The definition of "risk" is - The possibility of suffering harm or loss; danger.
The relative perspective of investment risk is a subject of interest of mine. The abnormal way people consider risk can be explained by an example... If someone suggests taking a large (> 50% of your portfolio) position in a certain company, some people's automatic response is to imagine the worst possible outcome for that company, like "what if the CEO walks outside and gets hit by a bus?" or "what if one of their products is found to cause cancer?" etc. The possibility of one these highly improbable occurrences happening is near zero, so why do people seriously consider these possibilities as realistic? It's because risk is relative. But when it's taken into the perspective of reality, we can ignore the outlying data points and assume the norm will happen. At least thats what I do whenever I board an airplane.
A general rule I like to follow when considering the level of risk I'm exposing myself to is a saying by Warren Buffet. "Risk comes from not knowing what you're doing. " The more deeply you understand a situation, the less risk exists.
Friday, September 11, 2009
Thursday, July 16, 2009
Building A Stock Investing Strategy
My friend Adrian over at Shareyournumber.com asked me to write a post on how to build a strategy to invest in stocks.
To check out the post and comment click here. Enjoy!
Thursday, April 16, 2009
Letting The Winners Run
Fear is a dominant player in the markets. Stocks drop, people get scared, and the stock drops more because people are selling...because their scared. Good companies selling at depressed values make excellent opportunities, if you can ignore the fear.
The same applies to stocks increasing in value while you hold a position in it (always a good thing). As the shares increase in value, some people become more and more afraid, especially in these market conditions (April 16, 2009), the questions pass through the mind... is this a true rally, or is this stock about to slide back down, erasing all profits earned.
It is important to ignore fear in both examples. This is accomplished by committing to an entry price and exit price BEFORE taking on a stock position. Before entry, you are thinking clearly, unaffected by the bombardment of emotions as the share value fluctuates. The key to allowing your winners to run is to stay the course and allow the value to raise to the predetermined price...then sell.
A principle I recently acquired and have taken as my own is the 7% rule (found in Jack D. Schwagers' book "Market Wizards"). If you have a working theory about a stock, based on fundamentals and sound reason, take the position, but set a limit order to sell or cover after a 7% loss. This will keep you from losing your shirt on any one trade.
The same applies to stocks increasing in value while you hold a position in it (always a good thing). As the shares increase in value, some people become more and more afraid, especially in these market conditions (April 16, 2009), the questions pass through the mind... is this a true rally, or is this stock about to slide back down, erasing all profits earned.
It is important to ignore fear in both examples. This is accomplished by committing to an entry price and exit price BEFORE taking on a stock position. Before entry, you are thinking clearly, unaffected by the bombardment of emotions as the share value fluctuates. The key to allowing your winners to run is to stay the course and allow the value to raise to the predetermined price...then sell.
A principle I recently acquired and have taken as my own is the 7% rule (found in Jack D. Schwagers' book "Market Wizards"). If you have a working theory about a stock, based on fundamentals and sound reason, take the position, but set a limit order to sell or cover after a 7% loss. This will keep you from losing your shirt on any one trade.
Thursday, February 19, 2009
Market Timing
I left this comment on 7million7years.com and thought I might expound on it.
The term "market timing" reminds me of double dutch. With the jumper waiting on the outside of the ropes, waiting until they believe they have the rhythm of the ropes, and can predict them.
I tried this a few times in grade school and got whacked in the face.
This is the type of trading you don't want to participate in. It may turn out well a few times, but for the long term, you will inevitably lose money.
While double dutch is the sport I liken "market timing" to, consistent, successful investing is more like surfing. The surfer waits patiently for the perfect wave, there is no rhythm or signal to tell him the wave is coming, it just arrives (there is a rhythm to ocean waves, but to catch the perfect wave takes patience). He can either take advantage of it without hesitation, or let it pass him by.
When observing a market inefficiency, I know its time to invest, and the opportunity won't be around for long. This has nothing to do with "timing" and more to do with fundamentals and anticipating the emotions of the market.
The term "market timing" reminds me of double dutch. With the jumper waiting on the outside of the ropes, waiting until they believe they have the rhythm of the ropes, and can predict them.
I tried this a few times in grade school and got whacked in the face.
This is the type of trading you don't want to participate in. It may turn out well a few times, but for the long term, you will inevitably lose money.
While double dutch is the sport I liken "market timing" to, consistent, successful investing is more like surfing. The surfer waits patiently for the perfect wave, there is no rhythm or signal to tell him the wave is coming, it just arrives (there is a rhythm to ocean waves, but to catch the perfect wave takes patience). He can either take advantage of it without hesitation, or let it pass him by.
When observing a market inefficiency, I know its time to invest, and the opportunity won't be around for long. This has nothing to do with "timing" and more to do with fundamentals and anticipating the emotions of the market.
Friday, February 6, 2009
Trading and Black Jack
If you've ever played Black Jack, you know what the term "double down" means. This option is available for every hand you play, but should only be taken advantage of when the odds are in your favor. To utilize this option, you tell the dealer, "I would like to double down". At this point you would put the maximum amount of chips next to your original bet, which can be up to 100% of your original bet, the dealer would then give you one more card, and one more card only.
If you could apply the rules of the New York Stock Exchange to Black Jack, you would be able to see your hand and the dealers hand before you ever had to bet anything, and if the odds were in your favor, you could wager all your money, and even borrow up to your chip count from the casino!
Good practice for investing in stocks, much like Black Jack, is to wait for the most opportune time (when the odds are in your favor) and get as much of your money in as you can! Unfortunately at the casino, you have to bet a least the table minimum (the minimum amount of money you can bet per hand) just to see your cards, then evaluate if the odds are in your favor and whether this hand is qualified for the "double down" option.
The great thing about investing in stock, is you get to see the "cards" (company accounting records, conference calls, price to earnings) before you ever commit any cash. You determine if the odds are in your favor and how much of your bank role you think this opportunity demands.
The tough part is determining when the best risk to reward ratio is in place for that hand....... I mean investment.
If you could apply the rules of the New York Stock Exchange to Black Jack, you would be able to see your hand and the dealers hand before you ever had to bet anything, and if the odds were in your favor, you could wager all your money, and even borrow up to your chip count from the casino!
Good practice for investing in stocks, much like Black Jack, is to wait for the most opportune time (when the odds are in your favor) and get as much of your money in as you can! Unfortunately at the casino, you have to bet a least the table minimum (the minimum amount of money you can bet per hand) just to see your cards, then evaluate if the odds are in your favor and whether this hand is qualified for the "double down" option.
The great thing about investing in stock, is you get to see the "cards" (company accounting records, conference calls, price to earnings) before you ever commit any cash. You determine if the odds are in your favor and how much of your bank role you think this opportunity demands.
The tough part is determining when the best risk to reward ratio is in place for that hand....... I mean investment.
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