OUTSIDE THE BOX
TRADE your money in the stock market, and people tend to look at you like you’re a member of some strange alien cult. Never has anyone said to me, “Gee, that’s something I always wanted to do.” The least sympathetic opinions center on investors being a part of the Old Boys’ Club or that stock-market investing is just another casino gamble.
In 2010 I officially became a member of the Old Boys’ Club; at least that’s what the birth certificate says. Having played professional poker for a few years, I know about the inside of casinos and the Philippine Stock Exchange is not a casino; no free food and drink, among other things.
However, there are several things that a stock investor must do and not do in order to increase the likelihood for success just like in every other money-making venture.
Stock trading is a personal exercise. Rarely are trading decisions reached through a consensus of opinion even at the institutional fund level. Most often, and usually always with individual traders, it is a single person who makes the investing decisions and pushes the buy or sell button.
And it is the “button pusher” who must avoid the trading mistakes.
Every book on stock-market trading is going to tell you to have a clear and definite plan on what price to take profits, when to cut loss, and to have the discipline to strictly adhere to that plan.
Every book on being healthy is going to tell you not to smoke, drink only a little, and eat your vegetables and to have the discipline to strictly adhere to that plan.
While the trading plan is crucial and sticking to it is a must, most traders lose money because their basic strategy often put in their plan is wrong.
The most popular and foolish strategy is “averaging down.” That is, buying more shares at a lower price as the stock goes down. The idea is that your cost basis is reduced. This strategy is almost a guaranteed loser.
Say you buy at P10 and the price goes to P8. That’s only 20 percent you say and since the price is lower, you double up bringing the net cost down to P9. But now the price has to appreciate 25 percent just to bring you back to break even. Going down 20 percent is easier than going up 25 percent.
And think about it logically. Why would you want to buy a stock that is going down? “But eventually it will stop going down!” I hope you are right, but why not wait until it stops going down and buy when it starts going up?
Every stock investor struggles with the concept and process of cutting a losing position. How do you know when to cut a loss? Attend my seminar and I will show you.
But in the meantime, use a simple risk/reward formula.
Would you cross a busy street with cars whizzing by just to get to the other side? No, you would wait for a break in the traffic because the risk, getting hit by a car, is greater than the reward, crossing the street.
Would you cross a busy street with cars whizzing by if someone was chasing you with a knife? Maybe. Because the risk/reward equation has changed.
The odds of a stock going up or down are 50/50, no matter what your research says. It’s either up or down. Therefore, if your profit target is 15 percent, you do not allow a 20-percent or 30-percent loss. That makes no sense.
Did you wake up this morning, look over at your spouse, and think whether or not you wanted to be married today? Probably not. Relationships deteriorate over time.
But that is what you need to do with your stocks. You own stock XYZ. Ask yourself, if I didn’t own it, would I buy it today at today’s price? If the answer is no, sell. If yes, hold it.
Too many losing investors are found to be married to their stocks, holding on as the price goes lower and lower like a bad relationship. You can easily press the “sell” button and stop the financial pain quickly.
On a personal note, I will be conducting my seminar, “Your Money: Preservation and Profits—A Stock Trading Seminar,” in Manila on March 24. If you would like the details including an outline of what I will be speaking about, please e-mail me at firstname.lastname@example.org. Let me know if you would prefer a Makati or Ortigas venue location. I promise you this will not be an academic lecture. This is real world how to pick them and how to trade them profitably.
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