When a position results in a loss just after buying, most likely the trade was a mistake. It may mean missing an element in selection norms, or the timing could be wrong.
Many investors understand that they should cut losses to control risk. Yet they persuade themselves to wait. Trading is difficult enough without undermining one’s own rules.
Being disciplined means taking lots of small losses to keep safe. Mark admits that his performance went from average to outstanding when he made up his mind and decided to never have a “just this one-time” moment ever again. He decided not to break the rules because it doesn't pay.
Paul Tudor Jones has a message over his trading desk: “Losers average losers.” Those three words comprise impactful intelligence that only losers average down on losing positions. That message knocked the author for a set of reasons. First, if a wizard-like Paul Tudor Jones makes that statement, then it’s worth paying attention. Second, if one of the greatest traders was compelled to post such a sign, it is evident how alluring it is to “average down,” and how important it is to remind yourself not to do it.
A stealthy probability of the 50/80 rule is very important to compound money and not losses. Once a stock establishes a major top, there’s a 50% chance that it will fall by 80% and 80% chance that it will fall by 50%.
This is a warning about being aware of the first loss to hit the radar. Every major reduction starts as a minor retreat. If a person is disciplined to notice trading rules, he will limit his losses while they’re small.
Professionals are consistent and bet only when the odds are in their favour. They avoid risking money on low probability trades.
Buying a stock that is suddenly cheaper can be a trap instead of being a good bargain. When a trader buys a so-called cheap stock and it moves against him, it is difficult to sell because it becomes even cheaper. Then it becomes more attractive based on the cheap rationale.
When a leading stock tops, it may look inexpensive after a decline, but it’s expensive. This is because stocks discount the future. Usually, after the decline, the P/E ratio rises because of negative earnings comparisons or losses showing up on the balance sheet. However, it's too late by then. People are not willing to buy such stocks irrespective of how high quality they are, making them just worthless pieces of paper.
One must strictly stay away from stocks whose price action does not confirm the fundamentals.
A series of small successes bound together over time result in big success. Mark too initiates with a considerably small position. If it works, he adds more positions or more stocks. If he succeeds in a few trades, then he prefers to go aggressive and increases the overall exposure of his portfolio. This process keeps him out of trouble and helps to win big when right. Trading smaller while trading the worst is controlling risk.
The goal in trading should be to execute a strategy one can consistently rely on, realizing that the result of a single trade does not define success; rather, it’s the combined outcome of all the decisions and trades over time.
Mark shares his general trading rule. He never allows any stock to go into the loss column if it has risen to a multiple of his stop loss and is above his average gain. When the price of a stock he owns rises by three times his risk, he moves up his stop. If the stock rises to twice his average gain, he moves the stop to breakeven or equal to his average gain. This protects from losses and also safeguards confidence and profits.
To attain consistent profitability, one must protect his profits and his principal. There is no difference between the two. Once a trader makes profit, that money belongs to him. Yesterday’s earnings are part of today’s capital. Novice investors treat their income as the market’s money instead of theirs, and in scheduled time the market takes it back.
The marketplace is full of publicity and exaggeration. To trade successfully, one must know how to make his own decisions. A trader’s best and most robust protection is to have a strategy and rules that direct his actions.
If he wants invariant success, he must apply discipline unfailingly. He can’t have one without the other.
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FAQs
If a sum A is compounded annually becomes A1 in t years and A2 in (t+1) years, then the principal can be calculated using: P = A1 (A1/A2) In two years, the difference between compound interest and simple interest can be calculated using: P x (R)2/ (100)
What is a famous quote about compounding? ›
According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.” At first this quote might seem like a bit of an exaggeration but the math behind it shows that it is not.
How do you beat paying compound interest? ›
There is no magic trick to 'beating' compound interest. Making your repayments more frequently, such as daily or weekly, won't make a significant difference to your home loan unless you increase the amount you pay, as in the fortnightly repayment example above.
What is the short trick to find CI for 3 years? ›
principal (3rd yr) = Amount (2nd yr) = Principal(2nd yr)+Interest(2nd yr) = 1100+110 = 1210 CI (3rd yr) = (1210×10×1)/100 = 121 Hence total CI for 3yrs = 100+110+121 = 331 Amount after 3 yrs = 1331 Interest is always calculated on the Principal.
How much is $1000 worth at the end of 2 years if the interest rate of 6% is compounded daily? ›
Hence, if a two-year savings account containing $1,000 pays a 6% interest rate compounded daily, it will grow to $1,127.49 at the end of two years.
What is the magic number for compound interest? ›
For continuous compounding interest, you'll get more accurate results by using 69.3 instead of 72. The Rule of 72 is an estimate, and 69.3 is harder for mental math than 72, which divides easily by 2, 3, 4, 6, 8, 9, and 12. If you have a calculator, however, use 69.3 for slightly more accurate results.
What did Warren Buffett say about compound interest? ›
He famously said, “If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes.” This aligns perfectly with the principle of compound interest, where the focus is on long-term growth rather than short-term gains.
What is the number one rule of compounding? ›
Charlie Munger's first rule of compounding is to never interrupt it unnecessarily. Because of the way compounding works over time, to prematurely interrupt it (e.g. selling your shares or stopping to contribute) will forgo the largest upside—most compounding interest benefits occur at the end.
How to use compound interest to become a millionaire? ›
Here's how:
- Start Early: The key to supercharging your compounding is time. ...
- Save Consistently: Even small amounts can add up significantly over time. ...
- Invest Wisely: Look for investment options with a good historical rate of return, like low-cost index funds.
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
Effect of paying an extra $1 a day
Rather than taking 20 years to repay the loan, it will take 19 years and nine months. You would save about $5,470 in interest (paying about $286,480 rather than $291,950).
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
What is the formula for continuous compounding amount? ›
What Is Continuous Compounding Formula? The continuous compounding formula is nothing but the compound interest formula when the number of terms is infinite. This formula says, when an amount P is invested for the time 't' with the interest rate is r% compounded continuously, then the final amount is, A = P ert.
What is an example of a compound interest for 3 years? ›
For example, if you have an investment that earns 5% compound interest and you want to know how much money you'll have after 3 years, you would plug the following values into the formula: A = P(1 + r/n)^nt. A = 1000(1 + 0.05/1)^3. A = 1000(1.05)^3.
What is compounding by Einstein quotes? ›
The quote, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it," is often attributed to Albert Einstein.
What is the power of compounding in life? ›
Power of compounding refers to capability of an investment to generate earnings, not only on the principal amount, by also on the interest earned over time. There are a number of investment options where the power of compounding is used and the interest earned is added to your invested funds.
Why is compounding so powerful? ›
Why is compound interest important? Compound interest causes your wealth to grow faster. It makes a sum of money grow at a faster rate than simple interest because you will earn returns on the money you invest, as well as on returns at the end of every compounding period.
What was Charlie Munger's famous quote? ›
He said 'if all you have is a hammer, the world looks like a nail. '” Munger, who was worth $2.7 billion according to Forbes, was revered for his pithy and often humorous remarks on investing, life and more.
