Page 948 - How to Make Money in Stocks Trilogy

Appendix A 197

tional investors to stumble. The first step of our method is to determine the
overall trend using market directional analysis. This might sound simple to
some investors—buy during an uptrend, don’t buy during a downtrend—
but correctly tracking the trend is the least understood aspect of investing.
This became really apparent during the past decade, where a protracted
choppy market got the better of most investors. In this kind of environment,
uptrends are short and tend to end just as investors reach a comfort level
with their positions. But when the charts give clear warning signs, our sell
rules guide us to take the correct action when the market direction is start-
ing to change. Sometimes it’s not easy to put on the brakes and sell because
of what the charts are indicating, but investors who don’t act quickly enough
usually experience a larger drawdown. Over time, especially in a back-and-
forth market, their equity continually gets chipped away in a kind of death
by a thousand cuts.
There is also a whole generation of investors out there who didn’t find a
need for learning to analyze the general market’s direction. Some of these
investors started trading during the booming 1990s and continued looking
at post-2000 market action through a 1990s’ lens. Many have given up.
Those who started investing after March of 2000 actually have an advantage.
They know how bad it can get. Knowing what you’re up against in the mar-
ket is essential to being successful long term. Most people don’t realize that
decades of success in the stock market is the exception, not the rule. They
think it requires a strong offense, riding the big winners, fully loaded. Not
true. Like a good sports franchise, long-term success requires that you build
a dominating defense and a great offense.
Our defense is a robust set of sell rules that apply to circumstances in the
general market and in individual stocks that often change without notice.
Our approach may sound rigid, but historically determined rules, in fact,
offer us the flexibility to wade in, build positions, back away, and go to the
sidelines when necessary. This flexibility has kept us mainly on the right side
of the market—especially at critical times of opportunity or real danger. I’m
thinking of 1987, 2000, 2008, and all of the less drastic 20% drops in-
between.
Ultimately, capital preservation has been the number one rule this past
decade. So many investors slipped backwards because they never made the
mental shift from offense to defense. They continually focused on making
money—not preserving it. They forgot that not going backward is a much