As we approach the first trad­ing day of 2012, it will be time well spent to review Arthur Huprich’s list of invest­ment rules. Art is Senior Vice Pres­i­dent and Senior Mar­ket Tech­ni­cian of Ray­mond James Equity Research. The list comes cour­tesy of Barry Ritholtz, writer of The Big Pic­ture blog.

• Com­mand­ment #1: “Thou Shall Not Trade Against the Trend.”

• Port­fo­lios heavy with under­per­form­ing stocks rarely out­per­form the stock market!

• There is noth­ing new on Wall Street. There can’t be because spec­u­la­tion is as old as the hills. What­ever hap­pens in the stock mar­ket today has hap­pened before and will hap­pen again, mostly due to human nature.

• Sell when you can, not when you have to.

• Bulls make money, bears make money, and “pigs” get slaughtered.

• We can’t con­trol the stock mar­ket. The very best we can do is to try to under­stand what the stock mar­ket is try­ing to tell us.

• Under­stand­ing mass psy­chol­ogy is just as impor­tant as under­stand­ing fun­da­men­tals and economics.

• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

• Don’t think you can con­sis­tently buy at the bot­tom or sell at the top. This can rarely be con­sis­tently done.

• When trad­ing, remain objec­tive. Don’t have a pre­con­ceived idea or prej­u­dice. Said another way, “the great names in Trad­ing all have the same trait: An abil­ity to shift on a dime when the shift­ing time comes.”

• Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usu­ally, over time, right.

• Even the best look­ing chart can fall apart for no appar­ent rea­son. Thus, never fall in love with a posi­tion but instead remain vig­i­lant in man­ag­ing risk and expec­ta­tions. Use vol­ume as a con­firm­ing guidepost.

• When trad­ing, if a stock doesn’t per­form as expected within a short time period, either close it out or tighten your stop-loss point.

• As long as a stock is act­ing right and the mar­ket is “in-gear,” don’t be in a hurry to take a profit on the whole posi­tions. Scale out instead.

• Never let a prof­itable trade turn into a loss, and never let an ini­tial trad­ing posi­tion turn into a long-term one because it is at a loss.

• Don’t buy a stock sim­ply because it has had a big decline from its high and is now a “bet­ter value;” wait for the mar­ket to rec­og­nize “value” first.

• Don’t aver­age trad­ing losses, mean­ing don’t put “good” money after “bad.” Adding to a los­ing posi­tion will lead to ruin. Ask the Nobel Lau­re­ates of Long-Term Cap­i­tal Management.

• Human emo­tion is a big enemy of the aver­age investor and trader. Be patient and unemo­tional. There are peri­ods where traders don’t need to trade.

• Wish­ful think­ing can be detri­men­tal to your finan­cial wealth.

• Don’t make invest­ment or trad­ing deci­sions based on tips. Tips are some­thing you leave for good service.

• Where there is smoke, there is fire, or there is never just one cock­roach: In other words, bad news is usu­ally not a one-time event, more usu­ally follows.

• Real­ize that a loss in the stock mar­ket is part of the invest­ment process. The key is not let­ting it turn into a big one as this could dev­as­tate a portfolio.

• Said another way, “It’s not the ones that you sell that keep going up that mat­ter. It’s the one that you don’t sell that keeps going down that does.”

The table below depicts the per­cent­age gain nec­es­sary to get back even, after a cer­tain per­cent­age loss.

• Your odds of suc­cess improve when you buy stocks when the tech­ni­cal pat­tern con­firms the fun­da­men­tal opinion.

• As many par­tic­i­pants have come to real­ize from 1999 to 2010, dur­ing which the S&P 500 has made no upside progress, you can lose money even in the “best com­pa­nies” if your tim­ing is wrong. Yet, if the tech­ni­cal pat­tern dic­tates, you can make money on a short-term basis even in stocks that have a “mixed” fun­da­men­tal opinion.

• To the best of your abil­ity, try to keep your pri­or­i­ties in line. Don’t let the “greed fac­tor” that Wall Street can gen­er­ate out­weigh other just as impor­tant areas of your life. Bal­ance the phys­i­cal, men­tal, spir­i­tual, rela­tional, and finan­cial needs of life.

• Tech­ni­cal analy­sis is a wind­sock, not a crys­tal ball. It is a skill that improves with expe­ri­ence and study. Always be a stu­dent, there is always some­one smarter than you!

Source: Barry Ritholtz, The Big Pic­ture, Jan­u­ary 1, 2010.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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