Trading and Investing: Similar Principles, Different Time Frames
Successful trading and great investment results share common themes. While Dr. Brett Steenbarger’s work attracts the attention of active traders, investors can also learn from the key principles. Only the time frame is different.
As markets once again approach new highs, it is wise to review these fundamental precepts.
Key Steps to Success
The process for successful investing may seem easy to state, but most find them difficult to implement. Here are the key steps:
- Develop an approach that has an advantage. We call it "edge" and describe how to find it. Dr. Brett makes the analogy to the card counter at blackjack, an example we have also written about. Warren Buffett finds it by discovering good businesses at good prices, while not worrying about recessions.
- Maintain discipline. Over several weeks we have shown the need for investors constructing an ETF portfolio to develop and adhere to a system. Ours is not the only one that works. The key is having enough confidence to stay with your method.
- Do not fear success. In particular, the investor must not be afraid of winning big! Bull markets repeatedly hit new highs and also include corrections. It is important to be on the right side of big moves.
- Manage investment size. No money management system can turn a losing method into a winner, but poor money management can cripple the best system. Many traders and investors make oversize plays based upon what they hope to gain rather than what they can afford to lose. They either suffer big losses or make untimely sales as very normal variations create psychological pressure.
- Have an exit strategy. There are many choices of exits, but all involve a recognition of when a trade has not worked — some form of a stop. We discussed the special need for stops in ETF trading, proposing our method for portfolio adjustment. The Steenbarger "penalty box" approach is a similar theme.
Investors who focus on the list of market worries hammered on daily by news media and many popular blogs will always find reasons not to invest, even as the market makes new highs. It is important to take general news in the context of the overall tradeoff between equity and bond returns, which remains quite positive for equity investors.