Risk Control
Everything you invest in has risk so you want to do your research before you put your money on the line.
For example, when McDonald's opens a new restaurant (please, don't call it a hamburger joint) they will investigate as many of the relevant facts as possible. The demographics of the area - age and income of those within a certain driving distance. Who, where and how much is local competition? The number of cars driving by each day will be counted and will be tallied at one-hour increments. Local labor costs must be figured in. The cost of acquiring the land and construction of a new building or rental of an existing location is estimated. These and many other factors are added up to get an idea of the approximate operating costs and amortization of fixed assets.
When they have all that then they will be able to figure out how many hamburgers will need to be sold to break even. This true and meaningful research to decide whether to risk money for investment - in this case return on investment or as Wall Street calls it, ROI.
Unfortunately, Wall Street also tells you to do similar research before you buy stock in a company. There is almost no correlation between doing research for ROI and doing similar research to determine if a stock is going to go up. There are thousands of companies that have excellent Operating Statements, but the stock goes nowhere year after year. One of the easiest ways to see this is to go to www.bigcharts.com , type in the symbol of the stock and check back on its price performance for the past 5 to 10 years. If it doesn't have a nice steady upward movement it will be best not to buy it. Also if the price action is extremely volatile you should also pass even if your broker says to buy it, especially if your broker says to buy it.
The type of research brokerage firms tell you to do means absolutely nothing as far as finding out if the stock price will go up. Wall Street-type research is basically worthless.
Let's says you have done some intelligent research and have found a stock or mutual fund that has been going up for the past several months or even years (these are very rare) and you decide to buy it. There is no guarantee it will continue to go up, but you want to limit your risk. How? There are a couple of very simple things you can do.
The first and simplest is to determine how much you are willing to risk in this investment. Maybe the stock cost $60 per share and you are going to buy 100 shares for $6,000. You decide you are willing to risk $1,000, no more. At the time you make the purchase you also put in another order with the broker. Tell him to place a Good Til Canceled Stop- Loss Order for $50 per share. If the stock drops to that price you are out.
The second way is to go back to the Internet and the above web site and print out a chart for the past one, three or five-year time periods. Then draw in a trendline along the bottoms of the price action. Connect a straight line along the lowest price. Usually you will have at least three places that will hit this line as it is progressing upward. When that line is penetrated you want to sell out.
Investing in anything without risk control could mean large losses of capital. Wall Street trained brokers are not taught risk control. If you want to preserve your capital it is up to you.
Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.
Copyright 2005
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Investment Attorneys and Garbage Stocks
How is it possible that trash Companies are posting less than expected results? Trash Companies are thought of by prudish investors as some of the safest stocks to own. Ask Warren in his Buffet of Essays on Corporate America.
Psychology - How to Reduce Negative Thoughts Relating to Trading?
The thinking process of the brain relating to the psychology of trading involves:-- Beliefs -- Feelings -- Values -- Dispositions and -- FaithThe positive or negative energy brings power to a person's actions, which ultimately determines whether a person is a winner or a loser. You can change for the better or for the worst.
Size Counts!
What the heck am I talking about?It is often said that to grow mentally, spiritually, emotionally and personally that you have to stretch and move out of your comfort zone. I definitely believe in this concept, however.
Stock and Fund Dividends
When is a dividend not a dividend?The latest thing "conservative" brokers are preaching these days is to buy stocks that pay dividends. Everyone likes dividends.
Selection Vs Direction
As I have said many times before in this column it really doesn't make any difference what you buy - stocks, funds or indexes - it takes smarts to know when to sell. Direction of the general market is more important than selection of any equity.
Investment Discipline
One of the great "secrets" of successful people is discipline and it doesn't make any difference whether it is manufacturing, processing, servicing or investing in the stock market.Before you can have that discipline you must have a successful plan and stick with it.
Performance Funds
Mutual funds are doing more and more to discourage investors from leaving them and taking their money to a better performing fund. What does better performing mean? It has nothing to do with who the manager is, what the expense ratio is or how well they performed over the past 5 or 10 years.
Selling Strategies - Setting a Stop Loss
Sometimes the best way of lowering exposure to risk is not to invest at all! However, when we make the decision to jump into the muddy waters of the stock market, its always a good idea to have a life jacket ready, just in case.We all have stories of that "must have" "can't lose" stock that looking back, we didn't really need to buy, and it definitely lost.
The Information Age
It is wonderful to be alive in the information age. We know in a matter of seconds the change in the value of gold in Switzerland, the death of a world leader or the birth of a peasant in Israel.
Time Out
Are you paying any attention to your retirement savings? Do you have it in cash or an account with a broker? Maybe you have a professional manager who is investing your money as you add to it every month.Is your account increasing in value every year? If it isn't why are you letting anyone else invest for you? There is no point having a loser in charge of your money.
What is the Most Important Indicator of All?
Most stock market traders have a favorite technical indicator.The one that they have the most confidence in.
The 10 Commandments
Wall Street has been preaching for years and years to investors how and where to put their money. The "experts" have put forth these ideas for so long that they seem to be carved in stone just like Moses did with God's 10 Commandments.
How to Read an Annual Report
Every publicly traded company is required by the SEC(Securities and Exchange Commission) to provide annual reports to it's shareholders, and the general public as well. These annual reports contain very important financial information, as well of summaries of the companies progress made by the CEO, board members, etc.
So, What is This Stock Market Thing Anyway?
We've all heard of the stock market and probably have a general idea of what it is and how it works either from high school economics classes, television financial reports, and the countless film depictions of what happens on the floor of the New York Stock Exchange. But how does it really work and what is meant by "playing the stock market?"The Stock Market in a NutshellCompanies sell shares of stock as a means of raising capital.
The 401(K): How The Insider Has Stolen Your Retirement!
Mutual funds were moderately successful in creating a presence in the stock market until the advent of the investment retirement account and in particular the 401(k). Corporate insiders persuaded the federal government to allow for the 401(k) in lieu of offering employees the traditional pension.
The Golden Goose is Sick
It is finally catching up with them. The brokerage companies I mean.
Historical Briefing: Stocks, Finance and Money
The World Bank claims that some two billion of the world's citizens live on $1 per day or less! That fact absolutely shocked me. With this statistic in mind it becomes important to focus on all of the things that have served as money over the history of civilization.
A Triple Dipper: How to Make 3 Profits on 1 Stock Trade
This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don't see anyone talking about it anymore.
My Stock - Right or Wrong
We all know the expression, "My country, right or wrong", but have you ever thought about the stocks or mutual fund you own and said to yourself, "My stock - right or wrong" and held on to your position even as you saw your hard-earned money disappearing?This is the Buy N Hold strategy and, in case you haven't noticed, lost from 40% to 60% and more of investors' money from 2000 to 2003. Fortunately, for the past year stock markets around the world have gone up and folks have recovered about 25% to 30% from those low numbers.
Wal-Mart: Discount Store, Discounted Stock?
As GuruFocus updates the stock buys and sells of gurus, Wal-Mart (WMT), the discount retail giant, stands out as the stock with a high ValueRank (7 out of 10). Just recently, Clipper Fund's James Gipson and T.