There is no principle that makes more sense than 80/20 principle when it comes to investing/trading. What is 80/20 principle? Some things are more important than others, and success depends on recognizing those important things. 80% of the results flow from 20% of the causes or effort. Lot of people may dispute this, but remember this is a well researched principle. Now, let's apply this principle to Investing/Trading - 80% of the portfolio profit comes from 20% of stocks - If you want to test this rule, look at your portfolio. It's very rare that you may find all stocks in your portfolio doing great. It just happens that you pick few right stocks, and it makes up for all the other stocks, and gives you super returns. I am not a big fan of diversification. I know investing gurus strongly recommend well diversified portfolio, but that does not change the fact that 80% of the profit comes from 20% of stocks. If you feel this argument is too stretched, you can make it 70/30 i.e. 70% of the profit comes from 30% of stocks. Over diversification is one mistake lot of people make and then get ordinary results on their portfolio. You can get best results by concentrating your portfolio on few quality stocks, rather than diversifying among large group of mediocre stocks. Diversification dilutes overall result. Hence, next time when you add a stock to your portfolio for diversification - think about it. Are you putting eggs in right basket or too many baskets? 80% of what you achieve comes from 20% of the time spent. Thus for all practical purposes, a large part of the time spent towards success is irrelevant. That's why trading is all about waiting for that 20% of time - when it makes most sense to trade.
Market timing is against the conventional wisdom of Investment Gurus. I know its tough to time the market, but as a trader, my job is to time the market. It's another matter that it's a tough skill to acquire. You may have seen the ad - "Time in the market is more important than timing the market." I agree, but even if you don't time the market, the fact doesn't change that 80% of your profits come in 20% of the time. That's the nature of the market - it does nothing for long time, and then suddenly shoots up and make exponential move in short span of time. Market is not a tortoise that slowly moves all the time, it's like a hare that sprints for a while and then takes a long nap. That's why, it's said that the big money is made by sitting and waiting. As a trader, I am paid to wait for the best opportunities. It's a very tough act to follow. And above all, remember 80% of the money is made by 20% of the traders. That's why trading/investing is considered as a risky job, because there are more losers than winners. The Loser becomes a common man, and becomes a lesson for large group of people as a role model of failure. Lesson - Be Patient, Have focus, Buy Right and Buy Big. Momentum chases momentum. Any asset/stock where there is strong business momentum, momentum money will chase it down, but on first signs of business weakness, momentum money will exit. Remember, when there is mad rush to own assets; there is no value argument at play. The only rationale that works is Supply versus demand equation; and desperation to own the asset. Never buy stocks on momentum, and hold on Value. Be clear on what you are buying, and why you are buying? If you are doing a value buying, stick to value buying. Don’t mix Value with momentum, and vice versa – it can be dangerous for your portfolio. Always ask a question if you are buy and hold - What is the value in holding a stock? Remember, there is always an opportunity cost to holding a stock. You may be missing a great opportunity by holding a dead stock.
Market timing is against the conventional wisdom of Investment Gurus. I know its tough to time the market, but as a trader, my job is to time the market. It's another matter that it's a tough skill to acquire. You may have seen the ad - "Time in the market is more important than timing the market." I agree, but even if you don't time the market, the fact doesn't change that 80% of your profits come in 20% of the time. That's the nature of the market - it does nothing for long time, and then suddenly shoots up and make exponential move in short span of time. Market is not a tortoise that slowly moves all the time, it's like a hare that sprints for a while and then takes a long nap. That's why, it's said that the big money is made by sitting and waiting. As a trader, I am paid to wait for the best opportunities. It's a very tough act to follow. And above all, remember 80% of the money is made by 20% of the traders. That's why trading/investing is considered as a risky job, because there are more losers than winners. The Loser becomes a common man, and becomes a lesson for large group of people as a role model of failure. Lesson - Be Patient, Have focus, Buy Right and Buy Big. Momentum chases momentum. Any asset/stock where there is strong business momentum, momentum money will chase it down, but on first signs of business weakness, momentum money will exit. Remember, when there is mad rush to own assets; there is no value argument at play. The only rationale that works is Supply versus demand equation; and desperation to own the asset. Never buy stocks on momentum, and hold on Value. Be clear on what you are buying, and why you are buying? If you are doing a value buying, stick to value buying. Don’t mix Value with momentum, and vice versa – it can be dangerous for your portfolio. Always ask a question if you are buy and hold - What is the value in holding a stock? Remember, there is always an opportunity cost to holding a stock. You may be missing a great opportunity by holding a dead stock.