I am being asked all the time, what do I think about this and that stock. I don’t have an opinion about every stock. I might have the occasional insight into the merits of one business or another, but I never let my subjective perspective dictate my buy and sell decisions. Not in public markets, where liquidity and momentum have created their own world; where perception is the reality.
When conviction and biases trump discipline, nothing good happens in the financial world and if does, it is due to non-repeatable luck and not a skill. (apparently if you are a value investor, this doesn’t apply to you – you have a different market philosophy and that is ok; there is room for everyone)
If you honestly believe that you don’t know what will happen next when you open a new position, then:
1. You will find a method that has positive expectancy in the current market environment. After years of adding and cutting, complicating and refining, the basics of my approach could be summed up to: buying breakouts near 52-week highs from proper technical bases in healthy markets. It is not the perfect approach for every market environment, but it is consistently profitable.
2. You would never venture to use a method you don’t understand and just buy random stocks based on tips or rumors. There will be no fear of missing out, because you realize that you don’t have an edge outside of your market approach.
3. You will not hesitate to take your signals – because you don’t know which ones will be successful
4. You will always have a predefined stop – because you could be and occasionally, you will be wrong. It is Ok to be wrong. It is not Ok to stay wrong.
5. You will risk equal percentage of your capital on each signal (idea), because there is no way to know in advance which ones will be the big winners. They are obvious only in hindsight.
6. You will have an exit plan – rules to protect profits and keep you in a position until a trend persists
Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known for each of the major market approaches – momentum, value and statistical arbitrage. Most people simply lack the discipline to follow the rules. There is a huge empathy gap between knowing something and actually applying it. It is just like the difference between knowing how to get in shape and doing it. It takes strong will and a desire to make it; it takes discipline.
Other than using a market method with proven positive expectancy, the only edge I have is discipline and it is more than enough. Diligently doing my homework and following my rules.