Learn to Short/Hedge Stocks: Short is not a four-letter word. Successful traders learn to play both sides of the fence. That's less controversial today than it was as the market was first falling apart, but it is no less true.
When a particular strategy isn't working, the market is telling you something. Thoughtful traders must consider whether there are bigger issues than their own trading mechanics when they enter a losing streak.
In Law School, students learn they have to be ready to argue either side of a case. You never truly knew a case until you could argue both for and against it. Only when you were able to see its warts could you truly appreciate the beauty.
The trading corollary is that you should never own a stock unless you know what makes it an attractive short. Each buy and sell decision should be an argument pro and con.The market is cyclical; count on a bear market every four years or so. Unless you plan on sitting out for 18 to 24 months once or twice each decade -- as much as four years out of 10 -- you better learn to either short stocks or hedge long positions.
Understand Sector Strength and Market Trend: This rule generates the most "pushback" of any on the list, because it's so counter-intuitive: Stock selection matters less than you think.
Studies have convincingly demonstrated that about 30% of a stock's progress is determined by the company itself; a stock's sector is equal to at least another 30% (if not more). The overall direction of the market is an even bigger factor, counting for some 40%.
If you own the best company in the wrong sector, or buy the greatest stock when the broader market is going the other way -- both positions are likely to be losers. But if you see a strong sector, the market trend will help out even the weakest stock in the bunch.
|1.||Expect to Be Wrong||2.||Your Fault, Reader|
|3.||The Wrong Crowd||4.||Bull or Bear? Neither|
|5.||Know Thyself||6.||Prepare for Battle|
|7.||Bite Your Tongue||8.||Don't Speak, Part 2|
|9.||The Zen of Trading||10.||The Folly of Forecasting|
|11.||Lose the News||12.||Tracking Elephants, Pt 1|
|13.||Tracking Elephants, Pt 2||14.||Nothing Doing|
|15.||Surviving Silly Season|
|Check back for more of Barry Ritholtz's
Apprenticed Investor series