ak3583's Blog : Dancing With Mr.--or Ms.--Market

Howdy, AK!

. . . 24 Essential Lessons for Investment Success . . .

Although I am familiar with William O'Neil's How to Make Money in Stocks, I am unfamiliar with his 24 Essential Lessons for Investment Success, so thanks for mentioning it!

Good luck!

MackTheKnife

AK

William O'neil's number one rule is to 'cut you losses short'.

My comment on 'determiniation and persistence' is to make sure you balance it out and don't be stubborn about it if you are wrong. Jesse Livermore once said 'Personal opinions are frequently wrong but the market never is'.

Hi Mack,

I just checked Bill O'Neil's book out of the library a couple of days ago, so haven't finished it yet. It seems to be an easy and informative read for the beginning to intermediate investor. He does devote several lessons on how to use his newspaper most effectively and he makes continual reference to it, but quite a few of the lessons have been helpful..A.K

Hi Mo,

Thanks for the advice. Cutting losses seems to be the number one rule on just about every great investor's list and it does seem to be one of the most difficult thing for me to become persistent at. I am determined to work on that though. Supposedly if someone cuts all their losses short and then sells a few when they're up 25% to 30%, they can be right once and wrong twice and still not get into trouble, according to Bill O'Neil.

AK,

The back-tests below could be used to display and explain many important features of successful trading. But the one in particular I want you to pay attention to is the one on bottom where the importance of limiting losses is clearly illustrated. But first a little background.

The tickers chosen were an arbitrary sequence taken from the Russell 1000. This particular combination of backtests would require 100,000 of capital and it invested $10,000 each time an entry was made. The lower test is for positioning short. One could have positioned short in each of the lower test's trade with no additional capital as the entry of the bear strategy was identical to the exit strategy of the bull strategy. (obviously there wasn't much juice to squeeze though it was profitable). The test was run from March 5th through last Friday. I wanted the test to the run of the bull market so that the bear strategy could demonstrate the need and importance of limiting losses. If you look at the right side you will notice that every ticker was up (bull market) and that the average ticker gained 75%. And so going short carried significant risk if one held short without a good exit strategy. It is important to note the exit strategy needs to take profits as well as losses. But by limiting the loss of gains and limiting losses this strategy managed a gain of 7% before commissions BEING SHORT TICKERS WHICH GAINED AN AVERAGE OF 75% over the test period. Exit is every bit as important as entry and losses are not a significant factor to overcome provided they aren't allowed to run.

Never give in--never, never, never, never, in nothing great or small, large or petty, never give in except to convictions of honour and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.
Sir Winston Churchill, Speech, 1941, Harrow School
British politician (1874 - 1965)

Mage,

Churchill is spot on.

I would say the proper management of loss limiting follows under the "conviction of good sense". Say for example, if one were sending his calvary into gatlin gun reinforcements and his men were getting mowed down with little harm to the enemy. It would soon be evident that good sense would dictate withdrawal from engagement, regrouping, and ultimately a change in strategy which might give advantage.

My contribution ....for those who sssthink the U.S. dollah is going to sink into the abyss of werthlessness (99.99% o'the sheeple) and esssspecially for the .01% who don't...from the Crosby Stills n Nash tune Long Time Comin >>> And you know...the darkest hour...is always...just before the dawn. *-) 3J

Hi TB,

Thanks for the chart. Now that you've been using that system that you have for awhile, are you happy with the automated trade feature or have you experienced drawbacks with it?


AK

Hi Mage,

Thanks for the quote. I like this Churchill quote. All the great things are simple, and many can be expressed in a single word: freedom, justice, honor, duty, mercy, hope..(Hope, maybe not in the stock market!).....AK

Hi 3J,

Nice one! Thanks...AK

AK,

I love the system. It's awesome.