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Financial Wisdom From the Three Wise Men
By Hans Wagner
26-12-2006
Some of us are more disciplined than others. Shortly after we are
born, we start to learn the rules of life. Some of these rules we had
to learn the hard way, through trial and error. Others we learned
from our parents. Learning from others in this way is often easier,
however, we seem to do a better job of remembering the lessons
we learn the hard way. As investors, we have a choice. We can
learn the hard way and hope that we'll survive our lessons and not
run out of money, or we can learn from the following three wise
men.
Three wise men - Warren Buffett, Dennis Gartmen and Puggy
Pearson - found very different methods to achieve financial
success, but they all share a common trait - their success came by
following a strict set of rules. In this article we'll show you nine
rules that three wise investors live by.
be the greatest investor ever. He is also known for giving much of
his $40 billion fortune to the Bill & Melinda Gates Foundation,
which is dedicated to bringing innovations in health and learning.
Buffett is primarily a value investor that closely follows Benjamin
Graham's investing philosophy.
Buffett has several excellent investing rules. You can read about
many of them in his company's (Berkshire Hathaway) annual
reports, which are an excellent source of investing knowledge.
Here are three of Buffett's rules:
1.Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
If you lose money on an investment, it will take a much greater
return to just break even, let alone make additional money.
Minimize your losses by finding quality companies that are
temporarily selling at discounted prices. Then follow good capital
management principles and maintain your trailing stops. Also,
sitting on a losing trade uses up time, money and mental capital. If
you find yourself in this situation, it is time to move on.
2. The stock market is designed to transfer money from the active to
the patient.
The best returns come from those who wait for the best
opportunity to show itself before making a commitment. Those
who chase the current hot stock usually end up losing more than
they gain. Remain active in your analysis, look for quality
companies at discounted prices and be patient waiting for them to
reach their discounted price before buying.
3. The most important quality for an investor is temperament, not
intellect.
You need a temperament that neither derives great pleasure from
being with the crowd or against it. Independent thinking and
having confidence in what you believe is much more important
than being the smartest person in the market. Most of the time, the
best opportunities are found when everyone else has given up on
the stock market. Over-confidence and emotion are the enemies of
a high quality portfolio.
published 15 simple rules for trading. He is a successful trader
who has experienced the gamut of trading from winning big to
almost losing everything. Currently, he publishes The Gartman
Letter, a daily publication for experienced investors and
institutions.
1. There is never one cockroach.
When you encounter a problem due to management malfeasance,
expect many more to follow. Bad news often begets bad news.
Should you encounter any hint of this kind of problem, avoid the
stock and sell any shares you currently own.
2. In a bull market only be long. In a bear market only be short.
Approximately 60% of a stock's move is based on the overall move
of the market, so go with the trend when investing or trading. As
the saying goes, "The trend is your friend."
3. Don't make a trade until the fundamentals and technicals agree.
Fundamentals help to find quality companies that are selling at
discounted prices. Technical analysis helps to determine when to
buy, the exit target and where to set the trailing stop. A variation of
this is to think like a fundamentalist and trade like a technician.
When you understand the fundamental reasons that are driving
the stock and the technicals confirm the fundamentals, then you
can make the trade.
Puggy Pearson offers our last set of rules to follow. "Only three
things to gamblin'," Puggy once said, "knowing the 60/40 end of a
proposition, money management and knowing yourself." Well,
those rules apply to investors too.
Here are Pearson's all-encompassing rules:
1. Knowing the 60/40 end of a proposition
Understanding the odds of drawing a winning hand is essential to
poker. The 60/40 bets are those that offer the best chance of
winning given all the options available. If you only play hands
that have these odds or better, the statistics are on your side.
As investors, we should strive to put the odds in our favor with
every trade. Finding the best 60/40 opportunities takes time and
research, as there are many ways to find good candidates. These
can be identified through individual stock selection, top-down or
bottom-up approaches, technical or fundamental analysis, value-
based pricing, growth-oriented, sector-leaning or whatever
approach works best for a particular investor. The point is that
investors must be constantly working toward finding and
recognizing opportunities as they present themselves. Once you
have been dealt the right cards, it's time to take the next step.
2. Money Management
Managing money is an ongoing process. The first tenet is to
minimize losses on each opportunity. Fortunately, investors do
not have to ante up to play, as in poker, though investors must
work hard to find good opportunities. Once you have a good
hand, it is time to decide how much money to commit to the
opportunity.
While much is written on this topic, let's keep it simple. Basically
it is a risk-reward decision. The more money you commit, the
greater the possible reward and the higher the risk of losing some
of that money. However, if you do not play, then you cannot win.
Basically, when the best opportunities present themselves, it is
usually wise to make a significant commitment. For good (but not
great) opportunities, committing smaller amounts makes sense as
the potential reward is less. As in poker, most of an investor's
money is made in small increments with the occasional big win
coming along every once in a while. This requires that an investor
evaluate each opportunity compared to others that have shown
themselves in the past. Experience is an excellent teacher. Finally,
investors can use a stop-loss strategy to mitigate greater losses
should their assessment of the opportunity prove to be wrong. Too
bad gamblers don't have such a tool!
3. Knowing Yourself
The last gambling rule, knowing yourself, means doing everything
you can to stick to your discipline. Everyone wants to get on with
it to make the next trade, but if that opportunity does not fit within
your measure of a good 60/40 opportunity, then you must force
yourself to pass. While you will miss some good gains, this will
also save you from some hefty losses. Following your discipline is
essential for success as a gambler as well as an investor. You must
be extraordinarily patient in your search for the right opportunities
and then aggressively go after the best ones.
Conclusion
Each of these three wise men excels by following his rules. In this
way, they have succeeded where many others have failed. While
we might not be as wise as these three men, we can learn from the
best.
By Hans Wagner
26-12-2006
Some of us are more disciplined than others. Shortly after we are
born, we start to learn the rules of life. Some of these rules we had
to learn the hard way, through trial and error. Others we learned
from our parents. Learning from others in this way is often easier,
however, we seem to do a better job of remembering the lessons
we learn the hard way. As investors, we have a choice. We can
learn the hard way and hope that we'll survive our lessons and not
run out of money, or we can learn from the following three wise
men.
Three wise men - Warren Buffett, Dennis Gartmen and Puggy
Pearson - found very different methods to achieve financial
success, but they all share a common trait - their success came by
following a strict set of rules. In this article we'll show you nine
rules that three wise investors live by.
- Warren Buffet
be the greatest investor ever. He is also known for giving much of
his $40 billion fortune to the Bill & Melinda Gates Foundation,
which is dedicated to bringing innovations in health and learning.
Buffett is primarily a value investor that closely follows Benjamin
Graham's investing philosophy.
Buffett has several excellent investing rules. You can read about
many of them in his company's (Berkshire Hathaway) annual
reports, which are an excellent source of investing knowledge.
Here are three of Buffett's rules:
1.Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
If you lose money on an investment, it will take a much greater
return to just break even, let alone make additional money.
Minimize your losses by finding quality companies that are
temporarily selling at discounted prices. Then follow good capital
management principles and maintain your trailing stops. Also,
sitting on a losing trade uses up time, money and mental capital. If
you find yourself in this situation, it is time to move on.
2. The stock market is designed to transfer money from the active to
the patient.
The best returns come from those who wait for the best
opportunity to show itself before making a commitment. Those
who chase the current hot stock usually end up losing more than
they gain. Remain active in your analysis, look for quality
companies at discounted prices and be patient waiting for them to
reach their discounted price before buying.
3. The most important quality for an investor is temperament, not
intellect.
You need a temperament that neither derives great pleasure from
being with the crowd or against it. Independent thinking and
having confidence in what you believe is much more important
than being the smartest person in the market. Most of the time, the
best opportunities are found when everyone else has given up on
the stock market. Over-confidence and emotion are the enemies of
a high quality portfolio.
- The Great Trader Gartman
published 15 simple rules for trading. He is a successful trader
who has experienced the gamut of trading from winning big to
almost losing everything. Currently, he publishes The Gartman
Letter, a daily publication for experienced investors and
institutions.
1. There is never one cockroach.
When you encounter a problem due to management malfeasance,
expect many more to follow. Bad news often begets bad news.
Should you encounter any hint of this kind of problem, avoid the
stock and sell any shares you currently own.
2. In a bull market only be long. In a bear market only be short.
Approximately 60% of a stock's move is based on the overall move
of the market, so go with the trend when investing or trading. As
the saying goes, "The trend is your friend."
3. Don't make a trade until the fundamentals and technicals agree.
Fundamentals help to find quality companies that are selling at
discounted prices. Technical analysis helps to determine when to
buy, the exit target and where to set the trailing stop. A variation of
this is to think like a fundamentalist and trade like a technician.
When you understand the fundamental reasons that are driving
the stock and the technicals confirm the fundamentals, then you
can make the trade.
- The Gambler
Puggy Pearson offers our last set of rules to follow. "Only three
things to gamblin'," Puggy once said, "knowing the 60/40 end of a
proposition, money management and knowing yourself." Well,
those rules apply to investors too.
Here are Pearson's all-encompassing rules:
1. Knowing the 60/40 end of a proposition
Understanding the odds of drawing a winning hand is essential to
poker. The 60/40 bets are those that offer the best chance of
winning given all the options available. If you only play hands
that have these odds or better, the statistics are on your side.
As investors, we should strive to put the odds in our favor with
every trade. Finding the best 60/40 opportunities takes time and
research, as there are many ways to find good candidates. These
can be identified through individual stock selection, top-down or
bottom-up approaches, technical or fundamental analysis, value-
based pricing, growth-oriented, sector-leaning or whatever
approach works best for a particular investor. The point is that
investors must be constantly working toward finding and
recognizing opportunities as they present themselves. Once you
have been dealt the right cards, it's time to take the next step.
2. Money Management
Managing money is an ongoing process. The first tenet is to
minimize losses on each opportunity. Fortunately, investors do
not have to ante up to play, as in poker, though investors must
work hard to find good opportunities. Once you have a good
hand, it is time to decide how much money to commit to the
opportunity.
While much is written on this topic, let's keep it simple. Basically
it is a risk-reward decision. The more money you commit, the
greater the possible reward and the higher the risk of losing some
of that money. However, if you do not play, then you cannot win.
Basically, when the best opportunities present themselves, it is
usually wise to make a significant commitment. For good (but not
great) opportunities, committing smaller amounts makes sense as
the potential reward is less. As in poker, most of an investor's
money is made in small increments with the occasional big win
coming along every once in a while. This requires that an investor
evaluate each opportunity compared to others that have shown
themselves in the past. Experience is an excellent teacher. Finally,
investors can use a stop-loss strategy to mitigate greater losses
should their assessment of the opportunity prove to be wrong. Too
bad gamblers don't have such a tool!
3. Knowing Yourself
The last gambling rule, knowing yourself, means doing everything
you can to stick to your discipline. Everyone wants to get on with
it to make the next trade, but if that opportunity does not fit within
your measure of a good 60/40 opportunity, then you must force
yourself to pass. While you will miss some good gains, this will
also save you from some hefty losses. Following your discipline is
essential for success as a gambler as well as an investor. You must
be extraordinarily patient in your search for the right opportunities
and then aggressively go after the best ones.
Conclusion
Each of these three wise men excels by following his rules. In this
way, they have succeeded where many others have failed. While
we might not be as wise as these three men, we can learn from the
best.
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