Saturday, June 16, 2007

The Wisdom of Playing a Loser’s Game

In the book Extraordinary Tennis for Ordinary Tennis Player, Dr Simon Ramo pointed out that professional players and amateurs play differently. Professionals attack by playing powerful and tricky shots to win points. Amateurs, except for a gifted few, must play defensively to win. While professionals seldom make mistakes, amateurs make many mistakes if they play aggressively. So to win the game, amateurs must make fewer mistakes than their opponents. This is called, “the loser’s game.”

In the stock market, amateurs will do well to play a loser’s game to win. You cannot afford to play like the professionals. You do not have the skill or the resources to do that. You have to invest intelligently and play the market in your own terms. Appended below are some common mistakes you need to be aware of and avoid as well:

  1. Listening to rumors and taking advice at face value.
  2. Going after penny stocks that have no value.
  3. Overtrading and trading on thin margin.
  4. Buying in a downtrend.
  5. Buying a stock because of its name.
  6. Holding on to a falling stock. Hence failure to protect your capital.
  7. Averaging down indiscreetly.
  8. Failure to allow a winning stock to complete its uptrend.
  9. Confusing price with value; not knowing what is cheap and what is low-priced.
  10. Bargaining for a bid when you should buy or sell at the market.
  11. Overact to good news or bad news.
  12. Trying to make quick money without knowing the risk-reward ratio.
  13. Failing to know the importance of buying sound and solid companies.
  14. Not knowing fundamental and technical analysis.
  15. Overestimating your own abilities.
  16. Buying a Proton for the price of a Mercedes.

The fewer mistakes you make, the more is your chance of winning.

As for trading, this is what Benjamin Graham, the mentor and teacher of Warren Buffett, said, “Everyone knows that most people who trade in the market lose money in the end. The people who persist in trying it are either unintelligent, or willing to lose money for the fun of the game, or gifted with some uncommon and incommunicable talent. In any case, they are not investors.”

In every field, however, we do have the exceptional and the gifted few. If you are one of them, I salute you!