On November 20, shareholders of Phelps Dodge received an early Christmas present. Freeport McMoran placed a bid to buy the company at a 27% premium. Instantly all shareholders were 27% richer, simultaneously all shorts were 27% poorer. This was a big news story, so CNBC reporters went to work. Later on that day, Dennis Gartman was interviewed on CNBC. Gartman had been betting that cooper’s run was over extended. Instead of shorting the commodity itself, he choose to short a major cooper producer (Phelps Dodge). Ouch.
Before that day, I had never heard of Dennis Gartman. Turns out that he is a well respected and well known trader. He publishes the Gartman Letter that is a must read among professional traders. He should be commended for coming on CNBC on a day in which he had taken such a pounding. So many come on that network- tout their stocks and are never heard from again. Needless to say, he lost mega-bucks on this trade. He stated that this had turned a good year into a mediocre one. I was most impressed when he said that he immediately closed his position. He didn’t try to rationalize the situation. He cut his losses and moved.
I discussed a similar situation in my article, “Navigating Thru a Trading Fiasco.” I cut bait on Enerplus Resources, a Canadian Income Trust, after the Canadian Government announced a new tax on such entities. The article generated a nice discussion - see comments to article.
I just ran across Gartman’s Not-So-Simple Rules of Trading. Each year he updates the list. I believe this is his latest and greatest. Here are my favorites:
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.
Read the rules in its entirety. Here…… What are your favorite trading rules? It may not be a bad idea to write them down and review every day.
About the Author
Michael Dawson recently said goodbye to a 20 year career in Engineering, Marketing and Sales to focus on living his dream of financial independence. He has since founded The Time and Money Group as vehicle to encourage others to do the same. The company's mantra is “Why trade time for money . . . when you can have both. " Sign up for their free weekly newsletter, where he and others discuss the different paths to financial freedom and offer insights for your successful navigation.
Make sure to read one of Dawson's most popular articles: "Saying Good-Bye to the Time for Money Swap"