Five Trading & Investing Proverbs You Should Never Forget
These simple investing related proverbs are worth repeating and remembering, especially when it comes to your hard earned money.
Before you make your next investment or pull the trigger on that next trade, take a moment to remember these old adages.
1. Cash Is King
There's absolutely no reason to always be fully invested. There's nothing wrong with having a larger than normal amount of cash in your investment account.
Think of cash as a position. Or better yet, as ammunition. Think of the financial crisis of 2009 or more recently the massive sell off in oil and gas related stocks.
Having cash allows you take advantage of extreme situations when the markets offer up incredible opportunities.
2. Don't Try and Catch a Falling Knife
No one knows where or when a stock will bottom.
Many will try but nearly all will fail at the useless endeavor of trying to pick or time a bottom in a stock.
I would much rather miss the first 10% to 15% move off of the bottom then buy a stock in free fall only to watch prices go lower and tie up precious capital.
If you cannot resist the urge to buy, then dip your toe in with a fraction of your regular position size and then add later when the stock has actually bottomed.
3. The Trend Is Your Friend
An object in motion tends to stay in motion.
Stocks that are making new highs and are in clearly defined up-trends tend to continue in that direction, especially in a bull market.
When the bottom is in and prices start to make higher highs and higher lows there will be plenty of time to participate and make money from the trend.
Focus on catching the "meat" of the trend or the move and forget about trying to buy the bottom or sell the top.
Don't fight the tape.
4. Cut Your Losses Short and Let Your Winners Run
A very commonly used phrase in trading and investing but easier said then done.
People love to be proven right and often times investors experience more pain from missing an opportunity then they do from losing money. This is why it's so difficult for amateurs to sell a losing position. Many fear as soon as they sell their stock it will start moving up again.
Even the most seasoned investors fail to do this and allow losses to get out of control.
One big loss can blow up your account and take many months or years to recover from.
We hate being wrong and taking a loss is emotionally difficult. By keeping losses small we live to fight another day.
On the flip side we often realize our gains too soon. We want the feeling of being right and ringing the register with a realized profit. This is okay if you have a profit target in mind but it's best to ride your winners and let the market take you out via a trailing stop.
Give your profitable positions room to move and work their way higher. Get rid of your losers quickly while they are small and manageable.
5. Markets Can Remain Irrational Longer Than You Can Remain Solvent
Not the most commonly used saying but one of my favorites by British economist John Maynard Keynes.
Just because something appears to be "cheap" or "can't possibly go any lower," doesn't mean that it has to go up.
Prices can go lower or even get "cheaper" than most think possible. They can also go higher and become more "expensive" than anyone can imagine.
How many people in 2009 would've guessed the S&P 500 would be up over 300% 10 years later? Or that there would be multiple Trillion dollar market cap companies?
What people forget is that stocks don't only go up and down but can go sideways for a very long time. This can tie up valuable capital that could be used for investing in better opportunities.
The above proverbs are commonly used and can seem very simple and obvious. However, good investing is not complicated and when the markets become volatile and the headlines (noise) confusing it's best to keep things simple.
The next time you hear one of these old adages give it an extra moment of thought. It just might help you navigate through some tough investing decisions you face this year.
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