How To Lose Money In The Stock Market
With these two important reasons for losing money in the stock market in mind and with tongue planted firmly in cheek, I present for your consideration:
THE THREE RULES FOR LOSING THE MOST MONEY IN THE SHORTEST TIME.
1. BUY WHATEVER THE TELEPHONE CALL IS ABOUT.
Who among us hasn't received a telephone call from some "caller", saying something like: "Mr. prospect, Mr. broker calling; hold on please." And then he puts us on "hold" while some other youngster finishes his last phone call before he is able to talk to us.
Should we be foolish enough to stay on "hold" and wait, we find another very brash youngster gets on the phone and fills us with stories of his past conquests and then paints a rosy picture into which he is willing to put us, if only we will part with a substantial portion of our life savings.
They are selling oil and gas, coins, scotch, wine, etc., and every other hot idea under the sun. And, you can't lose. These people are willing to help you to invest your money until it's all gone.
The easiest way to terminate the conversation is to ask how much experience they have had in this field or how much of their own money they have invested in this great sure-thing investment.
If you give your money to an absolute total stranger, sooner or later you may come to harm. Or, as Al Capone once said "Anyone found sleeping in the trunk of a car, deserves to be shot."
2. NEVER BUT NEVER TAKE A LOSS
This rule may, at first, seem like nonsense. How can I lose a great deal of money if I never take a loss?
It's simple; buy a stock at
$40 a share and hold on to it for six or seven years, as it declines.
Now it's selling at $12. "If I haven't sold it, I really haven't lost
This stock may never get back to what you paid for it, but what is even worse, you might have sold the stock somewhere along the line and reinvested the money in something better.
Don't be an amateur! The perfect human being hasn't been created yet, so therefore, the perfect investor hasn't been created yet. If you expect to be perfect in the stock market, you are in for a terrible disappointment.
3. FOLLOW STOCK TIPS
It's not the bulls or the bears on Wall Street that hurt you, it's the bum steers.
I will never understand why intelligent professionals, businesspeople and entrepreneurs, people who exercise such good judgment in their own businesses, will use such poor judgment when investing in the stock market.
For example, take a man about to invest $50,000 in a machine for his own business. He would research the capabilities of the machine. He would certainly get some brochures about competing equipment, and, he might even go out and see some of
these machines in operation. He probably would have representatives of a few companies call on him. He might have his accountant or chief financial officer figure out a payback schedule or an internal rate of return after taxes.
This same man comes into the office Monday morning and buys 1000 shares of a $50 stock because some stranger whom he met on the golf course, told him that the stock was going to go up.
It sounds crazy but it happens ... far too often.
FIVE RULES FOR STOCK MARKET SUCCESS
There is really no substitute for knowledge and wisdom. You must obtain/possess them in order to select the best investments or to choose a knowledgeable and trustworthy financial advisor. That handled, there are some very simple yet very effective rules which you can follow in order to increase your chances for stock market success.
1. CREATE A SOUND LONG-TERM STRATEGY AND STICK TO YOUR GAME PLAN
As every businessperson knows, there is no substitute for a good plan. Identify your long range goals but be flexible enough to profit from ever- changing investment environments and your own changing objectives. Determine how much risk you are willing and able to take. Diversify. Become knowledgeable.
The biggest risk of trading in and out too often is that you would have taken a profit too quickly and sold MANHATTAN at 28. In the long run it's smarter to hold onto quality stocks rather than to do a lot of trading.
How much smarter?
Since 1926, there have been only 20 years when the stock market has posted a loss. The worst year of all was 1931, when the market declined more that 40 percent.
According to statistics, if you hold an investment grade common stock for only 1 year, you have a 70 percent chance of making a profit. If that time frame is increased to 5 years, the odds of you making a profit go up to 88 percent. A 10 year holding period promises a 96 percent chance of profit; and in 15 years, the statistical prospect of profitability shoots up to 100 percent.
Because of medical advances, better diets and exercise, people are maintaining active lifestyles into their seventies and eighties. Most people do not realize that their greatest risk is that the cost of living(inflation) is going to outpace their income.
In about 10 years your buying power could be cut almost in half. Just look at what a car cost 10 years ago versus what one costs now.
2. LEARN TO TAKE LOSSES AND LET YOUR WINNERS RUN
Some years ago, I decided to
take parachute lessons. I asked the instructor: "How many successful jumps
do I need to make before I graduate?"
Fortunately, you don't have to be perfect in the stock market in order to be very successful. If you are willing to take lots of small losses and let your winners run, you can obtain a very high rate of return over a long period of time.
Losses are a very important part of a successful investment program. And, since it is not possible to be perfect, you can make more money by limiting your losses rather than trying to never have any losses. One of the simplest ways to limit your losses is actually one of the most effective ways too.
I'm the "Down and Out Stockbroker"
Many years ago, when I was the Director of Investments Research, I did a computer study of the stock market and found that if a stock declined 121/2 % from it's high, 85% of the time a new downtrend had started.
So, one of the best and simplest
ways to limit your losses is to multiply your purchase price or any subsequent
higher price by 87 1/2% or .875. Any time the price of the stock drops
below that figure... sell.
Cut your losses short, using the "DOWN AND OUT" formula. You will probably save much more money by being out of sharply declining stocks than you will forgo by missing a major upward move in a stock after you have sold it. And, you will still have most of your funds available for the next opportunity. By the same token, there is no rule that states that you have to sell a stock just because you have a profit.
3. WORK WITH A GOOD FINANCIAL ADVISOR
You can't do everything yourself. You certainly wouldn't study medicine in order to remove your own appendix. Most smart companies have a good chief financial officer; you should too. If you are very busy making money in your own business, you will not have time to concentrate on your outside investments. Make sure that your personal C.F.O. is tops. You don't drive one of those cheap little compact cars so you know that there is no substitute for quality - and quality costs.
4. BECOME RICH ... SLOWLY
Wall Street's emphasis on performance and the media's focus on the big winners creates completely unrealistic expectations. Successful businesspeople, by our very nature, are results oriented. Without immediate performance, we are disappointed.
Lack of patience is probably the biggest single impediment to success in the stock market. The rewards of your professional life probably came after many years of hard work. And yet, when it comes to investing that hard-earned money in the stock market, you expect to win right away, and every time. Prime investments, like fine wines, mature slowly.
5. UTILIZE WHAT YOU ALREADY KNOW TO CREATE TREMENDOUS PROFITS FOR YOURSELF.
You may not know how much you really know. There are many things which you already know about your company, your industry, your suppliers, your competitors, and important items which appear in local newspapers and trade journals which could be profitable to you. Very often, by the time news reaches the business section of most newspapers or even The Wall Street Journal, it's old news.
Combining your own knowledge and information with some stock market savvy could lead to very big profits.
Copyright © Gary Wollin