3 Best Bits of Advice
Posted on April 22, 2015
1. Put in Money you can Lose: I think this is somewhat self explanatory. I have a friend who has a friend. Let’s call them friend A and friend B. Friend B made $25,000 buying a penny stock in one day. So my friend, friend A decided his new career was going to be day trading. A few days later he got back to me and said he lost $11,000. His career of day trading within just a few days abruptly came to an end. Sadly so many of us jump into stock investing with the golden tickent mentality. This is surely a formula for failure. I don’t know what happen to friend B, but chances are he enjoyed making the $25k and most likely tried to do it again and lost it all. That’s usually how it goes.
2. Trailing Stops and why it’s a beautiful thing: Did you know that you can set trailing stops in your portfolio? If you have made money in a stock and want to make sure that you lock in your gains, set a sell order if the stocks dips down to a certain level. This way, you can ensure you minimize your losses should something catastrophic happen. Now, I am aware that with as much market volatility that we have seen, you stand a chance of selling right before it goes back up. You then have to pay more in transaction fees. My point of view is so what. As long as you have gotten past the initial earnings issue, then you are good to go. What do I mean by that? I mean, if you have made a decent return on the stock, then you can set the stops to lock in at least a 15% return. That might be a rule of thumb I would use.
3. Slow and Steady: We are emotional. Chances are when things are up we are buying and when things are down we are selling. The contrarions out there do the opposite. But this requires a high amount of intestinal fortitude. It is just way too easy to make the wrong choice when things don’t look as you hoped. That is why point number 1 is valid in my eyes. It can’t matter. It can’t matter if it goes up or down to a degree. I had a stock that I inherited. My mom bought it for $20,000 (roughly). Today it is worth may $40 total. This of course was disheartening. But I remember at the time, my mom believed so heavily in the leadership of that company (rather than the facts), that she bought in hook line and sinker. I’ve done similar things don’t get me wrong. But, we need a definite calculated strategy of going about our buys and sells.
I usually think about it in these terms. If my friend came to me and asked to borrow money, would I let him borrow it? Well this in its most rudimentary form is exactly how I approach investing. I think about my friend and how likely he is to pay me back.
If it’s unlikely then I am not going to let him borrow the money. If it is highly likely, then probably.
When I look at companies, I simply pretend that they are my friend asking for money. Then I go research whether I think they will pay be back or not.
More on that later.