How do Top Traders Trade ?
Want to do it like the professionals and profit from the stock market? Here are the secrets of the world’s legendary investors.
1. Benjamin Graham – Markets always over-react
Ben Graham was the father of investment analysis. While working in Wall Street in the 1930s and 1940s he invented many of the rules of thumb which are still widely applied today, and backtested them on historical stock market data.
He was the real pioneer of value (as opposed to growth) investing, producing accurate ways of measuring when stocks are cheap and therefore worth buying. His techniques pre-dated the days of computer stock screeners, but being purely quantitative they work beautifully with them.
However, one of his most appealing ideas was imaginative rather than scientifically rigorous. It concerned a fictitious stock market partnership that every individual investor is in, with a moody but persuasive lunatic called Mr Market.
This individual would arise each day in either a crazily optimistic mood, during which he would offer to buy out all your shares, or a black depression, in which he wanted to dump his shareholdings on you. Graham’s contention was that rather than being tainted by these moods and being miserable or happy with him, you should eventually yield to his suggestions.
So that means selling your shares when the market is full of optimism, and buying when the market is miserable. Graham showed that this contrarian position is the best way of exploiting market over-reaction.
2. Warren Buffett – Don’t buy what you don’t understand
There is no investor more frequently quoted than Warren Buffett, and it would be pretty easy to fill dozens of articles with his pithy sayings. However, it is what he has done rather than said that is the most amazing.
Buffett, a down-to-earth septuagenarian from provincial Omaha, Nebraska turned an original stock market investment of $100 in 1954 into $20 billion by 2002. He has followed many of the precepts of Benjamin Graham, but developed plenty of his own. Perhaps the most astounding of these is his ability to stand aside from a booming market, forgoing considerable profits, just because he didn’t understand what was driving prices.
In 1969 he did just that, winding up his partnership after 13 years of 30% compound growth. According to John Train’s book, The Midas Touch, Buffett told his partners: “I am out of step with present conditions…I will not abandon a previous approach whose logic I understand… in order to embrace an approach which I don’t understand…”
