Martin J Pring - Investment ...

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Investment
Psychology
Explained
Classic Strategies to
Beat the Markets
Martin J. Pring
John Wiley & Sons, Inc.
New York • Chichester • Brisbane • Toronto • Singapore
Contents
Introduction
PART I
KNOWING YOURSELF
1. There Is No Holy Grau
2. How to Be Objective
3. Independent Thinking
4. Pride Goes Before a Loss
5. Patience Is a Profitable Virtuc
6. Staying the Course
7
9
24
47
67
79
89
PART II
THE WALL
STREET HERD
7.
A New Look at Contrary Opinion
8. When to Go Contrary
9. How to Profit from Newsbreaks
10. Dealing with Brokers and Money
Managers the Smart Way
107
109
134
154
167
PART
III
STAYING ONE STEP AHEAD
11. What Makes a Great Trader or Investor? 183
12. Nineteen Trading Rules for Greater Profits 205
13. Making a Plan and Sticking to It
181
224
14. Classic Trading Rules
244
Bibliography
267
Index
271
Introduction
x"or most of us, the task of beat-
ing the market is not difficult, it is the job of beating ourselves
that proves to be overwhelming. In this sense, "beating our-
selves" means mastering our emotions and attempting to think
independently, as well as not being swayed by those around us.
Decisions based on our natural instincts invariably turn out to
be the wrong course of action. All of us are comfortable buying
stocks when prices are high and rising and selling when they are
declining, but we need to develop an attitude that encourages us
to do the opposite.
Success based on an emotional response to market condi-
tions is the result of chance, and chance does not help us attain
consistent results. Objectivity is not easy to achieve because all
humans are subject to the vagaries of fear, greed, pride of opin-
ion, and all the other excitable states that prevent rational judg-
ment. We can read books on various approaches to the market
until our eyes are red and we can attend seminars given by ex-
perts, gurus, or anyone else who might promise us instant grati-
fication, but all the market knowledge in the world will be
useless without the ability to put this knowledge into action by
mastering our emotions. We spend too much time trying to beat
the market and too little time trying to overcome our frailties.
One reason you're reading this book is that you recognize
this imbalance, but even a complete mastery of the material in
these pages will not guarantee success. For that, you will need ex-
perience in the marketplace, especially the experience of losing.
ability
imbalance
INTRODUCTION
Introduction
The principal difference between considering an Investment
or trading approach and actually entering the market is the com-
mitment of money. When that occurs, objectivity falls by the
wayside, emotion takes over, and losses mount. Adversity is to be
welcomed because it teaches us much more than success. The
world's best traders and Investors know that to be successful
they must also be humble. Markets have their own ways of seek-
ing out human weaknesses. Such crises typically occur just at the
crucial moment when we are unprepared, and they eventually
cause us financial and emotional pain. If you are not prepared to
admit mistakes and take remedial action quickly, you will cer-
tainly compound your losses. The process does not end even
when you feel you have learned to be objective, patient, humble,
and disciplined, for you can still fall into the trap of compla-
cency. It is therefore vitally important to review both your pro-
gress and your mistakes on a continuous basis because no two
market situations are ever the same.
Some of the brightest minds in the country are devoted to
making profits in the markets, yet many newcomers to the finan-
cial scene naively believe that with minimal knowledge and ex-
perience, they too can make a quick killing. Markets are a
zero-sum game: For every item bought, one is sold. If newcomers
äs a group expect to profit, it follows that they must battle suc-
cessfully against these same people with decades of experience.
We would not expect to be appointed äs a university professor
after one year of undergraduate work, to be a star football player
straight out of high school, or to run a major Corporation after six
months of employment. Therefore, is it reasonable to expect suc-
cess in the investment game without thorough study and train-
ing? The reason many of us are unrealistic is that we have been
brainwashed into thinking that trading and investing are easy
and do not require much thought or attention. We hear through
the media that others have made quick and easy gains and con-
clude incorrectly that we can participate with little preparation
and forethought. Nothing could be further from the truth.
Many legendary investment role models have likened trad-
ing and investing in the markets to other forms of business
endeavor. As such, it should be treated äs an enterprise that is
slowly and steadily built up through hard work and careful
planning and not äs a rapid road to easy riches.
People make investment decisions involving thousands of
dollars on a whim or on a simple comment from a friend, associ-
ate, or broker. Yet, when choosing an item for the house, where
far less money is at stake, the same people may reach a decision
only after great deliberation and consideration. This fact, äs
much äs any, suggests that market prices are determined more by
emotion than reasoned judgment. You can help an emotionally
disturbed person only if you yourself are relatively stable, and
dealing with an emotionally driven market is no different. If you
react to news in the same way äs everyone eise, you are doomed
to fall into the same traps, but if you can rise above the crowd,
suppressing your own emotional instincts by following a care-
fully laid out investment plan, you are much more likely to suc-
ceed. In that respect, this book can point you in the right
direction. Your own performance, however, will depend on the
degree of commitment you bring to applying the principles you
find here.
At this point, clarif ication of some important matters seems
appropriate. Throughout the book, I have referred to traders and
Investors with the male pronoun. This is not in any way intended
to disparage the valuable and expanding contribution of women
to the investment community but merely to avoid "he or she"
constructions and other clumsy references.
In the following chapters, the terms "market" or "markets"
refer to any market in which the price is determined by freely
motivated buyers and sellers. Most of the time, my comments
refer to individual Stocks and the stock market itself. However,
the principles apply equally, regardless of whether the product or
specific market is bonds, commodities, or Stocks.
All markets essentially reflect the attitude and expectations
of market participants in response to the emerging financial and
economic environment. People tend to be universally greedy
when they think the price will rise, whether they are buying
gold, cotton, deutsche marks, Stocks, or bonds. Conversely, their
we also know that this is far easier said than done. We will ex-
amine why this is so, and we will learn when contrary opinion
can be profitable and how to recognize when to "go contrary."
Part III examines the attributes of successful traders and in-
vestors, the super money-makers—what sets them apart from the
rest of us and what rules they follow. This Part also incorporates
many of the points made earlier to help you set up a plan and
follow it successfully. To solidify and emphasize the key rules
and principles followed by leading speculators and traders in the
past hundred years or so, I have compiled those guidelines fol-
lowed by eminent individuals. While each set of rules is unique,
you will see that a common thread r uns through all of them.
This theme may be summarized äs follows: Adopt a methodol-
ogy, master your emotions, think independently, establish and
follow a plan, and continually review your progress.
This recurring pattern did not occur by chance but emerged
because these individuals discovered that it works. I hope that it
can work for you äs well. All that is needed is your commitment
to carry it out.
PartI
KNOWING
YOURSELF
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