Trading and Investment Strategies

Attended a talk by the Head of Derivatives unit of Karvy Broking. He gave us insights on investment strategies, and gave tips on trading and investment. He called them the 30 incomplete rules of trading and investment.One of my friends noted them down, so just keying them in. Thankfully have loads of time at my disposal. Hope some people would find them useful, and also for my future reference. Obviously they are not gospel, not all people follow the same strategies. For every seller there has to be a buyer.

Tips For Trading(mostly intra-day)

1. Do not try to outsmart the market. contrarian is fashionable but not necessarily profitable

2. Always trade with a stop-loss. Which maybe a technically determined. Or use your own affordability stop-loss. i.e if technicals point to a 280 SL on a 290 stock, but you may put a SL of
285, because you maynot want to lose 10 bucks. One Caveat is that it should not be a whipsaw effect. which is the case when the stock is inherently volatile.
3. Do not panic when in loss. By this you subsidize people who do not panic.
4. Set target returns. There is a difference between book profit and booked profits.
5. Profit is what you book.

6. It is a crime to be wrong twice
7. Averaging is the cardinal sin. It tends to create bias and distorts your portfolio and increases exposure.
8. Always trade based on a rule.
9. Do not chose broker based on brokerage. Look for value-added services. (Maybe he was pitching for his firm :) )
10. If something is too good to be true it probably isn't.

11.Do not buy the compounding story. That means one day return of say 5% does not translate in annual returns of say 7000% or more. Because on some days you will lose that 5%.
12. Never hesitate to kick yourself.
13. There are opportunities at all times
14. There is no GodPlayer i.e. one who is almost everytime right. Even the best have an average of no more than 65% right calls.
15. Trading is best learnt with your own money. Then you understand the psychology much better.

16. Trade on news before it sinks in
17. Better to be wrong earlier in your trading career, otherwise the seduction of winning trades can be harmful later.
18. Keep questioning assumptions.
19. Have a risk return benchmark, i.e. never enter a position where risk -return trade-off is less than 1:2.5
20. And finally go with your gut

Tips For Investing (Long Term: 2 years and more)

1. Cash Flows are the king. Always look for the expected cash flows of the company in the future.

2. If you want your money back in a year then forget investment.

3. History never made anyone rich. Therefore do not go much with past performances.

4. Trend is enemy. Do not follow it if you want to invest. For trading it is fine.

5. Cheap crap is crap anyways. Beware of penny stocks.

6. A great company need not be a great investment.

7. Ride your winners long, dump your losses. Generally people do the reverse. They will sell a profitable stock, after getting 20%-30% return, though there may exist significant upside. whereas they will persist in loss makers, till they recoup. Such thinking imposes high opportunity costs.

8. Diversification is a fool's paradise. Have only a few stocks in investment portfolio. Similar to Warren buffet, who bet big on Coke and Gillette.

9. No broker made anyone rich (Strong words for a man who works in a broking firm)

10. Scrap the Sensex ticker. Do not get the Heebie-jeebies if the sensex does gyrations. You need to just see your own stocks, and believe in them. Periodic up and downs should not perturb you.