Some stock market proverbs. ”Buy the rumor, sell the news”: The stock price always incorporates a part of anticipation that reaches its peak when a rumor occurs. Once confirmed, the investor, having nothing to hope for the immediate future, will take his profits to look elsewhere
for a way to grow his savings. “Do not put all your eggs in one basket”: It is always better to diversify your investments to reduce the risk inherent in each of them. “It’s better to be right with everyone than wrong on your own” (Keynes): One way to say that the market is always right and that it’s never safe to go against the trend. “Do not catch a falling knife”: It is always difficult to determine where the lowest is when prices fall; confirming a trend reversal is better to take a position. “The trees do not rise to the sky”: It is not because a value has risen a lot that it will continue to do so. An investor must know how to take his gains, if only partially. “Better to cut your hand than an arm”: Taking losses as long as they are relatively limited is probably the most difficult decision on the stock market, but it will avoid bankruptcy.So, for Warren Buffet, “If you ever find yourself in a sinking boat, the energy to change boats is more productive than the energy to plug the holes.” Since the human mind hates losses, the investor generally prefers to sell the securities on which he gains capital gains and to make downward averages on his losers. An attitude that can lead to ruin, for example, if you bought shares in Alcatel-Lucent, France Telecom or Vivendi in 2000, and you have never sold them … According to Markowitz’s portfolio theory, the market is by definition the most diversified portfolio. But by appropriate diversification, the investor can substantially reduce his risk without any sacrifice of expected profitability. We find the common sense of the popular saying: “Do not put all your eggs in one basket.” It turns out that a portfolio of 20 securities (or only 10) chosen in different sectors is sufficient to limit its volatility, and therefore the risk.