Buy and hold… and forget. Time in the market, not timing the market. Anybody who has ever contributed to a retirement account has probably heard the tried-and-true approach Wall Street pros have been peddling for decades.
But Richard Rosso, head of financial planning for RIA Advisors, says “trader” is not a dirty word. He explained in a post this week on RealInvestmentAdvice.com that taking profits, cutting losses, flipping one stock for another, heeding technical signals, etc., may run afoul of money managers clinging to certain narratives, but are critical strategies as the market mood shifts.
“Wall Street has forgotten the financial crisis,” he wrote. “You can’t afford such a luxury.”
Berkshire Hathway’s BRK.A, -0.02% Warren Buffett, Rosso said, is often held up as the shimmering example of the ultimate buy-and-hold success story, but here’s a list of stocks the Oracle unloaded in the third quarter alone:
— 750,650 shares of Apple AAPL, +1.23%
— 31,434,755 shares of Wells Fargo WFC, +1.34%
— 1,640,000 shares of Sirius XM SIRI, +0.88%
— 370,078 shares of Phillips 66 PSX, +0.21%
— 5,171,890 shares of Red Hat RHT, +0.00%
“Despite mainstream media to the contrary,” Rosso said, also pointing to the likes of Paul Tudor Jones, Ben Graham and Ray Dalio, “all great investors have a process to ‘buy’ and ‘sell’ investments.”
With that in mind, here are 10 rules that give some insight into Ross’s processes:
1. Cut losers short and let winners run — “There can be no such thing as hubris when investments go the way you want them; there’s absolutely no room in your brain or portfolio for denial when they don’t.”
2. Investing without specific end goals is a big mistake — “The Wall Street mantra is ‘never sell,’ and as an individual investor you’re a pariah if you do. However, investments are supposed to be harvested to fund specific goals.”
3. Emotional and cognitive biases are not part of the process — “We are suckers for narratives. They possess the power to fuel fear, greed and our overall emotional state. Unfortunately, stories or the seductive elements of them that spread throughout society can lead to disastrous conclusions.”
4. Follow the trend — “80% of portfolio performance is determined by the underlying trend… investors should understand how important an underlying trend is to the generation of returns.”
5. Don’t turn a profit into a loss — “The emotional whipsaw that comes from watching a profit turn to loss and then hoping for profit again, isn’t for the weak of mind. I’ve witnessed investors who suffer with this affliction for years, sometimes decades.”
6. Odds of success improve greatly when fundamental analysis is supported by technical analysis — “It’s a challenge for investors to wait. It’s a discipline that comes with experience and a commitment to be patient or allocate capital over time.”
7. Try to avoid adding to losing positions — “Paul Tudor Jones once said ‘only losers add to losers.’ Cutting losers short, like pruning a tree, allows for greater growth and production over time.”
8. In bull markets, you should be long. In bear markets, neutral or short — “To invest against the major ‘trend’ of the market is generally a fruitless and frustrating effort… It smacks of overconfidence. And overconfidence and finances are a lethal mix.”
9. Invest first with risk in mind, not returns — “Investors who focus on risk first are less likely to fall prey to greed. We tend to focus on the potential return of an investment and treat the risk taken to achieve it as an afterthought.”
10. The goal of portfolio management is a 70% success rate — “Portfolio management is not about ALWAYS being right. It is about consistently getting ‘on base’ that wins the long game. There isn’t a strategy, discipline or style that will work 100% of the time.”
After a steep pullback for stocks in the prior trading session, the bull market is back in business with the Dow DJIA, +0.66% , Nasdaq COMP, +0.54% and S&P SPX, +0.64% all moved nicely higher on Wednesday.