This post is sort of inspired by the Blue Chip stock entry by my friend Robin, of FortuneWatch.com.

I left a comment on it, and I thought I reproduce it here.

Without further ado, the second tip of this series is

“In times of sudden crisis, buy blue chip stocks”

Just in case you are wondering what the heck are blue chip stocks, let me first clarify. Nope they are not potato chips that are blue in color (Sounds yucky to me).

Blue chip companies are generally defined as big, safe, fundamentally strong companies with a market capitalization in excess of billions.

Blue chip stocks are good if you want to add some balance and diversification into your portfolio, but don’t expect any extraordinary gains. They are as safe (some people say boring which is a good thing actually) as can be. If you are looking for wild fluctuations, gyrations and excitement, you gotta look elsewhere.

So why buy in times of sudden crisis?

By sudden crisis, I mean a terrorist attack like 9/11, tsunami or hurricane devastation, death of a leading political figure or outbreak of disease like bird flu or SARS.

Such incidents usually spark off wild panic and indiscriminate selling. People are abandoning ship like nobody’s business.

You might be tempted to jump too, or stay off the market, but hold on a second!

Warren Buffett once said, “Be fearful when others are greedy and be greedy when others are fearful.”

How apt!

When everyone is panicking and selling like crazy, now it is time for you to pick up stocks like a crazed greedy mad man who seemed like he had never eaten in years! Not just any stock, but fundamentally strong blue chip companies with a solid balance sheet.

Now we are talking!

You can be assured that that the price of these companies will drop due to the mad sell off and this will represent a fantastic chance to scoop them all up at a bargain price. You probably won’t get such a good deal at the annual great sale by your nearest shopping mall.

If you think long term, and am willing to look past the short term downward spiral, the price will definitely correct itself in due time when the market has stabilized and regain it’s lost head.

Better still, look at government-linked companies like banks. The government won’t allow them to fall, so it’s a pretty sure bet in this scenario.

Blue chips have never tasted this tasty.

This strategy has worked in the past and will work in future. Just that, do you dare to go against the emotional mass crowd and walk the road less traveled? That is the question.

[tags]random finance tips, blue chap stocks, Warren Buffett[/tags]

---
Related Articles at E-MoneyMarketing:

Random Finance Quotes #1
Random Finance Tip #3
Random Finance Tips #1
Finance Downloads

I wrote this in a forum about two years ago. While searching for inspiration on what to write today, I thought I will just reproduce the whole piece for your reading pleasure. Do note, I’m an advocate of marrying both fundamental and technical aspect of investing together, but what I’m going to highlight here are rules from a technical perspective. So here goes:

The market is quite an unforgiving yet fascinating and challenging place. It rewards handsomely when one is right, and dishes out stern punishments when one is careless and underestimates it. Quite like the principal in school ain’t it?

It can be indeed a humbling experience. Don’t despair if you make mistakes and make losses. No one can make money all the time. Not even Warren Buffett if that is a consolation.

Taking this into perspective, even institutional fund managers, floor traders and professionals make mistakes too. You are not alone in this challenge. Important thing is to not focus on how much you make, but rather on how much you don’t lose. Capital preservation should be your no. 1 priority. After all, you need to make 100% just to break even from a 50% loss.

Don’t be too anxious to cash in on your winners too early. So long as the chart is showing a series of higher highs and higher lows, everything is well, fine and good. Sell off your losers as soon as the market proves you wrong.

Sure danger signs are failure to break to a new high and inability to hold above a prior low. In another words, think of getting the hell out when it shows a series of lower highs and lower lows. An appropriate stop loss order will help protect profits.

Buy intelligently. Safest time to buy is always at the end of a selling climax, when pessimism is at the most extreme. Look for formation of long base at bottom. It’s a good sign of a possible market turn-around. With a strong base as support, we can then look out for any breakout, and when it comes, make sure the volume is high, which is an indication of strength. If we can limit our buying to such situations, sure you may miss some odd winners, but among such purchases there will be almost some which will show definite significant gains, and far less mistakes.

Be wary of buying tempting stocks that are already well in progress upwards. You may just be buying near the top. Majority are bullish near the top. The later the purchase, the greater the odds against you. Of course, price could still go higher, but maybe its better to let someone have the last few gains. Market will always fluctuates back down again, and a time will come when it is safe to enter. Patience is the key.

Look at news objectively. It’s not the news that matter but rather how the stock reacts to it. Generally, buy on bad news, sell on good.

Don’t try to rationalize market movements. Accept it. If market indicates nothing, do nothing. No good buy, don’t buy. Curb the temptations. Responsibility is to your capital. Not to your broker or the person beside you giving you the next hottest stock ‘tip’.

Don’t bottom fish. Let others have the luck. You are not a fisherman. So let it stay that way. Don’t buy more stocks than you can watch. It’s no good having your hands too full. Follow big volume on breakouts and low volume on dips. In bear market, low volume is dangerous, as high volume declines could lie ahead. Low volume is only bullish when the stock is able to hold at a support.

You can always buy a stock back. So don’t get married to it. A free falling stock won’t give you any love back. Stay faithful only to your wife (or mistress). Lastly, Mr Market is an elusive unpredictable egomaniac. Let him tell you. Don’t try to tell him. Heck, I don’t even know who he is even if I could!

[tags]stock market, Mr market, trading, stock investment, speculating, market top, market bottom, bull market, bear market, Warren Buffett, stop loss[/tags]

---
Related Articles at E-MoneyMarketing:

Unbreakable Solid Rules To Winning In The Online Marketing WAR!
Maverick Rules To Business
Let’s Hop On The ‘MyBlogLog Wagon’ Bandwagon
Simple Approach To Negotiation

One of the most interesting and fascinating part of investment to me is standing at the sidelines to observe just how irrational investors and market as a whole can be.

Sometimes, at the lure of fast gains, they can get sucked into a trading frenzy, only to have the whole action dying down just as fast. I never fail to be amazed at such cases of mad crowd behavior.

One instance that reminds me of a crazy day in the market, will have to be the first day China Aviation Oil (CAO) re-opened for trading after a long suspension. For those unfamiliar with the Singapore market, CAO is a Singapore Stock Exchange (SGX) listed company based in Beijing, that supplies jet fuel.

It got it’s ass busted for illegal insider trading and crimes linking to risky oil derivatives speculation which resulted in massive losses of US500 million! To cut the long story short, the director, once hailed as a high flyer in the industry, was sent packing to jail, while the company went through a long painful restructuring process, which also saw the two knights in shining armour, Temasek Holdings (the investment arm of the Singapore government) and British Petroleum (BP) coming to it’s rescue.

Of course, in exchange for saving the company which was on the verge of meltdown, these white knights were able to buy the shares at the rock bottom price of 51.5 cents! And boy, were they in for some reaaaaaaaally BIG gains!

Price movement of CAO on the opening day. Note the huge surge in volume on that day compared to the teeny weeny average volume on subsequent days.

CAO was a very hot stock before it got suspended, and naturally it drew a lot of publicity during the whole saga. When it was finally primed to make a long awaited return to the Singapore market, everyone was anticipating and guessing how CAO will perform.

I knew that the first day was going to be field day for punters and speculators. I remembered vividly the day it re-opened on the Singapore market. The date was 29 March 2006.

Before the market was even opened, there were queues forming up to put in their bid for their lots of shares. Needless to say, the share price was being jacked upwards continuously.

Financial analysts were estimating beforehand that CAO will open trading in the market at a fair valuation of 50 cents. Lets bear in mind that Temasek Holdings and BP bought their share at 51.5 cents. With all the crazy punts and people who were jumping into the ride, guess what the price it opened at?

$1.30!

That an excess of 160% above what the analysts thought was a reasonable opening price! At the start of the day, Temasek Holdings and BP were already staring at a whopping 152% profit!

On that day, I was in the laboratory conducting some experiments (I was still a student then). I decided that I shall just turn on the computer to sneak a look at CAO’s price. When I saw the opening price, you can say that I was surprised, though I kinda expected this would happen. Still, I was a little taken aback by the mass interest the market was taking in that stock.

So the price just continued to climb and climb and climb, till it reached a climax of $1.85 before a mad sell off to take profit commenced. When the dust has settled, the stock closed at $1.64. Had Temasek or BP sold off that day, it will be a massive 218% profit in the pocket, all in a day’s work!

To put it in perspective, the black Monday stock market crash in 1987 dropped by 22% in a single day. Here, even though it wasn’t a crash, we have a stock that moved 42% from the opening to the high, and then plunging back by 11%. If you look it at another way, the closing price registered a 26% jump from the opening price.

If you are wondering, the price is now at $1.14 per share. Looks like the market has corrected itself and only rightly so.

So there you go! How wild, crazy and irrational can a market get? It can be exhilarating and also damn scary at times!

Looking to go into investment? Be prepared for a long ride! Not for the faintest of heart!

[tags]crazy, stock market, speculation, punters, investment, finance, singapore stock exchange, china aviation oil, black Monday, stock market crash, Temasek, British petroleum[/tags]

---
Related Articles at E-MoneyMarketing:

Up-sell Gone Crazy
Recession? Don’t Join ‘Em. Beat ‘Em.
Random Finance Tip #2
If There Is One Thing You Should Do Today, It Is BACKUP!

Image Credit: www.danablankenhorn.com

Today I read a report in the newspaper that got me shaking my head, half in pity and half in weary resignation.

It seems that there are always such cases happening!

The report was about how a student lost $700 000 trading in shares during the recent market slump! In the process, he wiped out his dad’s life savings, lost his girlfriend, and possibly also his family’s house!

Imagine $700,000! That’s not very far off one million! More money that most of us can ever dream of!

I find such cases really sad. Tragic even. Seriously, such cases can be avoided, and I hope this story serves as a wake up call to investors/traders who are living dangerously on the edge.

Some important lessons we can learn here

1. Firstly, he wouldn’t have been in such a predicament had he invested money which he can afford to lose. That is to say, even in the worse case scenario of 100% loss (assuming he doesn’t leverage), there will be minimal disruption and adverse impact to his financial health. He will still be able to carry on the normal lifestyle that he is leading. Alas, this is not the case here.

This is one of the worst mistakes any investors could have made. All this could have been avoided!

2. In the article, I read that his father gave him his life savings to play shares, and commented to his son that there is no gain without risk. I find this deeply disturbing.

One thing I hate is the phrase ‘play shares’. When it comes to investing or trading, it shouldn’t be treated like a game. This is not the usual casual Sunday soccer we are talking about here. This is serious business!

I find that a lot of people go into the market with a devil-may-care gung-ho attitude, and they often don’t usually have a good story to tell afterwards.

I cannot understand the part about no gain without risk. Yes while I agree that there is risk involved in everything, we should always try to take calculated (not mindless) risk. When I talk about calculated risk, it means that you go in with the odds in your favor. Investment/trading/speculating is all about probabilities. If you can have them on your side, while you will lose on occasions, you will be in positive territory in the long run for sure.

This involves hard work. The usual careful evaluation of company, market conditions and market timing among other factors apply. With proper due diligence, it goes a long way to ensuring that you will effectively lower the risk that comes with investing.

I once read about an experienced investor arguing that contrary to conventional norm that investing/trading is high risk high returns, it can actually be low risk high returns, provided you do the necessary homework and be disciplined in the way you carry out your investing/trading plan. I’m inclined to agree

3. Speaking about having a investing/trading plan, a system is vitally important. One must know when he should enter and when he should exit. Whether is it to take profit or cut loss, a system with proper screenings in place will tell him when to do that. A system helps the person to think clearly and act accordingly should the market take any unexpected turn.

Can you imagine a general leading an army into war without a systematic plan? That will be suicidal.

The student panicked when the market took a nose dive, and it’s quite obvious to me he probably has no system in place.

Lets note that he made the loss doing contra trade, which is to me, a very very risky move. In such short term outlook, a stop loss is vitally crucial. Anything can happen within the 3 days period (after which you have to pay up if you don’t sell). If he had placed a stop loss, he would not have suffered such a crushing blow!

You know how deer reacts when an oncoming train is rushing towards it? It stays rooted to the spot, blinded by the glaring light from the train. It probably doesn’t even know what hit it afterwards, and by that time that happens, it should have met his maker!

If you have no system, you could end up like the poor deer! I don’t want to see your life and dreams shattered!

4. Invest time and money in education and knowledge. Spend a bit on books. Read and learn as much as you can. It could save you much more in ‘tuition fees’ later.

I’m also an advocate of paper trading. Go test your system first. See if it’s workable. Treat the paper trading like the real thing. Approach it like what you will do in a real situation. Yes, the psychological factor might not be that compelling, as there is nothing to lose, but the experience will help nevertheless.

I’ve joined the stock competitions before I got into the real thing. I felt all the range of emotions while going through the course of the competitions.

The jubilation of seeing the price rise. The doubt creeping in when things do not go according to plan. And of course, the low when I see a red negative mark. I was rather new then, made quite a few mistakes, but the overall experiences taught me a lot on how to control the emotional aspect of investment.

I shall just repeat it one more time. Treat paper trading like the real thing! Don’t just throw caution into the wind just because this is merely paper trading. Yes you might actually do well (in fact very well in the case of that student) in a simulation by taking all sorts of high risk gambles, but this is not what we want here.

This should be done by simulating how you will react in real life with a plan at hand. Execute the plan faithfully and resist the temptation to deviate from it. If it doesn’t work after some time, refine your plan and test somemore. Do it till you get consistently good results, and then that’s when you know you are reasonably ready to get into the real thing.

Much has been written, and I think I shall end here. I’ve friends who have been through such situations before, and it’s definitely not nice. I just hope the student gets back on his feet and treat this as a learning experience. Everyone deserves a second chance.

[tags]investing, trading, speculation, contra trading, emotions, psychology, paper trading, stock market, important lessons, Mr market[/tags]

---
Related Articles at E-MoneyMarketing:

Educational Blogs That Are Worth My (And Most Probably Your) Time
Why Knowing And Segmenting Your Market Is Important
5 Steps To Perform Your Market Analysis
Some market rules to look out for

Image Credit: BBC.com

I wrote the first part somewhere at the start of February, and wanted to post the follow up a few days later, but somehow this matter slipped my mind. It didn’t help I got so much other stuffs occupying my thoughts and time.

Never mind, better late than never though!

Back to the topic, psychology is a vital and very important aspect of investing. Overlook it, and be prepared to under-perform. The average investors out there are driven predominantly by greed and fear. Price fluctuations are all heavily influenced by emotional investors, as they make up the bulk of the market crowd. Yes even institutional investors are prone to making emotional and irrational market moves.

Some examples of irrational and emotional behavior of investors:

1. Investors hesitate to purchase a stock when it is an obvious bargain, but instinctively chase popular stocks to very high and overpriced valuations. They either probably think that it is too good to be true or it is just too ‘unwanted’ to their liking. The hot stock seem a ‘sexier’ choice.

2. Investors feel the need to take a profit on a stock that has raised a modest amount, and often missing out on much larger profits had they held on longer. Yes many of them cannot wait. They are happy to cash out on a few percentage points of gain, only to watch in horror as the price keep moving upwards.

3. Investors postpone selling stocks for a loss, even when the business fundamentals have obviously deteriorated and are rotten to the core. They rationalize that things can only look up after having sunk so low.

“It’s high time for a rebound! I will hold on just a bit longer. After all I’ve waited for so long and lost so much on paper, so no big deal holding on a for just little more!”

4. Investors become bored of holding onto a portfolio of good, solid, fundamentally sound businesses. These are companies which consistently post healthy profits, giving out decent dividends but are low on profile. However they find that there is no kick and excitement holding on to just these stocks.

They feel a strong desire to use any spare cash to trade more often just to create some activity, when they could have better spend the cash reinvesting on the good (but dull) companies that they are already holding.

Perhaps things are looking a tad too boring on paper? More activities automatically translate to more gains?

5. Both amateur and professional investors start to feel like superstars and top of the world after a few winning streaks. They begin thinking that they are the next Warren Buffett or George Soros. Or maybe even better?

“Who is this Warren Buffett? He is old-schooled! Not a threat!”

7. Acting on ‘expert investment’ advice and ‘hot tips’ from friends, financial journalists, stockbroker or even the man in the street instead of first doing his due diligence and research.

????????????????????????????? Are you guilty of such behaviors?

If you are, please prepare yourself for a rethink!

The fact is that we can profit from other people?s irrational behavior, provided we ourselves can keep our emotions in check.

Average investors like to chase the ?hottest? and ?in? stocks, pushing the price way above its intrinsic value to monstrous proportion. If we follow the crowd, we may actually end up buying when it?s at a high. That’s like a ship going on a collision course with an ice-berg!

On the other hand, certain stocks? prices fall sharply due to fearful investors going on a selling spree to cut losses, and in the process driving its price to way below its actual value. These stocks are often seen as dull and boring. Nobody wants to touch them, even if it’s offered on a silver platter.

We should be looking out for such ?dull? bargains instead, as they usually gives us a huge margin of safety. You can identify such shunned stock by its low P/E and price to book value (PBV).

To succeed, we must sometimes dare to go against the popular crowd sentiment. Go contrarian! Of course, when it comes to buying a stock nobody wants, you still have to do the proper research and scan them through proper and rigorous stock screening to ensure that it?s still fundamentally sound with good growth prospect.

Some of these companies may just be suffering a fall out from a short term over-reaction of investors. However we have to take note that some low P/E stocks are indeed really lousy! Watch out for such ?falling knifes? (term for lousy stocks which values keep dropping)! Learn to differentiate the good ones from the bad.

Adopting a contrarian approach can be quite painful, as you are not following the consensus. Other people may laugh at you for being stupid, but if you have done your homework, you will be the one having the last laugh, and all the way to the bank for that matter.

[tags]emotional investor, irrational investor, emotional, institutional investor, irrational, falling knives, investment, contrarian, crowd sentiments, stock market, Warren Buffett, George Soros, fundamentals[/tags]

---
Related Articles at E-MoneyMarketing:

The Emotional Investor Part 1
Pressing Your Buyer’s Emotional Hot Button
Greed is good!
Small crazy personal reminiscence on Investment and a great tool I (and you should) use – ChartNexus charting software

I know I’ve said this before, but I guess I shall just repeat again because I cannot stress enough how often people, even experienced investors, make such mistakes.

Before you enter investing, you must ask yourself, can you fulfill these 3 basic requirements?

1. Are you knowledgeable enough?

Do you know a lot about the company you are investing in? Do you know its fundamentals and growth prospect? Would you like to be owner of the company yourself? Are you aware of the trends in the business world?

If you are employing technical analysis, do you know enough about the technical indicators and price and volume trend? Do you have the necessary charting skills?

2. Are you able to control your emotions?

Are you able to think with a rational mind, and not let greed, hope and fear rule your head? Do you base your buy and sell decision on hastily following the crowd without proper analysis on your part?

3. Are you disciplined?

Do you follow the investing system you set for yourself religiously? Or you constantly shift your strategy just to justify your actions?

These are the 3 areas which many investors, novice or experienced, have problems with. In identifying these danger areas, we can question ourselves whether we have made the same mistakes, and then focus on not repeating them in future.

Here are some other mistakes, which are not as major, but no less important

4. Investing with money which one cannot afford to lose.

That is a big no-no. Investment is supposed to help you to accumulate wealth. Even with the most careful of planning and analysis, one cannot eliminate the risk totally, so investing with a sum which one can afford to lose is a rule which we cannot deviate from.

In that way, in the worse case scenario, if we lose 100% of our capital, we can still survive.

5. Allowing losses to accumulate and quick to take profit.

Capital preservation is one of the top most priorities. Once it?s clear you have made a mistake in your investment, you should cut loss quickly. Many people sit on a paper loss, and rationalize that as long as they don?t realize it, there won?t be any real loss. Dream on!

By the time they wake up from their mistakes and take action, their losses would have been much greater. Warrant Buffet style is to focus on not making any loss before thinking of getting profit. If the greatest investor of our time thinks that way, we won?t go very wrong if we follow the same way.

6. Not having the necessary patience.

Investing without patience is really like shooting yourself in the foot. Especially so when you are taking a long term approach. If you work so hard in evaluating and finally selecting a company based on good fundamentals, you should have the patience to wait for its true value to realize.

Very often you will find the price fluctuating, and moving sideways without making any real headway. It?s very common. If you are very sure of your stock selection, you should have patience to see it out. Some people get tired of waiting, and cash out for a small gain, only to see it rise further.

Patience pays.

7. Selling winners and keeping losers, instead of the other way round.

Doing so will only ensure that you will be net negative territory in no time.

8. Not having a long term goal.

We should always start something with an end goal in mind. Investing is no different. Many investors do not set a long term target, which explains why many of them incur losses or fail to beat the market average.

My aim for our portfolio is 15% or more gain per annum. It?s not an easy target, but it?s achievable. With 15% gain every year, the compounded gain will enable us to double our initial investment within 5 years. So 15% is a good starting point.

9. Not having a proper investing strategy.

Investing without a strategy is like going to war without war plan. Akin to planning for doom!

No strategy = Irrational trading activity = No consistent profits.

Ask yourself today, are you guilty of these mistakes?

If yes, I hope you know what to do!

[tags]investing, investment, mistakes, pitfalls, strategy, discipline, emotions, controls, patience, long term goal[/tags]

---
Related Articles at E-MoneyMarketing:

Mr Market claimed yet another victim!
Inner Game Of Online Success
Some market rules to look out for
Model Success

Many serious investors out there must have heard of or read the investment classic “The Intelligent Investor” by Benjamin Graham, the father of value investing.

I have my own version – The Emotional Investor.

The emotions associated with investing (or trading/speculation for that matter) are very real! And may I add very counterproductive, even harmful as well!

When one is emotional, sense and level-headedness are thrown out of the window. It blinds the most intelligent of people. It clouds the judgement of even the wisest of them all.

What deadly emotions are we talking about here?

1. Greed

So what’s new? Greed has been present in men since the very beginning of time. The insatiable urge to squeeze out more money, every little ounce of them. I for one has experienced this before, many times in fact!

Greed is one of the worst destructive emotional behavior.

Have you ever found yourself in a situation where you are supposed to take profit, quit the trade, but decide to stay on longer just to earn a few more percentage points, and in the process going against your own rules?

I have.

Ever wanted to go in at the low (or so you think it is), because you desired a dirt cheap bargain which may give you the most potential of profit, despite  the fundamental and technical picture looking real bad? And then finding yourself neck deep in water? 

I have (but fortunately I encountered this when I was paper trading. Didn’t lose any real money).

This is some real examples of greed at play. Highly destructive. And one of the prime reasons why many have lost a big pile in the market, who will then go on cursing their luck and so on, where in actual fact, they have only themselves to blame.

2. Fear

Everyone have their fears. The investors/traders are no exception to this

Fear of losing their profit.

Fear of incurring further losses.

Fear of missing out on the hottest stock.

Fear of losing control.

Fear, like greed, destroys. It discourages more than it stimulates. When fear strikes, you lose your composure to think. And when you do not think, you will face a hard reality check -  your vanishing hard-earned cash!

3. Hope

You see your stock rising up. You hope it goes up even more.

When you see your losses mounting, you hope it has reached the bottom, and the only way left is going up again.

Hope. Hope. Hope.

Many people do that. Just hoping, praying and doing nothing, but usually to no avail, when the situation can easily be brought under control by taking some simple actions (e.g. cutting losses).

Hope gives people a false sense of security. Putting it in a blunt manner, they sometimes end up deluding themselves.

Putting it all together

The emotional investors, filled with greed, hope and fear, are often the most irrational ones. When these people come together and act as a whole, the market goes crazy. The madness of the irrational crowd in full force if you will.

You want proof?

Do a Google search on all the following classic ”bubbles” and “crashes” cases throughout history and you will know why.

• Dutch Tulipmania (1634 to 1638)
• France’s Mississippi Bubble (1719 to 1720)
• South Sea Bubble (1720)
• Roaring ’20s U.S Bull Market (1924 to 1929)
• The Great Depression (1929)
• Japan’s “Bubble Economy”
• Internet Dot Com Crash (1999-2000)

Notice how such “bubbles” and “crashes” move in cycles?

Well actually markets do always move in cycle. Always has been, always will be. And the sentiments and psychology of the herd will always play a major role in them.

Why does it keep happening? It is so, simply because the nature of man do not change! Greed, fear and hope will always be there! This is true centuries ago and will continue to be so centuries later.

Want to win in this zero sum game called investing? You can, if you achieve the following:

Keep your emotion in check.

Be a cold blooded unfeeling robot.

Dare to be a contrarian (in appropriate moments). Be greedy when others are fearful and fearful when others are greedy, as Warren Buffet once puts it. (A little ironic here since we are taking about suppressing our emotions!)

You will be ahead of most people.

I’ll leave you with a picture I found most intriguing which details the psychological cycle of the market. It gives a visual picture to the famous quote from a famous investor, Sir John Templeton about bull market – “It born out of pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Enjoy!

Pic courtesy of The Big Picture

---
Related Articles at E-MoneyMarketing:

The Emotional Investor Part 2
Pressing Your Buyer’s Emotional Hot Button
Greed is good!
Small crazy personal reminiscence on Investment and a great tool I (and you should) use – ChartNexus charting software

I do remember vividly of one instance when I was discussing investment with a dear friend of mine.

When I mentioned the word ‘stock’, he straight away got a bit wary and defensive and commented, “Isn’t playing with stock no different from gambling? And not to mention it is a high risk game as well? If I make just one wrong move, I’ll be in deep shit right?”

Reflecting back then, I think there is still a perceived notion that dabbling in stock is equivalent to gambling. I don’t really blame my friend for that statement. He had a bad experience where his dad lost a pile in the stock market. Must be traumatizing for him.

Yes while I do admit, getting involved in stocks can be like gambling in certain cases, to equate both of them together will be to do injustice to all the careful and rational investors  who do their due diligence out there.

All too often, we hear of people losing a fortune in the stock market. When you really examine why is this so, the familiar old reasons come out. There are many, but I will just pick 1, which is

Listening to the hot tips.

This is the no. 1 killer. Far too often people love to listen to the latest hot ‘tip’, hoping to make a quick buck.

Tipster will always tell you which stock to buy. But do they ever tell you when to get out?

Many give tips because they want others to get into it, and in the process, helping to push up the price. When everyone is all happy and comfortable with the sky high price, reveling in self-congratulations, the tipsters will then dump it all and take profit.

Who suffers?  The suspecting fellow who listens to the tip and happily went in on the high, but not knowing what hit him later. When he finally does realized, his pants are probably gone by then!

 I could on and on about other reasons but I think I will leave that for another day.

In truth, stock investing and speculation/trading is all about mathematics. To be more precise, probabilities.

No one, not even the greatest investor out there, can truly say that he is right 100% of the time. Not even Warren Buffett. It is just not possible. If you can find one, please tell me. I will be the first in the queue to be his disciple.

Back to my point of probabilities, in investing/trading/speculation, you have the power to choose which stock you want to buy as well as when you want to enter and exit a trade/investment. If these actions are done properly and rationally, it can greatly increase your odds of winning. Coupled with a sound risk management/cut loss/take profit plan, the downside risk can be further mitigated and minimized. 

Speaking about getting your odds in your favour, what does it mean for you? Actually it’s a rather simple concept. For example, if out of 10 times, you make 6 winning calls, in the long run, you will still be in net positive territory. That will happen only when you get your odds right, and you should be striving for it, everytime!

That said,  how much you win when you make a right move, and how much you lose when you commit a mistake, is much more important than being right more often than wrong.

Why is it more important than being right most of the time?

Let say you make 4 winning calls instead of 6 this time round, but you manage to score big on all 4 winning calls and at the same time limiting the 6 losing calls to small ones, then you will still be on the right positive track in the long run.

How to get about doing this? Simple. Firstly, stick with your winners and let your profit run. Secondly, cut the losers! This is all about risk management. Many losing investors (gamblers?) do the exact opposite – sitting with losers and cutting the winners.

If we can get the probabilities right, going in with the odds in our favour, together with the right risk management, it really isn’t so risky right?

The same can’t be said of gambling. When you gamble, you are already at the wrong side of the odds, as the house edge is already against you.

As the saying goes, “Making a living from gambling is easy - if you are a casino.”

Many gamblers will probably tell you their rare success stories. Ask about his losses, and he will most likely keep mum and scurry away to one quiet corner. For the vast majority of the time, unless you are a professional gambler who can calculate the odds real well (these people are few and far between), the whole affair is a losing proposition in the long term.

You want some hard core statistics as proof, go to British Columbia’s partnership for responsible gambling to give yourself a sobering wake up call and see how much the odds are stacked against you,

So, as you can guess, gambling is a big no-no to me. It should be for you too. And no way is stock investing or speculation always equivalent to gambling. I rest my case.

---
Related Articles at E-MoneyMarketing:

Mistakes and pitfalls in investment you should AVOID!
Small crazy personal reminiscence on Investment and a great tool I (and you should) use – ChartNexus charting software
Mr Market claimed yet another victim!
Some market rules to look out for