ZF Capital

We have to understand that all stock market decisions– each and every one, including doing nothing– involve risk. Some people believe they can minimize their risk by relying on the cop-out “risk/reward ratio” cliche: “Ten points potential reward compared to 5 points potential downside” becomes “okay to trade” without even the slightest consideration of what the chances are that the stock will actually move in the undesired direction.

It is the risk itself that needs to be analyzable, not the potential reward. The stock might already have moved extensively; the reason might already be known; support underneath might be flimsy; the stock hasn’t moved yet even though the market is already up a lot; and so on. Not until we grasp the extent of and kind of risk should we consider the degree of reward. Hope has never kept a stock up when it doing things wrong.

– Justin Mamis, The Nature of Risk

The question “Why does a chicken cross the road?” is no joke on the Street; when someone asks, “Why is that stock going down?” the objective answer is, “More sellers than buyers.”

Therefore, if the law of supply and demand– the one thing you can keep track of objectively, the one tool that is devoid of emotion– tells you you’re wrong, it’s wise to accept it. You may think Kodak is going still higher for all those “becauses,” but if that support level gives way in the marketplace and the price falls to 125, don’t fight it. “Can I bear to take yet another loss?” “Suppose I sell and the stock goes back up?” “How can I sell such a nice company?” Can’t you just hear those echoes? But the rule is as applicable to the stock market as it is to real life: Do not rationalize failure.

If you root for stocks in the market game, there is nothing wrong with being a fair-weather fan. The decisive act of selling may turn out , with hindsight, to be a mistake, but the indecisive act of not selling can turn out to be a disaster.

– Justin Mamis, When to Sell

Indeed, the market often does look easy in hindsight. Tops are made as everyone rushes to buy what has been profitable already. At that point, to the astonishment of those who’ve missed it, the cliche becomes: “The easy money has already been made.” But while it is happening no one realizes it; investors are caught up in the classic “wall of worry” instead. It never can be easy because the rule of the market is that you have to act before you know enough. Because it is a process, there is no one moment, or single point, at which one can make an obvious “sure” decision.

– Justin Mamis, The Nature of Risk

Charts do not reduce risk. They turn what seems like risk into the reality of choices. Charts are simply a way to accumulate and express, and perhaps act on, perceivable information.

– Justin Mamis, The Nature of Risk