All investments must be characterized by prudence, research, discipline, and diversification, and be judged on the basis of safety, liquidity, and yield-- in that order. If all investments involved the same degree of risk and gave you about the same opportunity for reward, it would make little difference how and where you invested your money. But, of course, different investments have sharply different risk/reward relationships. In general, no-risk or low risk investments offer a small but guaranteed return, such as money deposited in an insured savings account. Moving up the risk ladder, various types of bonds pay an interest rate that reflects in large measure the level of risk they are thought to involve. Similarly, the degree of risk is one factor affecting the beta or volatility of common-stock values. You've a limitless range of alternatives. It's axiomatic that what may be the best investment for you may not be the best--or even suitable-- for someone else. I have preferred equities rather than bonds as there is no ceiling to how much that equity can grow. Debt however is always constrained by the prevailing cost of money.
In creating wealth, we should consider that the counterpoint to diversification is concentration. Once you've established your foundational investments, a valid tactic in achieving rapid wealth is to now focus your investments-- to put all your eggs in one basket but watch the basket like a cat would watch a robin. The returns are far greater (along with the risk), if you buy 10,000 shares of a single ten-dollar stock then if you bought ten different stocks for a total of $100,000. This, of course, presupposes that you have strong technical and fundamental grounds for buying that single stock and that you're prepared to take decisive action, no matter what the outcome. Thus, you would watch a stock fluctuate perhaps a half point and buy at $34.50 and sell at $40 and rebuy at $34.50 over and over again. During my day-trading years from 1985 to 1990, I took this approach and generally did well. But it is not for the faint-hearted, and just as I made tens of thousands of dollars in a day, so too on occasion I lost tens of thousands of dollars in a day. I tripled my initial capital of $30,000 that I got tax-free by refinancing my income property (as debt isn’t taxed), and then raising the rents to cover the higher debt, which also raised the value of my properties. Here are my trading rules that evolved from my experiences during that time:
1. My "no Asian land wars" rule: Never buy or hold into a down stock, market, or group trend.
2. Buy strength, volume, and leadership. Sell weakness or uncertainty,
3. Cut losses. Cut if the price falls below the moving average or a prior price support.
4. Don't panic sell. Allow for down-drifts.
5. Don't be afraid to buy the same stock at a higher price.
6. The Golden Swan chart formation is often a money maker-- a plateau, a rise in price on rising volume, a dip on some profit selling, and a break out (the "goose head") into virgin territory (no overhead resistance) on strong volume in a bull market.
7. Random walks, efficient markets, and contraryism are persistent voices of disinformation.
8. Buy with the trend. Don't try to predict trend changes. Bad begets bad, good begets good, excess begets reaction.
9. For security, diversify. For success, concentrate. Make meaningful investments. Concentration can only work if you are out of the market most of the time.
10. Sit tight. Let profits run.
11. Think and take responsibility for yourself. Absorb information but don't take advice—especially from friends or family.
12. Trade in high volatility, high liquidity markets.
13. In selling, liquidate all. Ignore volume when price erodes.
14. The voice of the market is the voice of God, all knowing, all powerful. It's ways are not our ways.
15. Attitudes have consequences. Master your thoughts and you will master the markets. Instead of hoping, you must fear. Instead of fearing, you must hope.
16. Stocks mirror nature. Nature is a curved line. Nature trends. Study nature, such as the behavior of the wildebeest on the African savanna, ocean tides, weather systems, and soccer riots.
17. Take an eclectic approach, embracing both technical and fundamental. Prior quarter and comparative annual quarter earnings are the shadow of the future.
18. Be patience. Don't over commit or overtrade.
19. Fade the state. Fade conventional wisdom.
20. If you are in hole, stop digging. Sell what shows a loss, keep what shows a profit.
