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A Guru's Guide to Beating the Markets

Written By Brian Hicks

Posted November 27, 2010

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

Lethargy may be a fine approach to Thanksgiving, but it’s no way to run a portfolio…

To make money these days, you need to be nimble, savvy, and have a certain level of market smarts.

And the cold, hard truth is that if the big boys catch you napping, you will probably manage to lose a pretty big chunk of money.

As they say, the market never sleeps… and neither should you.

That’s why The Gartman Letter is always one of the first things I read in the morning. Written by founder and author Dennis Gartman, it is something of a morning market wake-up call.

Starting around two o’clock, before the sun is even up, Gartman actually begins his day reading newspapers and economic reports while the rest of us are still sound asleep.

Afterwards, he writes a four-page newsletter with his opinion about what’s going on in the world’s markets.

In doing so, Gartman has become sort of a guru’s guru. In fact he counts institutional investors and hedge funds among his biggest readers.

Not surprisingly, when Gartman has something to say, it tends to draw a lot of ears. So when Gartman published his “Rules of Trading” a few years ago, it gave everyone — subscribers and non-subscribers alike — a glimpse into how he views and trades the markets.

That makes these simple lessons worth mentioning in these pages — especially since Dennis learned some of them the hard way.

Dennis Gartman’s Simple Rules of Trading

1. Never, ever, ever, under any circumstance, add to a losing position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin — count on it.

2. Trade like a wizened mercenary soldier. We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental capital trumps real capital. Capital comes in two types: mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This is not a business of buying low and selling high. It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In bull markets, one can only be long or neutral; in bear markets, one can only be short or neutral. This may seem self-evident; few understand it, however, and fewer still embrace it.

6. Markets can remain illogical far longer than you or I can remain solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy markets that show the greatest strength; sell markets that show the greatest weakness. Metaphorically, when bearish, we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish, we need to sail the strongest winds, for they carry the farthest.

8. Think like a fundamentalist; trade like a simple technician. The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading runs in cycles some good, most bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!

11. In trading/investing, an understanding of mass psychology is often more important than an understanding of economics. Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”

12. Bear market corrections are more violent and far swifter than bull market corrections.  Why they are is still a mystery to us, but they are; we accept it as fact and we move on.

13. There is never just one cockroach. The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be patient with winning trades; be enormously impatient with losing trades. The older we get, the more small losses we take each year… and our profits grow accordingly.

15. Do more of that which is working and less of that which is not. This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.

16. All rules are meant to be broken… but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

Great stuff, Dennis. Simple, yet profound.

By the way, we launched another free service earlier this month called the Wealth Wire. It’s an easy-to-read look all of the must-see financial news compiled everyday by our editors. To learn more about the Wealth Wire, click here.

As always, below you’ll find a few of the best investment ideas from the pages of this week’s top-read Wealth Daily and Energy & Capital articles.

Have a great weekend.

Your bargain-hunting analyst,

 steve sig

Steve Christ
Editor, Wealth Daily 

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