How to be a Trader and Investor
I trade and invest. So why can’t we do both? Because the rule book says that investors don’t trade, they invest. The rule book is wrong.
Warren Buffett is my quintessential investor. Therefore in order to be an investor, I need to follow his rules if I want to be like him, which I do. What are Buffett’s top 3 investment rules?
Three Investment Criteria
“First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”
” So When we spot such businesses, our preference would be to buy 100% of them. But the opportunities to make major acquisitions possessing our required attributes are rare. Far more often, a fickle stock market serves up opportunities for us to buy large, but non-controlling, positions in publicly-traded companies that meet our standards.” Warren Buffett and Charlie Munger (Investors)
Berkshire’s GAAP operating earnings include operating earnings from controlled companies (when Berkshire owns more than 50% of the shares). So, However, Berkshire’s operating earnings include just dividends from non-controlled companies, which are much lower than pro-rata shares of their retained earnings.5
Stevie Cohen, net worth 14.6 Billion is primarily a stock market trader.
Cohen on trading: “This is not a perfect game, I compile statistics on my traders. My best trader makes money only 63 percent of the time. Therefore Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better make sure your losses are as small as they can be, and that your winners are bigger.”
Stevey Cohen says all trades must have a “catalyst” which means a real reason for why you are putting on the trade in the first place. He also says get out when you are wrong and most traders are wrong 50 of the time. So you can always go back and put the trade on again.
Does Warren Buffett trade?
The simple answer is yes he does. Therefore he’s not a 100% investor in the true sense of the word. In his early days, he was a trader of penny stocks, a corporate raider, and as early as 2003 he was a big buyer in silver, a commodity like gold he has stated makes no sense to buy.
Warrens Derivitave Trade
“I-well, we’ve used derivatives for many, many years. I don’t think derivatives are evil, per se, I think they are dangerous. I’ve always said they’re dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.
But I mean, every American wants to have one. You know, the-a lot of things can be dangerous, but generally, we regulate how they’re used. I mean, there was a-there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they’re used.” Warren Buffett
Buffett’s 1997 Letter to Shareholders on his Trading activity
“When we can’t find our favorite commitment — a well-run and sensibly-priced business with fine economics — we usually opt to put new money into very short-term instruments of the highest quality. Sometimes, however, we venture elsewhere. So Obviously we believe that the alternative commitments we make are more likely to result in profit than loss. But we also realize that they do not offer the certainty of profit that exists in a wonderful business secured at an attractive price. Finding that kind of opportunity, we know that we are going to make money — the only question being when. With alternative investments, we think that we are going to make money. But we also recognize that we will sometimes realize losses, occasionally of substantial size.” Buffett
Three non-traditional Positions
“We had three non-traditional positions at yearend. The first was derivative contracts for 14.0 million barrels of oil, that being what was then left of a 45.7 million barrel position we established in 1994-95. Contracts for 31.7 million barrels were settled in 1995-97, and these supplied us with a pre-tax gain of about $61.9 million. So Our remaining contracts expire during 1998 and 1999. In these, we had an unrealized gain of $11.6 million at yearend. Accounting rules require that commodity positions be carried at market value. Therefore, both our annual and quarterly financial statements reflect any unrealized gain or loss in these contracts. When we established our contracts, oil for future delivery seemed modestly underpriced. Today, though, we have no opinion as to its attractiveness.” W. Buffett
Warrens’ Silver Trade
“Our second non-traditional commitment is in silver. Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. (So) Ever since I have followed the metal’s fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand. Inflation expectations, it should be noted, play no part in our calculation of silver’s value.” Warren Buffett
One more nontraditional position
“Finally, our largest non-traditional position at yearend was $4.6 billion, at amortized cost, of long-term zero-coupon obligations of the U.S. Treasury. These securities pay no interest. Instead, they provide their holders a return by way of the discount at which they are purchased, a characteristic that makes their market prices move rapidly when interest rates change.(Therefore) If rates rise, you lose heavily with zeros, and if rates fall, you make outsized gains. Since rates fell in 1997, we ended the year with an unrealized pre-tax gain of $598.8 million in our zeros. Because we carry the securities at market value, that gain is reflected in yearend book value.”
From Cash to Zero-Coupon Bonds
“In purchasing zeros, rather than staying with cash-equivalents, we risk looking very foolish: A macro-based commitment such as this never has anything close to a 100% probability of being successful. However, you pay Charlie and me to use our best judgment — not to avoid embarrassment — and we will occasionally make an unconventional move when we believe the odds favor it. (So)Try to think kindly of us when we blow one. Along with President Clinton, we will be feeling your pain: The Munger family has more than 90% of its net worth in Berkshire and the Buffetts more than 99%.” Warren Buffet 1997 Chairmans letter 1997
My AppleTrade 2020
|SYMBOL||DATE/TIME||QUANTITY||T. PRICE||PROCEEDS||COMM/FEE||BASIS||REALIZED P/L||CODE|
This is one example of how I traded in Apple stock for the whole year.
As you can see my costs for Apple stock ranged from $299 all the way up to $499 then the stock split. Therefore, if I just held onto my Apple shares at $299 and accumulated instead of trading, I would have realized about 100 shares at $200 profit for a return of $20,000. In other words trading in and out instead of accumulating in one stock costs me about $20,000.
It gets worse too
My worse trades came in MSFT or Microsoft Corporation. In other words, my loss was over $3000 in trading in this stock year to the day as I exited the stock months ago. Therefore if I never made the purchase or was able to hold the purchase I would have realized a net gain.
My Amazon trades on 10 shares netted me $1762 with a purchase price at just under $2000 a share. The price rose to over $3000 a share where it sits today. Therefore if I just held the position I would have realized a $10,000 profit
The BIG Mistake in Trade small accounts
My rules for trading and investing
- Don’t trade your portfolio unless you have additional cash to trade. (See Warren Buffets annual reports 1997 as an example)
- Keep a solid portfolio of stocks and hold them. My first choices for 2020 were my best.
- The Market wants you to trade it, resist the temptation
- Allocate a certain amount to public stocks and stay with it.
- Better to own 100% of a solid cash flow business that gives higher returns.
Publicly traded stock investment 2020.
The amount I allocated to publicly traded stocks for 2020 never exceeded $25,000. This represented less than 1% of my total portfolio of investments and less than 3% of my cash position.
This tells me that I never believed in the 2020 stock market and when COVID landed and I had a chance to jump in I did but kept it small instead of having the courage of my convictions to move big.
My Failure to jump in with a $100,000 investment for example would have netted me a fat return assuming I stuck with my original bets which were all tech stocks. (Apple, Amazon, Google, Alibaba, Microsoft). All the analysts said it was over for these companies pre COVID. Then Covid hit and we learned how valuable these companies really are.
As Gordon Geko says in the movie Wall Street. These analysts don’t know a preferred stock from Live Stock. Warren Buffet says the same thing only much nicer.
So don’t listen to analysts who have no skin in the game. Think for yourself then follow through.
I make my own rules. So I invest in Real Estate for the long haul (mostly outside the USA), trade occasionally for fun, and own whole private companies and pieces of public companies.
Warren Buffet has identified for me the risk in trading in his newsletters to stockholders, so be careful when you trade, and trade small until you are certain of the outcome (which you can never be). Know the risk that you can lose BIG.
Slow and steady wins the race baby.