There are two major reasons
why losing money is good for you:
1. You pay less taxes.
2. You learn from your mistakes.
If your stock market picks were perfect, if you won every single time, you would
be piling up millions and millions and millions of dollars. But, you never would
have learned anything.
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
2. NEVER BUT NEVER TAKE
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 anything."
YEAH ... RIGHT!
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
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?" She answered: "All of them!"
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
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. For example: if you bought a stock at $20,
your sell point on the way down would be $17 1/2 (20 X .875 =17.5). If the stock
went straight up to $35 after you had purchased it, you would have a sell point
of $30 5/8 (35 X .875 = 30.625).
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
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
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.