Note to thyself.

There are two key concepts that investors must master: Value and Cycles. For each asset you're considering, you must have a strongly held view of its intrinsic value. When its price is below that value, it's generally a buy. When it's price is higher, it's a sell. In a nutshell, that's value investing.

But values aren't fixed; they move in response to changes in the economy. Thus, cyclical considerations influence an asset's current value. Value depends on earnings, for example, and earnings are shaped by the economic cycle and the price being charged for liquidity.

 

Time diversification (ie stocks will be safer over the long run) is a fallacy. If you have boom/bust cycle, the longer you hold your stocks, the more market(systematic) risks you are exposing your portfolio to, unless as he rightly points out, you hedge your portfolio. If you can't hedge, you take money off the table (that is my hedge). Even if it means I might have taken only half out of the market before it's too late, you would still be less devastated than having all your money in the market when bear comes.

 

Investors often use distorted logic when buying stocks:

What goes up must come down?
Stocks that rise steeply in price and make new highs are viewed as expensive and overpriced. Sometimes they are, but you will also find the real winners here - stocks that rise 500 or 1000 per cent! Rather use the maxim:

What goes up may be a winner!

What goes down must come back?
Stocks that fall steeply in price, making new lows, are seen as being cheap and showing real value. Sometimes they are, but many stocks never recover. The market has a saying:

Dead cats don't bounce!

Commonly referred to as bottom-fishing, searching for undervalued stocks should be left to the experts: it requires a lot of research and expertise.

Averaging down
A related strategy is to buy more of a stock if the price falls after your initial purchase: if it was a good buy at the higher price it must be a real bargain now. What often follows is that the stock keeps falling ...... disappearing from the radar screens.

No-one has put it better than Edwin Lefevre:

Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.

Tips and Rumors
The quality of stock market tips is generally poor. Investors often become emotionally attached to the stocks that they hold and are not always objective about their prospects. They talk their stocks up, more out of hope than conviction.

Trading Psychology

Your biggest enemy, when trading, is within yourself. Success will only come when you learn to control your emotions. Edwin Lefevre's Reminiscences of a Stock Operator (1923) offers advice that still applies today.

Caution.

Excitement (and fear of missing an opportunity) often persuade us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.

Patience.

Wait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines.

Conviction.

Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don't let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.

Detachment.

Concentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow.

Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.

Focus

Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.

Expect the unexpected.

Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic.

Average up - not down.

If you increase your position when price goes against you, you are liable to compound your losses. When price starts to move it is likely to continue in that direction. Rather increase your exposure when the market proves you right and moves in your favor.

Limit your losses.

Use stop-losses to protect your funds. When the stop loss is triggered, act immediately - don't hesitate.

The biggest mistake you can make is to hold on to falling stocks, hoping for a recovery. Falling stocks have a habit of declining way below what you expected them to. Eventually you are forced to sell, decimating your capital.
Human nature being what it is, most traders and investors ignore these rules when they first start out. It can be an expensive lesson.

Control your emotions and avoid being swept along with the crowd. Make consistent decisions based on sound technical analysis.