7 Investing Rules From Stock Market Wizards

One of the coolest things about financial markets is that all the wisdom and knowledge that you need to succeed is available freely.

Whether this knowledge is gained from books, the internet, or one on one mentorship with proven successful investors, it really doesn’t matter.  Everyone has their own learning style and some learn best face to face, others learn best from reading brief articles, and still others love to dig deep into investment books written by the masters.

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  • I find that the best way to learn how to be a successful investor is to study directly what the wizards of the game have stated.  I am not talking about someone’s opinion of how they think the most successful investors on earth trade.  I am talking about direct statements from the market wizards themselves.

    This article will distill the wisdom of true market wizards into 7 rules.

    RULE 1: Jessie Livermore

    Never Enter An Investment All At Once

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  • Known as the Speculator King, Mr. Livermore was by far the most successful individual speculator on the last century.  His legendary status was cemented in history when he successfully shorted stocks during the great crash of 1929 earning over $100 million with his investments.

    Averaging up is Jessie Livermore’s stock trading secret. He called it “testing the market”. This stock trading entry method is also known as pyramiding.  Averaging up is when your 1000 share trade size is entered in pieces with the price going in a profitable direction.

    Jessie called this “testing the market” since he would test the stock by buying 100 shares out his 1000 and if the 100 moved in the profitable direction, he would buy 100 or 500 more until he reached his full investment size.

    Remember, the exact numbers are only as an example, every investor, depending on his risk tolerance, commission structure and opinion will break down the entry numbers in a variety of ways.  The exact numbers is not the important part of the tactic.

    Averaging up is how many fortunes have been made in investing, including Jessie Livermore’s.

    The reason it works is that your initial risk is relatively low due to the small relative size of your entry.

    When the trend starts to develop, gaining momentum you begin to increase your size in the trade which adds to profits as the move continues in the anticipated direction.

    RULE 2: Paul Tudor Jones

    Price Is The Most Important Thing

    Heralded by many as the greatest living hedge fund manager, Paul Tudor Jones firm Tudor Investment manages over $11 billion in assets.

    Unlike many hedge fund managers, Tudor Jones credits technical analysis for his career defining trade.  Back in 1987, his chief technical analyst, Peter Borish noticed a correlation between the pre-crash 1929 stock market and the 1987 stock market.  Jones acted on the signal and nailed the 1987 stock market crash. This tripled his and his investor’s money, forever earning him a place in stock market lore.

    Tudor’s firm belief that price is the only reality in the financial markets led to the rule. You don’t trade fundamentals, you trade price.  Jones goes so far as to believe that price moves before the fundamentals.  In other words, price leads news or other fundamental events.  While this may seem very strange, if you think about sentiment moving a stock in anticipation of fundamental, it makes sense.

    RULE 3. Victor Niederhoffer

    If it can be tested, it must be tested

    Victor is a legendary speculator, market philosopher, gamesman, and racquet sport champion. As well as a noted and published academic.  He worked directly with George Soros and was ranked the number one hedge fund manager in the world for several years.

    Victor firmly believes in applying the scientific method to all investment decisions.  This is Victor’s primary belief.  Take nothing from the market at face value.  There is a tremendous amount of misinformation, old wives tales and downright fraudulent information in the financial markets.

    When you have an idea or hear something about the market, test it to see if it stands up to scrutiny.  Only if it passes your tests can you accept it as truth.  As he is so apt to say, ‘if it can be tested, it must be tested’.

    RULE 4: George Soros:

    Don’t Ignore Your Intuition

    George Soros is likely the most successful trader who has ever lived.  Although he is vilified in some circles for his political beliefs, his investing track record is bar none.

    Known as the “man who broke the Bank of England”, Soros is a hyper successful, billionaire investor, philanthropist and political provocateur. His investing ability, massive $20 billion net worth, and political stance have made him both a feared and respected international powerbroker.

    In a world moving closer and closer to quantification, computer power, and high frequency trading, as it moves away from discretionary investing, George Soros is an anomaly. He firmly believes in the power of intuition when it comes to making investment decisions.

    When testing his investing thesis, Soros relies on bodily hints and intuition as clues for decision making.  For example, he has stated that if he gets a back ache after entering a trade, he takes this as a sign to close the position.

    Rule 5: Ray Dalio

    Diversification Is The Key To Success

    Not only does he manage the world’s biggest hedge fund, Bridgewater Associates, with approximately $140 billion under management, he is also a big game bow hunter, meditation practioner, and firm believer in radical honesty.  Dalio earned his massive net worth over $12 billion by not following anyone but himself.  All investors can learn valuable lessons from this one of a kind billionaire.

    The number one investing rule I have gleaned from studying Mr. Dalio is diversification within a balanced structured portfolio is the key to investing success.

    What I find most useful is his saying that despite having the all the researchers, market experts, and spending $100’s of millions, Bridgewater still doesn’t know what’s going to win and what’s going to lose. Therefore, we have a lot of diversified bets.  This is pure investing genius, everyone should take it to heart.

    Rule 6: Prince Alwaleed Bin Talal

    Focus on the long term

    Prince Alwaleed Bin Talal, of Kingdom Holdings, is one of the wealthiest men on the planet.  He is well known for holding his huge stake in Citigroup through the financial crisis and buying more at greatly discounted levels.

    Only someone with an ultra long term perspective would have followed this strategy.

    The Prince is noted for saying “We’re getting hurt, but I am a long term investor”.  Every long-term investor would be smart to keep this statement in the forefront of their mind.

    Rule 6: Carlos Slim

    Buy During Times Of Economic Depression

    Carlos is one of the two wealthiest men on earth.  Depending on economic conditions, he switches back and forth from the number one level.  Owning 100’s of company’s, he is well suited to give investment advice.

    He is famous for stating, ‘I am convinced that all this poverty in Mexico and in Latin America, like it’s happening in China is the opportunity to grow. It’s an opportunity for investment.’

    RULE 7: Warren Buffett

    Be Certain There Is A Margin Of Safety Built Into Your Investments

    Warren is who switches back and forth with Carlos Slim as the wealthiest man alive.  He is widely believed to be the best long term investor who has ever lived.

    The best part about Buffett is his willingness to share his tactics and stock picking methods with everyone.  He really lays everything on the line so savvy investors are able to follow in his footsteps.  Not only does Buffett hold no secrets, he publishes a yearly investor letter that explains the minutia of his thought process.

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