Stocks and The Seven Deadly Sins

Hieronymus Bosch's The Seven Deadly Sins and the Four Last Things The painting is presented in a series of circular images. Four small circles, detailing "Death", "Judgement", "Hell", and "Glory", surround a larger circle in which the seven deadly sins are depicted: wrath at the bottom, then proceeding clockwise, envy, avarice, gluttony, sloth, extravagance (later, lust), and pride. At the centre of the large circle, which is said to represent the eye of God, is a "pupil" in which Christ can be seen emerging from his tomb. Below this image is the Latin inscription Cave Cave Deus Videt ("Beware, Beware, God is Watching"), implying that no sin goes unnoticed (this last paragraph and art above is from Wikipedia, (http://en.wikipedia.org/wiki/Seven_deadly_sins).

The 2% C H I N G A L E.

That's what a good friend of mine from Texas named my get-rich-quick stock scheme.

But it's not a really a get-rich stock scheme. It's not a buy and hold scheme either. It's a formula for wealth-building that I am testing with some experimental capital. Real money to be sure, but money that was "found" basically.

The source of my capital was a small amount of stock awarded to me by my company. Knowing only the most rudimentary aspects of stocks, trading, investing, etc. I proceeded to watch my vested stock award go down like a darted rhino. I was tired of my equity getting beat up like a tied up goat. I started reading, doing some research, and educating myself about the stock market. In the process I embarked upon a psychological journey that resulted in an epiphany for me.

My goal is 2% a day. I achieved that today (24-January-2008) with Nokia (NOK). Actually I exceeded it, with a 4.4% growth of my capital assets today. The 2% Chingale is alive and well.

I was getting close to despair after the recent sell-off on Wall Street, and the associated world-wide market ripples. However, the rally from the past 2 days has put me back on track. For the record, my MTD since 3-January-2008 is 116.7% increase on my capital. Compare that to your Dad's favorite mutual fund, or the S&P 500 for that matter. (At the same time, my YTD on my 401K with an "expert" allocation of mutual funds is -14.9%. I need to look at that later)

If you're at all math inclined, run for yourself what a compounded 2% return per day on your capital will get you in a month (20-22 days of trading). In a 2 month period, or a quarter. Then sit-down with some oxygen and figure your annual return in about 220 days of trading. This even gets you 30 weekdays off a year-like France. The market trades about 250 days a year. All work and no play will make you very dull and probably frazzled too. The point is you can start with a small sum of money and by being disciplined and not really super-smart you can end up with a much larger sum of money.

I think I quote Warren Buffett in writing "Never lose money in the stock market". This is as fundamental as buy low sell high. Ridiculously simple in theory, but oh so hard in practical application. One of my own rules which I try to enforce on myself with iron will is "Get out of losing positions immediately". The reason is that to erase a 5% daily loss takes several days of 2% performance (Obvious). But the name of the game is to preserve your capital. I see no reason to take a five or ten or fifteen percent loss in a day as has been common in recent times. Even a 1% loss for me is likely too much. Set your limit for a loss, say $100 or whatever for a given position and stick to it. Just like your grades in high school or college, or your prom date, stocks go down really fast but come up a lot slower. Emotion or loyalty has no place in what I am doing. So far the stocks don't seem care that I am really rooting for it to go up 20 cents.

Unfortunately, I don't really follow my own rules very rigidly. I have taken some real poundings in January 2008. At one point very early on my capital was up 143.9%. Yes, you read that right. Even more unbelievable is that happened in the first 6 trading days of this year. But since then, by hoping against hope, making some bad choices and failing to act when I needed to get out, I lost a lot of money. That's why I am back to only +116.7%. I have learned this lesson over and over again, yet seem to continue to make the mistake of staying in a position too long. It happened at the end of December 2007, where I essentially erased all the gains I had made in my first, experimental month. And I have allowed it to happen to me on several occasions this January as well, thus erasing a lot of my gains. When I was up more than 140%, I was joking to myself that I should take the rest of the month off because I had exceeded my capital appreciation goal for the first month in the first 6 days. But Greed crept in...

So really the lesson for today is Protect Your Capital. You have got to ripcord out of a losing position as fast as you can.

"Fortune Favors The Bold" - Virgil

This goes both ways-bold into a position because you believe in why you are buying the stock and bold out of a position because you predetermined your exit point and you are disciplined enough to stick with it. The exit point discipline applies in either situation-exiting a win and exiting a loss.

Don't get greedy and don't be envious when you miss out on additional gains. Remember that all we need is 2% per day, compounding every day to make some pretty impressive returns.

You must be disciplined because Greed and Envy are two of the Seven Deadly Sins. Both will cause your ruin.

Good luck in your own wealth-building quest.