Few assets benefit when inflation is strong and economic growth is weak
5.9 You are unlikely to out-analyse the analysts
6 – Small Companies
6.0 Small companies offer more opportunities than large companies
6.1 The quality of a company's management is by far the most crucial factor in determining its success
6.2 Determining the fair valuation is more difficult with small companies
6.3 Clearly identify the comparative advantages
6.4 Be sure the business is sustainable
6.5 Good products don't always sell
6.6 Growth puts strains on small companies
6.7 Be sure of a route to exit and adequate cash resources
6.8 Shareholders can help unlisted companies
6.9 Be pragmatic with due diligence
7 – Price Behaviour
7.0 Prices go further than expected
7.1 Forget the old price
7.2 People often misjudge probability and logic
7.3 A price is an average of possibilities
7.4 The probability can be asymmetric
7.5 Be nervous when a market doesn't rally on good news
7.6 Don't day trade!
7.7 Avoid trading in options if you do not understand their pricing
7.8 Back your hunches with at least a small investment
7.9 Features of good trading models
8 – The Understanding and Use of Trends in Prices
8.0 There is statistical proof that market prices trend
8.1 Trends operate across commodities, currencies, interest rates, stocks and property
8.2 Trends have been in operation for a long time
8.3 It is not true that markets usually overreact
8.4 Trends are resistant despite being well-known
8.5 Trends represent the gradual dispersal of information
8.6 Price reaction is delayed by inertia and scepticism
8.7 A rising prices attracts buyers
8.8 Economic cycles breed market cycles
8.9 News against the trend is often ignored
9 – Market Timing
9.0 Combine fundamentals with price action
9.1 Ignore the noise in price movements
9.2 Don't be a hero - do not buy falling markets
9.3 Trade with the trend - wait for the trend before you enter the market
9.4 Add to winning trades, not losing trades
9.5 It is safe to be with the consensus
9.6 Do not use price targets or time limits
9.7 If the fundamentals have changed adjust the position accordingly
9.8 You will not get the high or the low
9.9 A powerful model shows probability is on your side
10 – Avoiding Temptation
10.0 Know when to stay out of the market
10.1 Identify what is difficult about the existing environment; it may change
10.2 Monitoring trends may alert you to opportunities you wouldn't normally find
10.3 With success, bank some profits
10.4 Negotiation is an art
10.5 The evolution of the con artist
10.6 Wealth preservation is not simple
10.7 Be sceptical of sophisticated retail products
10.8 Management and brokerage fees should be minimal in a passive portfolio
10.9 Follow these strategies and be part of the hedge fund (r)evolution
Richard and Camilla
Introduction
When I started my career in a Sydney investment bank in my early twenties, I did not believe that I could outperform the markets. As a former economist and a chess player, investment and trading just seemed to be a form of gambling. I had no idea how the markets could offer any opportunities.
Gradually, however, I came to believe that market prices are predictable, and within a few years I was running a trading desk dealing in hundreds of millions of dollars. Because I wanted a long and prosperous career, I developed a repeatable methodology which was based on observation and reasoning, not just on one-offs and luck.
I had many beliefs which went against conventional wisdom, some of which included:
Markets tend to under-react, not overreact.
Big, obvious ideas offer great opportunities.
It is safe to invest with a consensus view.
Contrarian trading is usually irrational.
It is best to enter and exit the share market at the right times instead of always staying invested.
Price trends are well known but under-utilised.
Chartists are just astrologers.
Investment and trading are increasingly similar.
Some things I simply tried to do better than other investors, these included being sure that I was chasing a genuine opportunity, managing my risks and coping with my losses.
I also developed some trading systems, which were still being used years after I left the bank.
As my
