The Harriman Book Of Investing Rules - Stephen Eckett

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essentially are paid to generate positive research for clients. Less than 10% of the pros’ recommendations are ‘sell’ downgrades. When the ‘sell’ proclamations do come, it’s way too late for most investors. A day of reckoning is ahead for Wall Street and London’s self-serving equity analysts.

      4. Trust the debt analysts.

      Their financial models for companies are far more rigorous than those of the equity crowd. Start tracking corporate bond prices as barometers of your favorite companies.

      5. Don’t take tips.

      That market tip from a newsletter or a friend has a 1-in-10 chance of coming good. Instead, be your own tipster. If your assumptions turn out to be wrong, at least you’ve learned a valuable lesson.

      6. Be very picky with your mutual funds.

      Most funds sport fees that eat into investment performance over multi-year spans. The best rationale for buying into a fund is when you cannot easily ‘own’ its chosen securities - like below-grade corporate bonds.

      7. Understand the psychology of investing.

      If you’re overly confident about an idea, you may need to re-think your premises. If you’re terrified, you’ve probably done your research and should take the plunge.

      8. Got a hunch, bet a hunch.

      It’s tried and true. I’ve heard it a hundred times. Never put yourself in a position where you were absolutely correct but didn’t take enough of a bet to make a difference in your life.

      9. Don’t short yourself.

      We’ve heard it plenty of times and it’s genuine. Most investors sell their winners too soon. Let it ride.

      10. Be in the game for the long-term - meaning decades.

      This is the hardest one because it takes the courage of your convictions. Since hitting its December 1989 peak of 38,915, Japan’s Nikkei Index has had plenty of 50 percent rallies. But it was still a bear market. If you believed Japanese stocks were suffering for the long-term, and bet against the market, you’d have an annuity going on 12 years. This year’s biggest winners are the professionals who shorted technology stocks in March and April of 2000 and still hold their positions.

      Donald Cassidy

      Donald Cassidy is a senior analyst with Lipper Inc., a Reuters company, doing research on money flows and closed-end investment funds. He conducts frequent seminars across the U.S.A., can be heard as a guest on radio talk shows, and has been quoted in The Financial Times, The Wall Street Journal, Barron’s, Worth, Kiplinger’s Personal Finance, The New York Times, and Smart Money.

      Books

      Trading on Volume, McGraw-Hill, 2001

      When The Dow Breaks, McGraw-Hill, 1999

      It’s When You Sell that Counts, Irwin, 1997

      30 Strategies for High Profit Investment Success, Dearborn, 1998

      Which stocks to sell, and when

      Principle #1: Always force yourself to move toward discomfort!

      Investment/trading success cannot come from actions that make you comfortable. Buying or holding when stocks are high (following the crowd because you cannot abide ‘missing the action’) is a comfort-seeking decision. Likewise, fearful selling in a collapsing and low market is moving toward the comfort of cash - again at just the wrong time. Good decisions involve thoughtful analysis including pro-and-con lists. When leaping in/out rapidly, you’ve thought of only one side and are moving to what is apparently obvious. The crowd, a few million in size, doing the same thing thus collectively is creating temporary maximum pressure and so a predictable price-reversal point. Hold and/or buy when it is scariest and sell when the majority celebrate their brilliant conquests. Right, contrarian actions are always lonely and very uncomfortable.

      Principle #2: Avoid the losers’ game of owning favorite stocks for the long term (a.k.a. Heresy #1).

      Rapid and relentless change (technology, regulation, internationalization, competitors’ ascendancy) makes the odds of extended corporate dominance extremely low. In the five highly prosperous years 1996-2000, of more than 8,000 U.S. stocks, only 20(!) managed to avoid a single down quarter in earnings - a 99.8% failure rate. Companies rarely control the top of the hill for long; those situated there are priced very dearly. Holding them exposes your capital to sudden devastating loss at any sign of faltering momentum.

      A tiny number of mutual fund managers compiles consistent above-average records. Their shares are worth holding while individual stocks of current corporate winners are at extreme statistical risk of obeying gravity. Xerox, Polaroid, Memorex, Digital Equipment, Sears, and AT&T are a few examples of the article-of-faith names of a generation ago. In the long term, there is no ‘business as usual’.

      Principle #3: Never buy a stock without simultaneously placing a sell order at your target.

      Failing to have a target reveals fuzzy thinking. Your target should include all three of these: a price objective, driven by a scenario, in a specific time frame.

      If your price is reached, or if the scenario does not play in the anticipated time, you must sell rather than rationalize. Don’t buy stocks merely because you like the industry, respect management, or agree with their social goals. Require a driver that will push the stock higher - not those other nebulous ‘reasons’. The object is profit, not good feelings!

      Principle #4: Believe deeply in the ‘cockroach theory’ and act on it.

      Like those lowly bugs, bad news for a company seldom appears solo; a first disappointment is very likely followed by others.With thousands of stocks available, why remain loyal to under-performers? Stocks are not insulted by your selling them! Move on to what is working rather than sticking with the sleeping dogs or bad ones.

      Especially, stocks heavily owned by institutions take long periods to regain money managers’ trust and to overcome overhanging stock held by those wishing they’d sold before bad news hit. The widely heralded ‘dead-cat bounce’ after a terrible fall is small and brief.

      Principle #5: Untie that second hand from behind your back: become able to sell short! (Heresy #2)

      I dearly wanted to list this first but feared most readers would quickly turn the page. Undoubtedly you’ve noticed that stocks both rise and fall. Then why be biased and seek profit in only one of two available directions? Shorting is not unpatriotic, morally wrong, or foolish - just an underutilized tool. Stocks get overpriced (fundamentally) and overbought (technically) exactly as many times as they’re cheap and oversold - because prices move in waves, whose tops and bottoms are equal in number. Don’t cut your opportunity to half the distance prices move. Would you fervently eschew a raincoat or umbrella because the weather is fair more days than not? Discard this self-imposed limitation!

      Tactic #1: Always, always sell all large-cap and high-P/E stocks before earnings are due to be reported!

      Good news is rewarded only slightly, but disappointment drives immediate, steep price declines. So holding literally stacks the payoff odds against you. Institutional ownership raises the size of selling deluges, as does a long record of prior successes.

      Today’s minimal commissions make stepping aside before the event very cheap

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