THE TWENTY RULES OF
1. NEVER, EVER, EVER ADD TO A LOSING POSITION: EVER!:
Adding to a losing position will
lead to ruin. Count on it. All great market humiliations are
first preceded by one man or one group doing precisely
the opposite of this important rule: Ask the Nobel
Laureates of Long Term Capital Management; ask Nick
Leeson of Barings or, in the more modern world, ask Jon
2. TRADE LIKE A MERCENARY SOLDIER: As
traders/investors we are to fight on the winning side of the
trade, not on the side of the trade we may believe to be
economically correct. We are pragmatists first, foremost
3. MENTAL CAPITAL TRUMPS REAL
CAPITAL: Capital comes in two types: mental and real,
and holding losing positions diminishes both the finite and
measurable real capital and the infinite and immeasurable
4. WE ARE NOT IN THE BUSINESS OF
BUYING LOW AND SELLING HIGH: We are in
the business of buying high and selling higher, or of selling
low and buying lower. Strength begets strength; weakness
only more weakness.
5. IN BULL MARKETS ONE MUST TRY ONLY
TO BE LONG OR NEUTRAL: The corollary,
obviously, is that in bear markets one must try only to be
short or neutral. There may be exceptions, but they are
6. “MARKETS CAN REMAIN ILLOGICAL FAR
LONGER THAN YOU OR I CAN REMAIN
SOLVENT:” So said Lord Keynes many years ago and
he was… and is… right, for illogic does often reign,
despite what the academics would have us believe.
7. BUY THAT WHICH SHOWS THE
GREATEST STRENGTH; SELL THAT WHICH
SHOWS THE GREATEST WEAKNESS:
Metaphorically, the wettest paper sacks break most easily
and the strongest winds carry ships the farthest, fastest.
8. THINK LIKE A FUNDAMENTALIST;TRADE
LIKE A TECHNICIAN: Be bullish when the technicals
and the fundamentals, as you understand them, run in
tandem. Be bearish when they run the other way of
9. TRADING RUNS IN CYCLES; SOME GOOD,
MOST BAD: In the “Good Times” even one’s errors are
profitable; in the inevitable “Bad Times” even the most
well researched trade shall go awry. This is the nature of
trading; accept it and move on.
10. KEEP YOUR SYSTEMS SIMPLE:
Complication breeds confusion; simplicity breeds
elegance and profitability.
11. UNDERSTANDING MASS PSYCHOLOGY
IS ALMOST ALWAYS MORE IMPORTANT
THAN UNDERSTANDING ECONOMICS: Or
more simply put, “When they’re cryin’ you should be
buyin’ and when they’re yellin’ you should be sellin’!”
12. THERE’S NEVER JUST ONE
COCKROACH: The lesson of bad news is that more
shall follow… usually hard upon and always with
13. BE PATIENT WITH WINNING TRADES; BE
ENORMOUSLY IMPATIENT WITH LOSERS:
The older we get the more small losses we take… and
very willingly so.
15. DO MORE OF THAT WHICH IS WORKING
AND LESS OF THAT WHICH IS NOT: This works
well in life as well as trading. If there is a “secret” to
trading… and to life… this is it!
16: CLEAN UP AFTER YOURSELF: Need we
really say more? Errors only get worse.
17. SOMEONE’S ALWAYS GOT A BIGGER
JUNK YARD DOG: No matter how much “work” we
do on a trade, someone knows more and is more
prepared than are we… and has more capital!
18: PAY ATTENTION: The market sends signals
more often than not, often times missed and/or
disregarded… so pay attention!
19: WHEN THE FACTS CHANGE, CHANGE!
Lord Keynes… again… once said regarding an investment
he had changed his mind upon that “When the facts
change, I change; what do you do, Sir?” When the
technicals or the fundamentals of a position change,
change your position, or at least reduced your exposure
and perhaps exit entirely.
20. ALL RULES ARE MEANT TO BE
BROKEN: But they are to be broken only rarely and
true genius comes with knowing when, where and why!