Guido's Trading Rule # 2 - The Most Important Thing to Remember

Whether a day trader or long term investor, or something in between, always remember this rule. Never forget it. Always follow it.

Know when to take a loss.

At first this sounds counterproductive. If I keep buying stocks and selling them at a loss, you may say, pretty soon I won't have any money to invest. Guido thought the same thing when he was young. But to my knowledge, it has never happened that way.

Thinking about what you can lose in an investment focuses your mind on what you can afford to lose, and how risky is that bet you're making. Rather then the millions you're promised. You carefully think about your decision, you ask yourself if you know everything about this stock, bond, etc., that you should know. In short you make much more intelligent investments You hope for the best, but expect the worst.

As implied in trading rule # 1, before you get involved in the financial markets, read Ben Graham's The Intelligent Investor. This will create the right thinking frame for your mindset.

To his regret, Guido has sometimes not followed this rule. The financial markets for hundreds of years have been littered with victims who should have known better, and didn't take a loss. Just look at most of last year's market bright boys.

But when do you take a loss, some may ask. Years ago a very successful speculator / investor, named Gerold Loeb, advised that  when an investment / speculation has fallen 10%-15%, sell it. Some hedge fund  managers today will dump a stock at a 1%-3% fall. But these are many times highly leveraged etfs which certain pros have  suggested to trade only for a day.

It all depends at what you're buying and will eventually sell. Obviously if it's real estate you may be stuck. Guido never fooled with it. The only really bright realtor he's ever seen is this billionaire investor, likely  of  French descent and with a passion for obscurity , whose residence is a tax haven in which he never resides. In a real sense, he is a citizen of the world travelling from one place to the next, making deals and checking his investments and having fun < if  Guido's brief encounter with him is anything to judge >.

To give an example of this man's ability, one deal he made several years ago was to buy a bevy of office buildings in one city. To clinch the deal, the seller threw in an office building in a another town that couldn't be rented. In essence, the buyer received it for free. A few years later, after successfully renting it to meet operating costs, he disposed of it for top profit to an Asian conglomerate. In other words he created millions out of nothing.

It would be fascinating if this investor ever wrote a book about his secrets of success. But then he's too busy making more millions and enjoying it. Unlike some  tycoons.

When you're in the stock markets, you're in a war. Gerald Loeb called it a battle. Money are your soldiers. Being defeated in a battle and withdrawing with most of your army is not a defeat. That army and that general are still  formidable. They can always come back for another fight. Remember that. After all, if you sold too early, and it starts going back up, you can always buy it the next day again.

After his victory in the Franco-Prussian war of the 1870s, Field Marshall von Moltke was compared by many to be another Hannibal, Caesar, or Napoleon.  "No,", the general said pensively , " I am not the equal of these great leaders." When asked why, he replied wistfully, "Because I never conducted a retreat."

< This article is in no way advice or a recommendation. It is for information purposes. It is not intended as a recommendation for what to do in the current or future financial markets. As always, you're on your own, mate. >