Skip to main content

12 principles of speculation strategies in stocks

Enumerated below are twelve major principles and sixteen minor ones with brief comments on each of them:

First Major Axiom: On Risk
“Worry is not a sickness but sign of health. If you are not worried, you are not risking enough.”

Adventure is what makes life worth living. Every occupation has its aches and pains. The rich have to worry about their wealth. But, if there is a choice between remaining poor and worry-free, the selection is obvious. It is better to be wealthy and worried than to be worry-free and poor.

Minor Axiom I: “Always play for Meaningful Stakes.”
If you invest Rs. 1000 and your investment doubles, you have only Rs. 2000 and are still poor! So if you want to be rich, you must increase your stakes.

Minor Axiom II: “Resist the allure of diversification”.
Firstly
, diversification negates the earlier principle of playing for meaningful stakes.
Secondly, it may keep you where you began so that your gains on few will cancel out the losses on the other few.
Thirdly, it entails keeping track of many more items leading to confusion and occasional panic.

Second Major Axiom: On Greed
“Always take your profit too soon.”

Lay investors having made the investment tend to stay too long on it out of greed for higher profits. But, one must conquer this weakness and book profits soon. If one is less greedy for more profits one will take in more. Don't stretch your luck. In effect, it suggests, SELL sooner than later.

Minor Axiom III: "Decide in advance what gain you want from the venture, and when you get it, get out. Decide where the finish line is before you start the race".
This is self explanatory and hence needs no comment.

Third Major Axiom: On Hope
“When the ship starts to sink, don't pray, jump”
This axiom is about what to do when things go wrong. Learn how to accept a loss. One should accept small losses to protect oneself from big ones. When the market starts falling, sell, take your money and run!

Minor Axiom IV: "Accept small losses cheerfully as a fact of life."
Expect to experience several smaller losses while awaiting a large gain.

Fourth Major Axiom: On Forecasts
"Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly."

The story of a monkey throwing darts on the stock exchange page of a newspaper, to select the companies to buy, and coming out a winner is too well known to be recited. Recent news from London, further proves the truth, when an untrained chemist's stock selections, in a widely publicized contest open to all and sundry, registered higher appreciation over several full time highly qualified fund managers' well researched selections. Human events cannot be predicted by any method by anyone and, hence, don't trust anybody's predictions.

Fifth Major Axiom: On Patterns
"Chaos is not dangerous until it begins to look orderly."
The truth is that the world of money is a world of patternless disorder and utter chaos. This axiom is a commentary on Technical Analysis - a branch of investment strategies based on charts and patterns. The fact is, no formula that ignores own intuition's dominant role can ever be trusted.

Minor Axiom V: "Beware the Historian's Trap".
This is based on the age old but entirely unwarranted belief that history repeats itself.

Minor Axiom VI: "Beware the Chartist's Illusion".
Life is never a straight line. Let us not be hypnotised by a line on a chart.

Minor Axiom VII: "Beware the Co-relation and Causality Delusions."
Don't be taken in by coincidences in the market.

Minor Axiom VIII: "Beware the Gambler's Fallacy."
There is a gambling theory which suggests that one should put small stakes initially and test their luck, and if these turn out well one should go for big stakes on the dice table. But this is not correct. It only shows that winning streaks happen. But nothing is orderly about it. You can't know how long it will last or when it will strike.

Sixth Major Axiom: On Mobility
"A putting down roots. They impede motion".

You may feel socially comforting to have roots. But in financial life, roots can cost a lot of money. Have a flexible approach while investing. This axiom implies a state of mind.

Minor Axiom IX: "Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia."
Do not develop emotional attachment to your investment. You should feel free to sell when desired.

Minor Axiom X: "Never hesitate to abandon a venture if something more attractive comes into view."
Never get attached to things, but only to people. Otherwise it hits your mobility. Never get rooted in an investment. You should remain footloose, ready to jump away from trouble or into a profitable opportunity as and when circumstances demand.

Seventh Major Axiom: On Intuition
'A hunch can be trusted if it can be explained.'
A good hunch is something that you know but you don't know how to recognise it. When a hunch hits you, try to locate some data in your mind for any familiarity. Then only should you act on it.

Minor Axiom XI: 'Never confuse a hunch with a hope'.
Be highly skeptical. Examine every hunch with extra care.

Eighth Major Axiom: On Religion and The Occulture
'It is unlikely that god's plan for the universe includes making you rich'.
You can't only pray that you should be made rich. You will have to work at becoming rich. Mere prayers will not suffice.

Minor Axiom XII: 'If Astrology worked, all astrologers would be rich.'
This is self explanatory. Don't trust predictions.

Minor Axiom XIII: 'As superstition need not be exorcised, it can be enjoyed provided it is kept in its place.'
In your day-to-day financial matters, act rationally. But, when buying a lottery ticket, give it a full play to amuse yourself.

Ninth Major Axiom: On Optimism and Pessimism
'Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.'
In poker and a lot of other speculative worlds, things are never as bad as they seem - most of the times they are WORSE. Confidence comes not from expecting the best but from knowing how you will handle the worst. Optimism can be treacherous because it makes you feel good.

Tenth Major Axiom: On Consensus
'Disregard the majority opinion. It is probably wrong'.

It is likely that the Truth has been found out by a few rather than by many.

Minor Axiom XIV: 'Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.'
This is the best way to get a good stock cheaply.

Eleventh Major Axiom: On Stubbornness
'If it doesn't pay off the first time, forget it'.
If at first you don't succeed, try and try again and you will succeed in the end. This is good advice for spiders and kings but not for ordinary persons with regard to financial matters. Every trial is a costly error.

Minor Axiom XV: 'Never try to save a bad investment by averaging down.'
If the price of the stock goes down after your purchase don't buy more to bring down' the average cost of your total holding. Investigate why the price went down rather than put good money in a bad bargain.

Twelfth Major Axiom: On Planning
'Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's seriously.'
This is self explanatory and hence needs no comment.

Minor Axiom XVI: 'Shun long-term investments.'
If possible try to a long-term investments.

The author noticed that the Swiss group never took a long-term view of their stock purchases. They always sold out as soon as their targeted profit was achieved.

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Fund Review: L&T MIP

        This fund won't deliver chart-topping returns. However, over the long run it will not disappoint and end up beating the category average The fund has seen numerous changes at the helm. When Katare took over in October 2007, he made dramatic alterations to the portfolio. On the equity side, he increased the number of stocks to 11 (November) from 2 (September). On the debt side, he added Certificates of Deposit (CDs), while earlier Treasury Bills (T-Bills) and cash accounted for 88 per cent (September 2007) of the portfolio. In November 2007 he exited T-Bills for good. The results impressed. In the last quarter of 2007, it delivered 12.83 per cent (category average: 6.12%). In 2008, the first quarter performance was nothing short of impressive, a return of 9.93 per cent (category average: -3.97%). While other players increased their portfolio maturity, Katare maintained a low maturity profile. While the average maturity of the category was 2.81 years that quarter, th...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Reconfigure investments to reap benefits in DTC

    Investing for tax benefits under the new Direct Taxes Code ( DTC ) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit. Here is a look at the situation and also how it changes from the existing position. Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduct...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now