OK….workstation’s down. Can’t run my simulation. Yay….this gives me some time to blog. Hehe….the stock market these 2 weeks has been crazy. Can almost “tiu keng” (hang myself). Really, the stock market is not for the weak hearts. You must be able to take it when you see your “money” reduced by 10, then 20 over percent. And then close your eyes and pray that it will go back up again!
I have actually made quite a handsome profit the last month only to lose it all again last week. Still not very good at protecting my profits. Hmm….so what is the best way to battle out this low period?
DJIA for the month of Oct 2007
The most important thing in investing in stock market is you must have reserves. It’s similar to having savings so that on rainy days, you can use this savings until the storm is over. It’s a common mistake for most inexperience investors (like yours truly) to not have reserves. In stock market terms, reserves means you must have cash at hand. Do not put all your cash into stocks, so that at bad times like this, you can use those cash to buy in at much lower prices. However, if you have used up all your reserves (meaning lock them all into stocks), then when the stock market goes down, the value of your stock will definitely go down with it but you do not have money to buy back the stocks at cheaper price. Make sense? That is assuming that you are holding on to your stocks and waiting for it to go up in value again. I think a 20% reserve of your total investment is a good practice. The only problem is small investors like us who don’t even have much capital to start with, you want to fully maximise your profits by dumping all of your investments into stock. That’s a very dangerous thing to do and I strongly urge those starting out to have good investing habits from the beginning and also the discipline if you want to play the stock market. If not, you would end up losing money only. Just assume you have 20% less cash to invest in the stock market. It’s like putting 20% of your pay every month into 401k. You just have 20% less to spend.
Now, another method is you could sell a portion of your stocks first, say one third or half of the stocks that you are holding and then buy them back at a lower price. This is call stop loss. I think stop loss is another good practice to have. I am not very disciplined in this, I must say. Let’s say you bought 10 stocks of ABC at $20 and if the stock price goes down by 10%, you want to sell half of it. Therefore, you put a “sell – stop limit” of 5 ABC shares at $18. That way, once the stock falls below $18, half of your stock would be sold ($18 x 5 = $90) and you can pick it up again at a lower price, say $15 ($90/$15 = 6 stocks). So, now I’m sure you can do the math. Initially, you had $200 worth of stock and 10 shares of ABC. At the end of it, you have $165 in stock and 11 shares. Compare this to if you just hold and did nothing. You would have ended up with $150 (10 shares x $15) and 10 shares of ABC. So, you can see the difference, you not only saved $15 ($165-$150) but you also purchased another extra share. Stop loss, if put to use can be very beneficial. Unfortunately, the difficult part is, you don’t know when the market is going up or going down. There are signs and indicators that you can use to predict the trend, which I will elaborate more next time.
Now, you must be thinking, why should I take advise from a someone who’s not even good at the game, who’s losing money? Well, let me tell you this, you must lose first in order to win. When you know the pits and falls of the game, you will know not to thread on it again and then that’s when you start winning! In everything we do, it’s the same principle. You have to fail in order to succeed. It’s part of the stepping stone to success. Of course, when you lose, don’t lose all of your money la. Start out small, take it as if you are paying tuition fee to learn the tricks of the game. Good luck to you all! Back to my deflated portfolio. Boohoo… :-(
~~~~Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. – Warren Buffet ~~~~