MY 10 POINT META THESIS TO UNDERSTANDING WALL STREET FINANCE AS AN INDIVIDUAL TRADER
as i stated above, i am an individual trader, not a professional. i don’t manage anyone’s money for a living nor have i been to business finance school. i have taken a course in economics and finance for engineers at GA Tech as a requirement for obtaining my bachelor in mechanical engineering. so i do understand fundamental concepts of discounted cash-flow, the compounding effects of time and interest rates and comparing mutually exclusive alternatives to financing projects.
after starting up 4 very small businesses over the last 15 years, managing money on wall street is much like managing finances of a small business. that is to say i don’t spend (trade) money i don’t have (credit) and at the end of the day my word is always my bond. paying attention to and following my core financial principals in everyday business transaction has kept me from getting tangled up in complicated messes. the same is true with trading. so here i highlight my observations as 10 wall street finance concepts as a meta thesis i hope you can benefit from also.
1. wall street is governed primarily by supply (sellers) & demand (buyers). driving S&D is emotion: fear and greed. no matter the investment or trading style, fear and greed will determine supply and demand. bears (sellers) make money, bulls (buyers) make money but pigs (greedy) get slaughtered. this is true of stocks, commodities, currency, bonds, derivatives; virtually anything that gets traded in a free market system so to speak.
2. the value of stocks is based more on perception not reality. physicists have enough trouble figuring out what’s real even while holding something in their hand. getting a good feel for sentiment is the name of the game on wall street which will take time. no silver bullets or magic potions will pad your portfolio flush with cash. this doesn’t mean we throw caution to the wind either. sticking to a consistent strategy of rules based on the market sentiment is critical to successful investing.
3. investors must learn to buy and sell stocks. that’s right. it’s not enough to keep pouring money into a portfolio of stocks each quarter, year after year. otherwise you’ll never beat the indexes. some of those stocks will need to be sold and bought back at a later time. another way of saying this is nothing that’s traded goes straight up in value or straight down in value. not even gold. so don’t panic when something you’ve wanted to buy goes on sale. :)
4. which leads me to the adage of buy low and sell high is truer than ever. knowing when to buy and when to sell isn’t always based on business fundamentals alone. to adapt to higher levels of market uncertainty investors need to develop a basic understanding of chart patterns and technical analysis. to do this, consider subscribing to a service like stockcharts.com.
5. cash is king during any market or business cycle. resist the temptation to be “fully invested” with no cash on the sideline or your head will be handed to you. this doesn’t mean putting cash into CDs at the bank but keeping cash available for use in your core brokerage account. also a companies cash position is what to look for when watching a companies stock.
6. wall street is not fair nor is it a socially responsible market place. when it comes to your hard earned money, you need to learn to separate business from personal w/o being greedy. no other system of finance is like american capitalism and none will be. if this bothers ya, investing will not become an enjoyable or rewarding experience.
7. on wall street nothing is guaranteed, nothing is free and the only thing that is certain is uncertainty. individuals need to learn how to hedge their equity portfolio with non-correlating asset classes whether it be bonds, commodities etc. in other words, when equities go down investors need to have other assets that will trade counter to equity market trends. this is probably the most critical point listed. more on this is discussed in my daily commentaries.
8. there ought to be a premise or thesis in the back of your mind before pulling the trigger and buying or selling stocks. this means understanding what “catalysts” (news or actions) move the price of a stock one way or another. also understand there is no one right thesis. your thesis may be similar or almost exactly the same to someone else. but as we all know plans change and so should your thesis if it must.
9. learning to live below your means is tough but is the first step toward becoming wealthy. wealth is not defined by having millions or billions of dollars. wealth is defined by managing assets worth more tomorrow than the cost of obtaining those assets today. ask yourself this question: will what you buy today be valued more tomorrow? if the answer is no and it’s not a necessity, then think twice about making the purchase.
10. very few things appreciate in value with time. that’s why it’s so important to understand how money works on wall street. also, don’t confuse wealth with greed. the christian new testament scripture says to whom much is given, much is required. that means learning to become a good manager of the easy AND the difficult choices that comes our way.
in a nutshell, that’s what WALL STREET FINANCE to me is about. however as lawyers like to say the devil is in the details. the mechanics of executing on these concepts is what i’ll take more time to elaborate on. so are you ready? let’s get ready to rumble on wall street!!
updated 2010-04-26 08:43 EST, copyright (c) 2010, michael s james, all rights reserved