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The Investor, Trader and Gambler - How to make Profits

InvestorEducation / Investing Feb 19, 2007 - 12:10 AM GMT

By: Hans_Wagner


What do an investor, a trader and a gambler have in common? As professionals, they have succeeded by following a strict set of rules. Actually, we all live our lives by following some set of rules. 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, such when you fall down you can skin up your knees. Others we learned from our parents, like look both ways before crossing the street. Learning from our parents is easier, at least sometimes. However, we seem to do a better job remembering the ones we learned the hard way.

As investors we have a choice. We can learn the hard way and hopefully survive our lessons and not run out of money. Or we can learn from three very successful professionals.

The World's Greatest Investor

So what are the best rules from some of the most successful investors of all time? Let's start with Warren Buffett. Warren Buffett, “The Oracle of Omaha,” is considered by many as the greatest investor ever. He is also known for giving much of his $40 billion fortune to The Gates Foundation. Mr. Buffett is primarily a value investor that closely follows Benjamin Graham's investing philosophy after having worked at Mr. Graham's firm, Graham-Newman.

Mr. Buffett has several excellent investing rules. Many of them come from the Berkshire Hathaway annual reports, an excellent source for investing education. Here are three of Mr. 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, then it takes a much greater return to just break even, let alone make any money. Minimize your losses through good capital management and trailing stops. You use up too much time, money and mental capital sitting on a losing trade. 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 it self before making a commitment. Those that chase the current hot stock are destined to loose more than they gain.

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 the crowd.” Independent thinking and confidence in what you believe is the right investing strategy 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.

A Great Trader's Rules

I n the October 1989 issue of Futures, Dennis Gartman published 15 simple rules for trading. He is a successful trader having 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. Here are three of Mr. Gartman's best rules:

1. There is never one cockroach.

When you encounter a problem due to management malfeasance then expect many more will follow. Bad news begets bad news. Should you encounter any hint of this kind of problem, then avoid the stock and sell any 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 they say “The trend is your friend.”

3. Do not make a trade until the fundamentals and technical agree.

Fundamentals help to find quality companies that are selling a discounted price. Technical analysis helps to determine when to buy, the exit target and the trailing stop. One way to use fundamental analysis is to focus on Return on Capital (quality company) and Earnings Yield (selling a relatively low price) as defined by The Little Book That Beats the Market . The chart of a stock coupled with selling volume help to identify the best entry points, where to exit and how to protect your money from undue loss. This approach takes advantage of the strengths of the two basic ways to analyze stocks for investing and trading.

The Gambler

The wisdom of late two-time champion world poker player Puggy Pearson offers our last set of rules to follow. Puggy stated "Ain't only three things to gamblin', knowing the 60/40 end of a proposition, money management, and knowing yourself." Well those rules apply to every investor.

1. Knowing the 60/40 end of a proposition. 

The better the hand the greater the chance of winning. 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 then statistics say you will win. As an investor we 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. They can be identified through individual stock selection, top down or bottom up approach, technical, fundamental, value based, growth oriented, sector leaning or whatever approach one finds works best for them. The point is one must be constantly working to find and recognize the opportunity when it presents itself. Once you have been dealt the right cards it is time to take the next step.

2. Money management.

Managing one's money is an ongoing process. The first tenet is to not lose any money on each opportunity. Fortunately investors do not have to ante up to play as in poker, though we do have to work hard to find good opportunities. Once we have a good hand it is time to decide how much money to commit to the opportunity. While much can and has been 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 occasionally big win coming along every once in a while. This requires the investor to evaluate the opportunity compared to others that have shown themselves in the past. Experience is an excellent teacher. Finally, as investor's we can use our stop loss strategy to mitigate a larger loss should our assessment of the opportunity prove wrong. To bad gamblers do not have such a tool.

3. Knowing yourself.

The last gamblin' rule, knowing yourself, is doing everything you can to stick to your discipline. We all want to get on with it to make the next trade. But if that opportunity does not fit within our measure of a good 60/40 opportunity, then we must force ourselves to pass. While you will miss some good gains, it will keep you from losing a lot. Following your discipline is essential for success as a gambler as well as an investor. We must be extraordinarily patient to search for the right opportunities and then aggressively go after the best ones. If each of us were to stick to our discipline we would be better poker players and investors.

Each of these professionals excels at following their rules. As a result they have succeeded where many others have failed. Every investor should have and use their set of rules. Fortunately we can learn from the best. 

By Hans Wagner

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at

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