HOW DO YOU BECOME A SUCCESSFUL AND PROFITABLE TRADER?

POSITIVE FRAME OF MIND

Well you start by getting yourself into the right frame of mind. You are who you are. You are human and your moods, health and inspiration will fluctuate. You need to feel good about yourself to do battle against your opponent.

Your opponent is the Stock Market or Mr. Market as Ben Graham has called him. He is the aggregate of all computations of company values and of all the greed and fear surrounding the future valuation of these companies. Like yourself, Mr. Market has good days and bad days and although he is very smart, he is not always right. It is always worth remembering that good advice is hard to find at the tops and bottoms of stockmarket cycles.

THE TREND IS YOUR FRIEND

You can start your battle campaign by assessing first of all, whether the markets are rising or falling. It will be a lot easier to earn your money in a rising market, where “everybody is a genius”! Why stand in the way of a charging stampede? If the market is rising, then hold little cash! If the market is falling, then hold more cash, not just for relative outperformance, but because of the need to maintain the feel-good factor and to be able to exploit opportunities to pick up bargains in panicky markets.

KNOW WHAT A STOCK IS WORTH

Remembering that the trend is your friend is important. However, you need to know more than the trend of individual stock prices. You need to know what each stock is worth. For each stock you hold, you should calculate its fundamental value.

You can do a basic calculation by discounting the future value of dividends over the next 10 years and adding to this the Net Asset Value Per Share (“NAPS”) at the end of this period. This period covers two business cycles. A 10 year government bond yield can be used for discounting. You arrive at the Year10 NAPS by adding 10 years Earnings Per Share (“EPS”)and deducting the respective Dividends for those years. The EPS growth rate can be derived from Return on Equity, Industry Growth or Common sense. This simple Fundamental valuation often approximates to the stockmarket value of individual large cap stocks.

The fun begins where you identify stocks where the stock price is way off the fundamental valuation. This is part of the disciplined approach to investing, which will serve you well, when the market starts to fluctuate wildly and brokers raise earnings to catch up with rising stock prices, or vice-versa.

by Martin Chapman