HOW DO YOU BECOME A SUCCESSFUL AND PROFITABLE TRADER?

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.

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.

Remember that the trend is your friend. 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.

Besides being comfortable with buying fundamentally cheap businesses, it is preferable to buy stocks, where you like the business, where these businesses have good Returns on Capital, have good Profit Margins and they are businesses that you can understand. This is because there will be phases where Mr. Market will drive down your stock's price, due to some news item and will try to convince you that the stock you hold is worth less than it really is worth and you will need to use every weapon in your armoury to reassure yourself that this is the case. However, if a stock falls dramatically without any news, then be on your guard!

It is important to diversify your portfolio as much as possible. It is true that the larger the portfolio, the harder it is to generate good ideas. Warren Buffett has emphasised this many times, but not everybody has a cashflow stream like he does, so it is all the more important for you to avoid panic selling of the holdings that you have and that you see your portfolio as a whole ship, which you should try to steer as calmly as possible though rough waters. Unrealised losses can always turn back to profit and you have lost nothing. If you sell - you lose!

Technical analysis or charting is useful in identifying the right time to buy or sell. I like to look at a moving average chart over periods of 9, 50 and 200 days. For example, the 200 day m.a. line can help define bear trends and the 50 day bear-market recoveries within those longer trends. Combine these with Director Buying/Selling and RSI and MACD charts and you have some nice weapons.

Directors Buying has to be in reasonable amounts. It is better if a number of Directors buy at the same time and even better if the Finance Director is a significant buyer. It is a good feeling to buy into a company at a level below the Directors buying price. At least you know you are not alone in your belief in the business. If the Directors are large Buyers just before the financial year end, then it is reasonable to assume that the results will be good. Do not panic if the market misreads the headline numbers and the stock falls initially on the day of the results! Read the results again carefully and watch as the stock recovers and rises. The Directors know their stock better than the market!

When you hold small cap stocks (or even large caps in poor markets) which are illiquid, then be careful with widening bid-offer spreads. You may be panicked into selling a stock because you saw the mid-price falling, whereas in fact no shares have changed hands in the market. Ignore widening spreads. Liquidity does not affect the value of your investment!

Trying to anticipate trading statements can be a dangerous game and optimistic management statements can change within weeks, especially in the current economic environment. By identifying this economic trend beforehand you can minimise the pain. Look for disclosure by Directors which is honest and which convinces you that they know what they are doing. It may be better to wait until the results are announced to be sure of what you are buying. If you do start trading and nothing is going right, then do as Buffett said about his untimely sale of McDonalds stock: "I should have gone to the cinema instead!"

Use the technology at your disposal. Set up price and news alerts if you trade online. This allows you to get away from watching the screens the whole time and lets you redirect your energies.

Use a Stop-Loss policy and stick to it! This is one of the hardest disciplines to follow. I prefer a 15% stop-loss based on the purchase price. You can reset this later to lock in gains.

Do not let the press or experts panic you. Both the experts and the newspaper men are marketing people. They rarely give good advice when you need it.

Finally, enjoy investing your own money! You have earned it! Why should you pay somebody else a commission of 1% or more per year, for him or her to enjoy playing with your money!