that, you will need ex-

perience in the marketplace, especially the experience of losing.

ability

imbalance

INTRODUCTION

Introduction

The principal difference between considering an Investment

or trading approach and actually entering the market is the com-

mitment of money. When that occurs, objectivity falls by the

wayside, emotion takes over, and losses mount. Adversity is to be

welcomed because it teaches us much more than success. The

world's best traders and Investors know that to be successful

they must also be humble. Markets have their own ways of seek-

ing out human weaknesses. Such crises typically occur just at the

crucial moment when we are unprepared, and they eventually

cause us financial and emotional pain. If you are not prepared to

admit mistakes and take remedial action quickly, you will cer-

tainly compound your losses. The process does not end even

when you feel you have learned to be objective, patient, humble,

and disciplined, for you can still fall into the trap of compla-

cency. It is therefore vitally important to review both your pro-

gress and your mistakes on a continuous basis because no two

market situations are ever the same.

Some of the brightest minds in the country are devoted to

making profits in the markets, yet many newcomers to the finan-

cial scene naively believe that with minimal knowledge and ex-

perience, they too can make a quick killing. Markets are a

zero-sum game: For every item bought, one is sold. If newcomers

äs a group expect to profit, it follows that they must battle suc-

cessfully against these same people with decades of experience.

We would not expect to be appointed äs a university professor

after one year of undergraduate work, to be a star football player

straight out of high school, or to run a major Corporation after six

months of employment. Therefore, is it reasonable to expect suc-

cess in the investment game without thorough study and train-

ing? The reason many of us are unrealistic is that we have been

brainwashed into thinking that trading and investing are easy

and do not require much thought or attention. We hear through

the media that others have made quick and easy gains and con-

clude incorrectly that we can participate with little preparation

and forethought. Nothing could be further from the truth.

Many legendary investment role models have likened trad-

ing and investing in the markets to other forms of business

endeavor. As such, it should be treated äs an enterprise that is

slowly and steadily built up through hard work and careful

planning and not äs a rapid road to easy riches.

People make investment decisions involving thousands of

dollars on a whim or on a simple comment from a friend, associ-

ate, or broker. Yet, when choosing an item for the house, where

far less money is at stake, the same people may reach a decision

only after great deliberation and consideration. This fact, äs

much äs any, suggests that market prices are determined more by

emotion than reasoned judgment. You can help an emotionally

disturbed person only if you yourself are relatively stable, and

dealing with an emotionally driven market is no different. If you

react to news in the same way äs everyone eise, you are doomed

to fall into the same traps, but if you can rise above the crowd,

suppressing your own emotional instincts by following a care-

fully laid out investment plan, you are much more likely to suc-

ceed. In that respect, this book can point you in the right

direction. Your own performance, however, will depend on the

degree of commitment you bring to applying the principles you

find here.

At this point, clarif ication of some important matters seems

appropriate. Throughout the book, I have referred to traders and

Investors with the male pronoun. This is not in any way intended

to disparage the valuable and expanding contribution of women

to the investment community but merely to avoid "he or she"

constructions and other clumsy references.

In the following chapters, the terms "market" or "markets"

refer to any market in which the price is determined by freely

motivated buyers and sellers. Most of the time, my comments

refer to individual Stocks and the stock market itself. However,

the principles apply equally, regardless of whether the product or

specific market is bonds, commodities, or Stocks.

All markets essentially reflect the attitude and expectations

of market participants in response to the emerging financial and

economic environment. People tend to be universally greedy

when they think the price will rise, whether they are buying

gold, cotton, deutsche marks, Stocks, or bonds. Conversely, their

we also know that this is far easier said than done. We will ex-

amine why this is so, and we will learn when contrary opinion

can be profitable and how to recognize when to "go contrary."

Part III examines the attributes of successful traders and in-

vestors, the super money-makers—what sets them apart from the

rest of us and what rules they follow. This Part also incorporates

many of the points made earlier to help you set up a plan and

follow it successfully. To solidify and emphasize the key rules

and principles followed by leading speculators and traders in the

past hundred years or so, I have compiled those guidelines fol-

lowed by eminent individuals. While each set of rules is unique,

you will see that a common thread r uns through all of them.

This theme may be summarized äs follows: Adopt a methodol-

ogy, master your emotions, think independently, establish and

follow a plan, and continually review your progress.

This recurring pattern did not occur by chance but emerged

because these individuals discovered that it works. I hope that it

can work for you äs well. All that is needed is your commitment

to carry it out.

PartI

KNOWING

YOURSELF

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