DePorre feels financial advisers and fund managers often tell investors to ‘stay the course’ and hold on to investments passively, but this advice mostly benefits only financial institutions and not investors.
DePorre is the author of
Invest Like a Shark, rated among the Top 10 investing books of all times. He operates the SharkInvesting.com website and is a hugely popular market columnist on Jim Cramer’s RealMoney.com besides being a frequent guest on TV channels and radio shows.
Although DePorre is now famous for his timely stock picks, market insights and his stance against the ‘buy-and-hold’ philosophy, not many know that he lost his hearing due to a hereditary genetic defect because of which he lost his job and his ability to communicate with the world.
To reduce his isolation from the world, he joined a few online stock market chat groups and forums to learn how the stock market really works. He used all his savings to invest in the stock market and began to buy good performing stocks aggressively while cutting losses quickly by getting rid of the non-performers.
DePorre feels investors have the unique ability to react to market volatility that can help them protect their precious capital and achieve success even in tough times.
But he believes individual investors often give up this advantage to be flexible and more nimble by not reacting to market volatility and remaining passive. DePorre lists out the five most important lessons that he has learnt in the 25 Years of his trading experience, which he says can help investors achieve success in investing.
1. Profits occur sporadically
DePorre says the market will always remain cyclical, as it goes through the ups and downs of various magnitudes on an irregular basis. He cautions investors that the trading style that may be working at a particular point of time may not last forever. If one chooses to ignore this fact, then her career in trading will be shortlived.
DePorre feels investors should be aware of the 80-20 rule, which means most investors produce 80% of their returns in 20% of the times, while they make little progress in the remaining 80% of time.
He says traders who are new to the investment world and have tasted immediate success may not agree with this rule, and may incur losses when market volatility increases.
“The problem with the 80-20 rule is that we never know when that period of peak productivity will occur. We must be constantly vigilant and ready to spring into action when the favourable conditions occur. When they do occur, we have to ramp up our aggressiveness and profit while we can. One trait effective traders share is the ability to be patient and do little for long periods of time, and then move suddenly and decisively when the time is right. Shifting from a patient state of mind to a more active one is not easy and becoming more cautious when conditions change is the key to holding on to the gains,” he wrote in a market column.
2. Predictions and forecasts are a waste of time
DePorre says throughout his career, he heard a large number of predictions and forecasts about market movement, of which the vast majority has been wrong or poorly timed and hence are of no use. Wall Street loves to predict and forecast about the market, because that is basically what they sell and it is their job to convince customers that they can predict the future better than the others.
“The predictions and forecasts are interesting, and can help us prepare for the volatility ahead, but what is most important is how you react to changing events. When a downtrend surfaces, moving to the sidelines will protect you better than any prediction or forecast. It is reacting decisively that works far better than predictions and forecasts. Don’t focus on anticipations and predictions; focus on vigilance and reaction,” he says.
3. Keep your accounts as close to highs as possible
DePorre says nothing is more unproductive than making up for the losses as when investors lose half of their money, they have to double it to just break even. If investors are committed at keeping their portfolio near high, they will definitely outperform in the long run.
DePorre says although long-term ‘buy-and-hold’ investing is often promoted on the basis that it allows investors to compound their money, which is what makes investors like Warren Buffett so successful, but the fact is money gets compounded only when investors keep their portfolios at highs.
Investors can equally compound their returns with aggressive trading, with a focus on keeping the portfolios at their highs. “Compounding fails to work when you suffer big drawdowns and losses. That happens to long-term investors and short-term traders. The key is to address it, and not just sit there. If you err on the side of not suffering large losses, you will produce substantially better returns as you compound your capital,” he says.
4. Use charts
Investors often underestimate and dismiss charts, and do not like to use them for portfolio analysis. DePorre says charts can be useful for analysis, as they provide a framework for discipline.
“There are millions of ways to use charts, but at the heart of every method is cutting losses and letting profits run. Don’t think of charts as a way to predict the future. Think of charts as a way to manage your existing trades. The charts will help you decide when to buy and when to sell, but they won’t tell you what is going to happen in the future. Charts are the best tool you have for developing the discipline you need to be a successful trader over time,” he said.
5. No trading approach is inherently superior
According to DePorre, there is no best approach on how to trade in the market. Different investors use different approaches while investing and still achieve success. “Some people do very well with following the trend and momentum. Others do equally well with value plays and fundamentals. What works best will depend on how you view the market and the methodology you use to protect capital and find new stocks to buy,” says he.
Based on the lessons learnt over the years from trading, DePorre came up with Ten Commandments for investing, which he feels can help investors avoid holding the wrong stocks and underperforming in the long run.
1. I am the market and thou shalt not know what I will do next
It is impossible to predict what the market will do in the future, as it goes through a variety of cycles of varying lengths. “Rather than trying to guess what the market will do next, it is better to formulate strategies that can be quickly implemented as and when conditions change,” DePorre says.
2. Remember to honour and keep holy price action
Investors should always keep their prime focus only on price action, as prices are the only thing that ultimately matter. “Complex macroeconomic arguments, valuation calculations, and technical indicators hold great appeal to traders that are looking for ‘the secret’ to the market. But price is the truth. Everything else is hope,” says he.
3. Thou shalt keep accounts as close to highs as possible
The key to long-term market success is to keep the portfolio as close to highs as possible. “When accounts are kept at highs, you benefit from the great power of compounding. When you are losing money, don’t just sit there. Do something,” he says.
4. Thou shalt trade in various time frames.
The secret to great trading is to average into and out of positions. “Rather than trying to guess the best entry and exit points, use a variety of entries and exits and vary your holding periods. This is the only real diversification you need to manage risk,” he says.
5. Thou shalt not worship conventional Wall Street wisdom.
Investors should follow a trading strategy that they feel is best for them and would benefit them the most, regardless of it being according to or against the market wisdom. “The primary goal of the investment business is to gather assets to manage. Making your money and giving you good investment advice are secondary considerations. You are the best person to decide what will benefit you most and should control your financial future,” he says.
6. Thou shalt honor and love the gift of selling
The most powerful investment tool for investors is the ability to sell any stock or entire portfolio in a matter of seconds. “Selling is the ultimate form of insurance and can be undone in a blink of an eye. There is no better way to control risk and there is no better strategic tool than the ability to sell and re-buy,” says he.
7. Thou shalt not worship any single stock
One of the most costly mistakes investors make in their investing careers is that they become emotionally and financially invested in one stock. “What wipes out more traders than anything else is building too big a position in a stock that is acting poorly because they are emotionally attached to it and their objectivity is impaired,” he says.
DePorre feels investors should consider a stock good when it has already been sold for a big gain. “All other stocks hold the seeds of your destruction, if they are not treated with skepticism,” he says.
8. Thou shalt love the market for its bounty of endless opportunities
One of the greatest things about the investing business is that there is always a new opportunity around the corner, which is why the market is very powerful and mighty. As long as investors have the capital, they have the potential to produce stellar returns. It is up to the investors to spot these opportunities and take full advantage of them.
“Every day, there is a new trade and another chance to make money. The market will provide these opportunities, but it is up to us to do the work to find them and look for ways to profit from,” he says.
9. Thou shalt be true to yourself and find your inner source of wisdom
There is no one right way to approach the market and investors should choose an approach they are comfortable with and suits their personality. “What works best is a function of your personality, emotions, needs and desires. You have to know yourself well before you can develop a market approach that works. The market is constantly changing, which means what works best will shift all the time. Just make sure you keep in mind that your profit will come at irregular cycles,” he says.
10. Thou shalt give thanks for the endless bounty and maintain a positive state of mind
Positive thinking can take investors a long way in their careers. If investors are convinced that they can make money in the stock market, then in all probability they will find a way to do so. “It doesn’t matter if it is a bull market or a bear market, there is always a way for an astute and hard-working trader to produce profits,” DePorre says.
(Disclaimer: This article is based on James ‘RevShark’ DePorre’s book Invest Like a Shark
and his market columns in Jim Cramer’s RealMoney.com)