15

10 Golden Investing Rules

Embed Size (px)

DESCRIPTION

10 Rules of Investing

Citation preview

Page 1: 10 Golden Investing Rules
Page 2: 10 Golden Investing Rules

The battlefield is a scene of constant chaos. The winner will

be the one who controls that chaos, both his own and the

enemies.

NAPOLEON BONAPARTE

Page 3: 10 Golden Investing Rules

1

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Hi! My name is Michael Comeau and I’m the executive editor of T3 Live.

I run T3 Live’s Buzz & Banter real-time market intelligence service and help manage our other premium subscription services.

I studied business, finance, accounting, and economics in college. Translation: I learned boring formulas and theories from overpriced textbooks.

My real financial education started when I was thrown in front of a trading platform and told to make sense of it. In the real world, stocks and bonds and options and commodities do crazy things.

Take Shake Shack (SHAK).

On conventional valuation measures like P/E and EV/EBITDA ratios, it was definitely expensive when it came public in early 2015 at $21 per share -- my finance professors would not have approved!

But what happened next?

Well, it opened for trading at $47... and then it went to $96.75 in less than 4 months.

Wow.

And in late 2014, countless financial

gurus called China a bubble because of its slowing economy and overheated stock markets.

Was China a bubble? Yes. But that bubble got bigger.

The Shanghai Composite went up 50% and the Shenzen rose 100%.

Financial markets are chaos come to life. So if you want to succeed, you’ve got to think outside the box.

I’ve read a lot of “What I’d Tell My 22-Year Old Self” articles lately. 22 was an important age for me. I was in my first senior year of college -- I was on a five-year plan.

And I knew everything about what markets were supposed to do but nothing about how markets actually worked.

In this report, I’m going to tell you exactly what I would have told my 22-year old self about investing.

I’m going to show you why Bruce Lee can teach you as much about investing as Warren Buffett.

I’ll share tricks for sniffing out hucksters. And most importantly, I’ll explain why brainpower is vastly overrated.

Let’s go.

Page 4: 10 Golden Investing Rules

2

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Emotional Intelligence Isthe Only Kind That Matters

Your biggest enemy isn’t high-frequent traders, evil phantom hedge funds, or even the Fed.

It’s you.

Just like my biggest enemy is me.

I can trace all of my worst investment decisions to acting emotionally instead of rationally.

In early November 2014, I sold a long position in Disney (DIS) at $91 because I was worried about its next earnings report.

I originally bought the stock because I was bullish on the company’s 2015 movie release slate including the next Avengers and Star Wars films … which had exactly nothing to do with that particular earnings report.

By acting emotionally, I cost myself a great deal of money -- Disney hit $113 in May 2015!

You don’t need to be a rocket scientist to be a great trader. However, you must develop high emotional intelligence.

Top performers have the ability to identify and manage their emotions.

They don’t let winning trades inflate their egos and they don’t let losing trades depress them.

They look at every day as a fresh start. Yesterday’s baggage always gets tossed aside.

And most importantly, the best of the best don’t fight the market.

They understand that being wrong is part of trading and that perfection is not a requirement for success.

Basketball legend Michael Jordan missed over 9,000 shots in his career and blew the game-winning basket 26 times.

He also led the Chicago Bulls to 6 NBA championships and was voted Most Valuable Player 5 times.

We all fall down from time to time. Our results are based on how well we bounce back from our errors.

1

Page 5: 10 Golden Investing Rules

3

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Be Like Bruce Lee

As active investors, we hear nonstop about what financial icons like Warren Buffett, Carl Icahn, and Jeff Gundlach are doing.

But you know what?

I want to be like Bruce Lee.

I think his philosophy is infinitely more valuable than Wall Street clichés like “buy low, sell high” and “diversify your portfolio.”

He can teach us a lot about investing. Let’s go through some of Bruce Lee’s most famous quotes:

“ Be like water making its way through cracks. Do not be assertive, but adjust to the object, and you shall find a way around or through it. If nothing within you stays rigid, outward things will disclose themselves.

Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup.

You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend. To me, being water means being flexible and going with the flow -- not fighting it.

Do you know what happens to investors that dig in their heels insist the price action is somehow wrong?

They go broke!

Bruce also said:

“ It is not a shame to be knocked down by other people. The important thing is to ask when you’re being knocked down, ‘Why am I being knocked down?’ If a person can reflect in this way, then there is hope for this person..

Glorifying victories and ignoring losses is an easy route to a big ego.

Big egos don’t last.

2

“ “

Page 6: 10 Golden Investing Rules

4

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

So we should pay extra attention to trades that don’t work out we can avoid similar mistakes in the future.

Did I fail to properly gauge a stock’s reaction to a specific event?

Did I make an incorrect forecast?

Or did an unforeseen event occur?

Even if we can’t always perfectly explain our investing mistakes, we must ask ourselves these questions.

Page 7: 10 Golden Investing Rules

5

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

If You’re Going to Lose,Lose Small

Since we’re on the topic of losing, we should go through a rare piece of conventional Wall Street wisdom that is actually true!

There’s a basic problem with big investing losses.

They require even bigger gains to make up for them.

Let’s say you start off with $10,000.

If you lose 50% of that money, you’re down to $5,000.

To get back up to $10,000, you need to make another $5,000. That’s a 100% gain, or double your money.

But aside from the mathematics, there’s a second and bigger factor at play -- big losses will frustrate you to no end.

It’s much easier to move on from a 10% loss than a 50% loss.

Remember what I said about emotional intelligence?

Big losses put you at risk of mismanaging your emotions. You could swing for the fences a little too hard on the next trade,

or you could become gun shy precisely when it’s time to embrace risk.

Therefore, you must have a plan to prevent small losers from turning into major losers.

The simplest solution is to institute stop losses.

For example, you could sell a stock when it loses 7% or 10%.

Or, you could do what I do, and take a mental gut check.

If a trade is going against me, I sit back, take a deep breath, and think about whether I’d put it on again right then and there.

In the past, I’ve had a tendency to get stopped out of trades on the lows, so I find it best to not rush to the exits too quickly.

3

Page 8: 10 Golden Investing Rules

6

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Your Memory Stinks,So Start a Diary

Albert Einstein said

“ If you can’t explain it to a six year old, you don’t understand it yourself.

If you have a compelling trading or investment thesis, you should be able to get your point across in a few sentences that the average investor can understand.

You can spend days or even months cranking through complex spreadsheets and industry data, but if you can’t boil your research down to a few paragraphs, you don’t have an idea.

So test yourself.

Take your biggest stock position.

Now imagine you have a school assignment to write 400 words explaining why that stock is worth owning.

If you can’t do that… why do you own it?

You don’t have to be Ernest Hemingway, but writing about your ideas will force you to organize your thoughts and present them in an organized way.

And if you do this on a consistent basis, you’ll have a trading diary to which you can refer in the future.

Having a diary is important because it will keep you accountable. Investors tend to have very selective and very inaccurate memories.

If you think a stock looks okay at $50 and it goes to $100, odds are you’ll remember yourself thinking “I was pounding the table on that as a strong buy!”

Writing is the best way to keep those false memories in check.

So do yourself a favor and start a diary in Google Docs today.

Even if you’re just sketching down bullet points, you’ll be surprised at how much you learn about your process once you start recording it.

4

“”

Page 9: 10 Golden Investing Rules

7

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

You Must Knowthe Serenity Prayer

Every investor must learn the serenity prayer.

It doesn’t matter what religion you are. You could even be an atheist.

But say these words out loud right now:

God, grant me the serenity to accept the things I cannot change;Courage to change the things I can;And wisdom to know the difference.

Bad investors are obsessed with things they can’t control.

Let’s say you hate the Fed.

You think they’ve built a bond bubble that will implode and take the world economy down with it.

What should you do with your next hour of free time?

Should you read 5 more anti-Fed articles that reinforce what you already believe?

Maybe.

But you’d probably be better off learning a new options strategy.

Or looking at your last 3 losing trades to see what went wrong.

Or examining your risk management strategy.

There’s nothing wrong with having opinions on the world. We all have them.

But we only have so much time and energy, and we ought to use it in productive ways.

We can’t control the Fed, the economy, or the White House. So we should focus our efforts on improving how we approach the market and manage risk.

That’s what matters -- not our opinions on how the world should be.

5

Page 10: 10 Golden Investing Rules

8

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Beware of Permabears, Permabulls, and Twitter Superstars

Permabulls always say everything is great and that everyone else is bearish.

And permabears always say everything is awful and that everyone else is too bullish.

They’re easy to spot -- they paint melodramatic pictures of fortune or doom based on incredibly simple reasoning, like a single valuation metric or economic statistic.

And with the advent of Twitter, we’ve created a whole new generation of charismatic Internet finance celebrities with varying levels of expertise.

Like the permabulls and permabears, you don’t have to work hard to find the bad apples.

The giveaway is that they tend to drone on endlessly about their huge trading wins and perfect economic forecasts.

I’ve been around Wall Street people for over a decade.

If someone is trying to prove to you that they’re smart, rich, or successful, odds are they’re not.

All these folks have a big thing in common: when you press them for details, they go silent.

On the flip side, I’ve found that genuinely smart and successful people like to share research, spreadsheets, and other information.

They don’t have anything to hide because they’re not insecure about what they do.

6

Page 11: 10 Golden Investing Rules

9

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Take Fear-Mongering Headlines With a Grain of Salt

I have no problem with headlines like “This Chart Proves We’re About to Crash” and “The US Economy Is in a Tailspin.”

But I do have a problem when those headlines aren’t backed up with real meat.

Scary headlines generate clicks and social media shares, so scary headlines are what we get.

Remember, market crashes are extremely rare and over the long-term, the market tends to go up.

Think about all the media-created financial “emergencies” over the past few years that turned out to be mere blips on the radar: ebola, sequestration, the end of QE, Cyprus, Russia, Greece, etc.

So take scary headlines with a grain of salt.

Most supposedly important events rock the boat just a little.

We very rarely actually sink.

And you know what I never see in these articles?

A disclosure showing that the author has a massive short position.

Why do we excuse fear-mongering permabears when they fail to put their money where their mouths are?

If you can accurately predict a market crash, you can retire on a single trade.

Say what you want about permabulls, but they’re usually invested in the market.

So why aren’t these superbears doing it?

7

Page 12: 10 Golden Investing Rules

10

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Understand That Timing Is Everything

Good investing isn’t about putting down the right chips.

It about when you put those chips down.

Let me tell you a story.

I once interviewed for a job at a hedge fund that made a major bet that the housing bubble would implode.

Smart money, right?

Yes, they were smart.

They showed me a 200+ page report full of statistics, specially commissioned studies, and in-depth analysis of regional housing markets.

In fact, they predicted the 2008-2009 housing meltdown to a T.

But they did it too early.

That interview took place in early 2003... right before the Housing Index (HGX) doubled.

They got crushed and went out of business years before their predictions come true.

If you have an investment thesis in your mind, ask yourself, “What makes now the right time to bet on this?”

That’s the toughest question you’ll ever come up against, and that’s how you know it’s the most important.

Here’s a quick rule of thumb to live by: you can’t always fight the broader averages.

If the S&P 500 is skyrocketing, even junky stocks can go up.

Likewise, if the market’s in meltdown mode, even the best of the best can get smashed.

Apple (AAPL) closed out 2007 -- the year it launched the iPhone -- at $198.08. And many smart traders accurately predicted that the iPhone would be a huge seller.

They were right. iPhone sales grew from 1.4 million in 2007 to 11.6 million in 2008.

But in 2008, Apple stock fell 57% to $85.35.

8

Page 13: 10 Golden Investing Rules

11

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

So you could have been correct on the underlying thesis -- huge iPhone growth -- but completely wrong on the stock price.

You can understand the who?, what?, where?, and why? of a story.

But if you can’t answer when?, you have nothing.

Page 14: 10 Golden Investing Rules

12

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Valuation Ratios AreUseless in Isolation

The biggest mistake in fundamental analysis is looking at a stock’s P/E ratio and declaring it cheap or expensive.

But you know what?

Cheap can be bad.

And expensive can be good.

Remember Shake Shack (SHAK)?

On its first day of trading, it was going for 600 times earnings, which was obviously crazy.

Right?

Of course… just not at as crazy as when the stock doubled and it went to 1200 times earnings.

There are countless other examples of expensive stocks that just keep on going up: Netflix (NFLX), Salesforce.com (CRM), Tesla (TSLA), etc.

The list goes on and on.

A high-priced momentum stock can suddenly look cheap if earnings are strong and earnings expectations rise.

A P/E ratio, like every other valuation metric, is 100% meaningless in isolation.

Rather, it is far more important to examine how the “E” part of the equation is changing.

Look at how fundamentals are trending -- not where they are right now.

Any old fool can tell you a stock’s trading at 10 times earnings.

Your mission is to figure out if that number is going to 8 or 12!

9

Page 15: 10 Golden Investing Rules

13

10 GOLDEN INVESTING RULES THAT BUSINESS SCHOOLS WILL NEVER TEACH YOUR KIDS BY MICHAEL COMEAU

Confirmation Bias Can Kill

The Oxford Dictionaries defines confirmation bias as “the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories.”

So if you’re bullish on Gold (GLD), you’ll interpret everything you see as bullish for gold.

In fact, during your so-called research time, you’ll just hunt around for more reasons to be bullish for gold.

I know the power of confirmation bias from a horrible experience with a former tech highflier called Rackable Systems, which changed its name to SGI (SGI) after it acquired Silicon Graphics in 2009.

Back in 2006, Rackable Systems was pulling in boatloads of money selling energy-efficient servers to major data-center operators like Microsoft (MSFT), Amazon, and Yahoo (YHOO).

And then -- let me point out that I had complete knowledge of this -- competitors like Hewlett-Packard (HPQ) decided they wanted to get a whole lot more of those data-center dollars.

I viewed the new competition a complete confirmation that Rackable was on the

right track -- a massive barrel of stupidity that resulted in me watching Rackable crash from $56 to under $10.

It is impossible to stay perfectly objective when performing research.

However, you can stay one step ahead of your own bias by regularly asking the question, “Am I just telling myself what I want to hear?”

Thank you!

I’d like to take a minute to thank you for joining the T3 Live community and reading this report.

If you’ve got any questions, comments, or complaints about it, please contact me directly at [email protected].

10