1. Stock prices run in cycles. Periods of re-pricing are usually quick and powerful and then they are followed by trendless consolidation.
2. Stocks are very highly correlated during drastic selloffs and during the initial stage of the recovery. In general, correlation is high during bear markets.
3. Bull markets are markets of stocks, where there are both winners and losers. When the market averages consolidate, there are stocks that will break out or down, revealing the intentions of institutional buyers.
4. In the first and last stage of a new bull market, the best performers are small cap, low float, low-priced stocks.
5. Try to trade in the direction of the trend. It is not only the path of least resistance, but also provides the best profit opportunities. Have a simple method to define the direction of the trend.
6. Traders’ attention (and market volume) is attracted by unusual price moves. Sudden price range expansion from a consolidaiton is often the beginning of a powerful new trend.
7. Opportunity cost matters a lot. Be in stocks that move. Stocks in a range are dead money.
8. Big winners are obvious only in hindsight. Many other stocks shared the same characteristics when they tried to break out. Some failed. Some had a followthrough. Being wrong is not a choice. Staying wrong is. You can only control your risk and how long you will ride your winners.
9. The overall market conditions will never be perfect and when they seem so, it is probably a good idea to decrease exposure and take profits. With that in mind, you don’t have to be in the market all the time. When you don’t see good setups, it just makes sense to watch from the sidelines.
10. Big institutions achieve outsized returns by riding strong trends for the long-term (long enough to make a difference). This is the only way for them. They can’t easily and often get in and out due to their size. Establishing small positions does not make sense for them as it would not make a difference for the bottom line. Big winners can make a difference when they are big positions. Big positions take time to accumulate and along the way institutions leave clear traces.
11. Small losses are often better than small gains. If I sell my position every time it shows me a small gain, I would never achieve a return high enough to make a difference and to cover the inevitable losses. Amateurs go bankrupt by not taking small losses. Professionals go bankrupt by taking small gains. It is absolutely true that a large number of consecutive gains could multiply returns substantially. The point is how big should be those gains. 4-5% is not going to help a lot. 15-20% gains is something completely different.
12. Optimism and pessimism in the stock market are contagious. Investors psychology often loses its logic and become emotional. The news media and the most recent price action play a particularly important role in developing moods of mass optimism or pessimism.
