Investing is a risky game. If you do it right, you can become wealthy. Conversely, a wrong move can wipe out a lot of fortune which you took long to accumulate. So, it is imperative to learn the investing lessons from those who have “been there” and seen the ups and downs of the market first hand.
One famous investor who has shared his wisdom is Dennis Gartman. He also publishes The Gartman Letter, a daily commentary on the global capital markets followed by banks, brokerage firms, mutual funds, and trading firms around the world.
These are some of the learnings one can draw from Gartman’s rules of trading:
1. Buy high and sell higher: The goal of trading is not to buy low and sell high, but, in fact, to buy high and sell even higher. Gartman says that we can never know what price is low or high. He gives an example that sugar once fell from $1.25/lb to 2 cent/lb and seemed cheap numerous times along the way.
2. Long period of uncertainty: Since markets are difficult to decode, and they can remain illogical longer than we can remain solvent. And sadly, irrationality often reigns and markets stay enormously inefficient despite what the academics believe.
3. Trade like a technician: To trade successfully, Gartman says that one should think like a fundamentalist and trade like a technician. It is vital to understand the fundamentals that drive a trade, but we should also understand the technicals.
4. Understanding mass psychology: It is more important to understand mass psychology than merely understanding economics. Markets are steered by human beings, and therefore, they are prone to human errors.
5. Hard trade: The hard trade is the right trade. Always remember that if it is easy to sell, then don’t go for it. Also, if it is easy to buy, then don’t do it. Instead, do the trade that is hard to do and which the crowd finds objectionable. Peter Steidlmayer mooted this several years ago, and it still holds true.
6. Buy and sell the right stocks: It’s not wise to become too attached to your securities. It’s, therefore, vital to sell those that show the greatest weakness, and buy the ones that show greatest strength.
7. Cycles of market: A number of experts and economists have pointed this out but it is vital to reiterate that trading runs in cycles: good and bad.
So, it is important to trade aggressively when there is good cycle. On the contrary, one should trade small and modestly during bad cycle. In good times, even errors turn out to be profitable whereas in bad times even the most well researched trades go wrong.