Naked Trader 4 – Trading in Real Life

Naked Trader

Today’s post is our fourth and final visit to the UK’s favourite active trading book, The Naked Trader. Let’s find out about Trading in Real Life.

Trading in Real Life

First, here are the links to the previous three articles in the series:

  1. Getting started
  2. Finding shares
  3. Winning strategies

We actually have three sections to try and get through today:

  1. Trading in Real Life (which has several subsections)
  2. The Naked Trader Rules, and
  3. The Appendices (websites, book, quiz, seminars)

Robbie begins by talking about trading mistakes.

  • Here are a few of the lessons from his stories, including his “top ten mistakes”.

They are broadly in reverse order, like a countdown of the pop charts.

  1. Don’t buy a stock where net debt is more than three times full-year profit1
    • this applies double where the debt is close to the limit of the established banking facilities
  2. Don’t buy illiquid shares with large spreads
  3. Don’t buy tiny penny shares
    • don’t chase “ten-baggers”
    • the smaller AIM shares are dangerous – Robbie advises sticking to the top 50, but I think there are a couple of hundred that are OK (still a small fraction of the thousand companies listed on AIM)
    • Robbie also gives the somewhat conflicting advice of don’t buy stocks with a market cap below £15M – I would raise this floor to £40M
  4. Avoid single-product / bet the house companies
    • and in particular, story stocks that aren’t making a profit yet
    • also avoid small pharma stocks that don’t yet have approval
    • and a similar rule applies to resources stocks that aren’t yet profitable
  5. Don’t buy shares that have been tipped.
    • and if a share is rising unexpectedly, check that it hasn’t just been tipped.
  6. Don’t sell on the ex-dividend date
    • the fall in the share price just represents the dividend that you are no longer entitled to.
  7. Don’t hold on to (or even worse, buy) a stock that has just issued a profit warning.
    • it might even be worth shorting the stock.
  8. On a related note, don’t buy shares that are falling heavily in price
    • don’t try to catch a falling knife
  9. Avoid over-trading
    • especially on the back of a good run
    • keep your discipline and stick to your rules
    • don’t change your tactics because you’ve had a few winners
  10. Don’t average down on a loser
    • averaging up (pyramiding your position) on a winner is much better
  11. Don’t day trade.
  12. Indices are volatile and difficult for beginners to trade.
  13. Cut your losses, and let your winners run
    • sell anything that is down 10%
    • don’t sell a winner until it’s up at least 20%
Dear Naked Trader

In the next section, Robbie presents some of the guidance he’s given to people who have got in touch via email:

  1. Don’t waste your time and money on trading formulae and systems.
  2. Don’t put all your money in a single stock.
  3. Don’t risk money in the markets that you can’t afford to lose.
  4. Don’t start too small
    • If you have less than £10K then the commissions on active trading will eat away at your money.
    • Paper trading for a year before you risk real cash is a good idea
  5. Be careful where a share has a small NMS (normal market size)
    • If you buy more than 4 x NMS you will have trouble selling.
    • Think about whether this stock is liquid enough to buy.
See also:  Naked Trader 2 - Finding Shares
Trader’s tales

The section after this is called Trader’s Tales.

  • It’s largely a set of cautionary stories from people’s real experiences.

It sounds like a good idea on paper.

  • But the mistakes are the same ones we’ve come across already.
  • I didn’t find too much new in there myself.

Here are the key lessons:

  1. When it comes to money, you can’t even trust people you’ve known for years.
  2. Don’t put all your money in one stock (again).
  3. Don’t catch a falling knife (three more times).
  4. Don’t buy stocks that have been tipped – by brokers, or even / especially by someone you know (again).
  5. Check the debt levels (again).
  6. Don’t get smug on the back of a good run (again).
  7. Cut your losses and run your gains (again).
  8. Watch what the sector that the stock belongs to is doing.
  9. Avoid binary bets.
  10. Indices are volatile and difficult for beginners to trade (again).
  11. Find your niche (trading style) and stick to it.
  12. Don’t buy trading software or systems (again).
I saw you coming

The next section is on scams, tipsters and the like.

It can be summed up in a single sentence:

A few don’ts:

  1. Don’t take the phone calls
  2. Don’t answer the “get rich quick” ads
  3. Don’t go to the expensive seminars2
  4. Don’t buy the software
  5. Don’t listen to tipsters
40 (or so) rules

Robbie closes the book with his 40 rules.

  • Many of which we have come across before.

Except that there are deliberately five mistakes, so really there are only 35.

  • He then adds some extra ones in another section called “Finally”

So let’s see how much we can condense and organise the list(s).

First, some general trading principles:

  1. Only trade with money that you can afford to lose.
  2. Don’t spend money on trading systems.
  3. Read investment books – you can never learn too much.3
  4. Also read the financial press – you need to keep in touch even though lots of it is rubbish.
  5. Don’t trade indices until you are experienced.
  6. Don’t go short until you are experienced.
  7. Don’t buy anything (stocks, or other products, like warrants and CFDs) that you don’t understand.
  8. Beware of trading on margin.
  9. Beware of relying on a single method for choosing stocks.
  10. Use more than one broker to compare services and systems (and sometimes prices).
  11. Don’t rely on charts but use them to support your trading decisions.
  12. Don’t over analyse so that you never get around to actually trading.

Next, how to buy:

  1. Have a plan before you buy.
    • Why do you think this share will go up?
    • Why are you buying now?
    • How much money are you investing and why?
    • How long do you plan to hold it for?
    • What’s your exit price?
    • How much are you prepared to lose (where will your stop loss be)?
  2. Get the whole story about a share before you buy.
    • There’s no rush – another share will be along in a minute.
  3. Don’t buy much more than the NMS of a share.
  4. Don’t buy a share with a spread above 5%.
  5. Don’t buy before 9am, because the spreads are at their widest.
  6. Only keep 8 or 10 open positions.4

Third, what not to buy:

  1. Don’t buy a share because it’s been tipped on a bulletin board.
  2. Don’t buy on director buys.
  3. Don’t catch a falling knife.
  4. Don’t buy loss-making or single product shares.
    • This includes small oil and mining exploration stocks.
    • It also includes loss-making pharma and biotech stocks.
  5. Don’t buy shares for their perks.
See also:  The Naked Trader - Lessons Learned

Finally, what to do after you’ve bought:

  1. Cut your losses but run your winners.
  2. Use stop losses.5
  3. Don’t average down.
  4. If you are losing heavily, cut back your positions.
    • It might be best to take a break completely and come back to the market in a week or two.
  5. If you are on a winning run, don’t increase your position size.
  6. Don’t sell on ex-dividend dates.
Appendices

The appendices include:

  • a list of websites
  • a list of books
  • a quiz to find out what kind of investor you are
  • details of the investment seminars that Robbie runs

I’m afraid you’ll have to buy the book to find out the details, but most of the websites were covered in one of our earlier posts.

  • I’ll also say that I haven’t read or even heard of most of the books on Robbie’s list – and I’ve read dozens of investing books.
Conclusions

And that’s it – we’ve come to the end of our look at one of the most popular investing books in the UK.

  • I haven’t discovered any secrets that I missed the first time around that might explain its popularity.

Within its niche – active investing for beginners who prefer a chatty approach to a more formal, academic style – it’s pretty good.

  • The ratio of sensible advice to silly advice is high.

But it’s incredibly repetitive, somewhat confusing, and around five times longer than it needs to be.

I also have my reservations about whether the style fits the content.

  • Trading really isn’t a blokey, “give it a go” type of activity.
  • It requires discipline, dedication and patience.
  • The kind of person attracted by the style of the book is less likely than most to have the psychological makeup that would make them good at trading.

Active trading should be a long way down the list of activities to sort out your financial life, and Robbie’s book spends very little time on this context.

  • Selling the idea of part-time trading from a leafy pad by the river to people who don’t have much spare cash and haven’t sorted out a house and a pension is not the most responsible approach.

But what do I know – the book is incredibly popular.

I’ll be back with a look at a new book in a couple of weeks.

  • If anybody has any suggestions for which book to cover next, let me know in the comments.

Until next time.

  1. We met this rule in an earlier instalment []
  2. An interesting one, this, since Robbie runs his own seminars []
  3. Also read quality investment blogs, like this one []
  4. I strongly disagree with this one. Apart from the fact that I would never be more than 30% active – 70% of my wealth will always be in passive positions – I run multiple, large – 30 to 50 stocks – portfolios. Once you are in a position, tracking the price is easy these days. []
  5. Robbie says 10%, but I prefer 15% to 20%, depending on the size of the share []

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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4 Responses

  1. Bulent Tinik says:

    “Selecting Shares That Perform” by Richard Koch and Leo Gough

  2. Gareth says:

    Thanks for a brilliant summary of this book. I have only recently discovered this site and found massive value in it. As for this book, it seems far too casual given the activity, and im glad your summaries were able to cut through the nonsense and deliver what is valuable.

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Naked Trader 4 – Trading in Real Life

by Mike Rawson time to read: 5 min
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