Fortune Watch

The world of stocks is a highly dynamic one. One has to constantly be on his/her toes in order to keep abreast of the latest developments taking place. To a layperson, it can be intimidating, with stock prices constantly changing every second.

Of course, we have seen during the (in) famous market crashes that can happen when things do not go according to what the markets expect. When unexpected events and their sudden impact on stock prices make even the most experienced among us quiver, imagine what the common investor must be thinking!

However, I am of the belief that certain simple investing habits, if inculcated well into one’s behavior can make one’s investing experience more comfortable and rewarding..

In this write-up I shall restrict myself with stock market investing. As such, the term ‘investing’ used in this article will simply imply investing in the stock markets. Let us now take a look at some characteristics effective investors possess.

Begin with the end in mind: Investing, in its broadest sense, is one of the most basic and important processes of preparing oneself for meeting future financial needs like child education and marriage and retirement. And stock market investing is no different. It has to be followed like a process with an aim of achieving your future financial needs. Started early, and done in a systematic manner, investing in good quality companies can help an investor generate good returns over a long-term.

Think ‘risk-risk’: In making an investment decision, apart from returns, there is one more very important factor that should weigh heavy on your minds — risk.

Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns. A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn.

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Risk perception is the subjective judgment that people make about the characteristics and severity of a risk.

As I’m writing this piece, a friend of mine and his wife are discussing the cancellation of a holiday to the hill station.. But my friends’ problem is this that an accident took place around the place he wanted to visit a few days back and killing 12 tourists. Now, my friends think that hill roads are too risky to travel on. They are too risky, aren’t they? Well, compared to what?

Human beings perceive and calculate risk in a very non-linear fashion. This may have been OK till prehistoric times but in the modern world, our perception of risk means we are often unable to take the correct decisions in everything from where to go on a holiday to where to invest our money. Savings and investing decisions are almost entirely about how we absorb and process risk-related information and how we balance this out with rewards and gains.

As it happened, when my friends told me about this recent crisis, I had just read an article titled ‘Rare Risk and Overreactions’. It says that human brains are not very good at probability and risk analysis, especially when it comes to rare and unfamiliar events. We tend to exaggerate spectacular, strange and rare events, and downplay ordinary, familiar and common ones. Our brains are much better at processing the simple risks we’ve had to deal with throughout most of our species’ existence, and much poorer at evaluating the complex risks society forces us to face today.

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Every investor has several components that combine to make them successful. The degree of success depends on how well you can implement the components and how well your strategy works.

The method investors have for selecting shares that they want in their portfolio is arguably one of the most important areas of being a successful investor.

The next vital component is the trading plan. This doesn’t need to be overly complex you just need to know what you will do if the share price goes up, down or sideways. If you can cover these three things then you have a contingency for anything the share price can throw at you. And more importantly you will prevent yourself from reacting to market fluctuations.

The trading plan should also incorporate an overall strategy for the share that you have selected and explain the reasoning behind why you’re doing what you’re doing ie why you decided to place your order level at this particular point.

You will need a risk management strategy and to be successful in the long term you will need to implement the strategy. The number of times I’ve seen people unwilling to sell when the share reaches a risk price is a little bit scary.

The above three things are great to have in place but don’t forget that you must be disciplined in implementing them otherwise you’re setting yourself up for failure.

After identifying these strategic factors you should consider how much you are willing to outlay on each share. It is important to try and spend the same amount on each share ie $5000 across a portfolio of 10 shares in order to maintain a balanced portfolio. In other words don’t put all your eggs in one basket.

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It is time to sell a stock when the points in your buy case have turned negative, but beware of false signals that can trick you into selling at the wrong time.

This written case is your reason for owning the stock. The only reason for selling the stock is if something changes the buy case. Here are some events that can fool you into selling, but may not mean your buy case has been compromised:

Falling stock price – A drop in stock price is not necessarily a reason to sell (it may, in fact be a signal to buy). Remember that you are investing in a company and its stock may not always reflect its true value.

Re-check the company’s fundamentals and if they haven’t changed, the stock is probably reacting to market conditions that are affecting all stocks or all stocks in the same sector.

If the company remains a strong buy, it may be time to add more to your portfolio.

Stock price rises – Oddly enough, investors sometimes can’t stand a good thing and sell after the stock has gone up. Stocks prices don’t necessarily operate by the laws of gravity. Just because they have gone up doesn’t mean they are doomed to come down. Some stocks keep going up for long periods, which is the idea.

Bad news and rumors – Bad news about a stock/company can send a stock down. It might be a story about the company missing earnings or something more serious like a government investigation.

Before an emotional “Oh my gosh” reaction, get facts, not rumors to assess the full impact of the news. Is this a bump in the road or a major wreck? Unless it is a serious problem, most bad news goes away quickly unless it involves criminal proceedings or a fundamental change in the company’s core business. Hang over bumps. If it’s truly a wreck, it is probably time to cut your losses as quickly as possible.

Knowing when not to sell is as important as knowing when to sell.

Don’t Abandon your Buy Case without a Good Reason.

Some days back I got an email from a young man who recently inherited a good amount of money, it is certainly enough for this teenager to finance as good an education that he wants for himself. He wanted to talk to me to get investment advice on how best to invest and preserve the neat little nest egg.

The conversation I had with him reinforced my feeling that the cult of the expert – the firm belief in an outsider who knows everything – is distorting how people (specially intelligent people) approach investment. There’s a strong idea around that there are some universally good investments, and that there are experts who know what these investments are, and all one has to do is to ask an expert and he or she will tell you and that is that.

This would be very convenient but it’s unfortunately not true. The question whose answer we all need is not, Which is a good investment but Which is a good investment for me. This seems like a trivial and self-evident point but is somehow only paid lip service to. There are no universally good investments. The most important part of that question is ‘for me’.

But what is it about you that decide which investment is good and which is not? Conventionally, the big role is played by something called your risk tolerance and based on that, a financial planner can work out what kind of investments you need. Most people’s risk tolerance is actually zero, and the more inexperienced you are as an investor, the more likely that any kind of loss will make you run. The reason is that what the conventional financial planning measures is your financial risk tolerance whereas what actually matters is your psychological risk tolerance. You could be financially very stable and yet be completely unable to tolerate the idea of any investment losing you money.

The solution is to adopt what we called time-based asset allocation and continuous re balancing. The idea is that you should try and divide up your investments into portfolios that are meant for different time-periods and put them in investments with different levels of risk based on how much time is it before you need the invested money. Moreover, this allocation must be rebalanced at least once a year. This way, you will end up booking profits and buying investments at low prices automatically.

One habit which leads most of us into panic is the habit of considering our investments on an individual basis rather than as a portfolio. There’s a little point in investing some money in equity and some in debt if you keep expecting both to always make money independently. It’s a portfolio, and the debt part is there to provide some stability when the equity is tanking.

By the way, while there may not be any universally good investments, the reverse is not true. There are universally bad investments. If you ask me for a list of investments that no one should ever make, I could come up with a fairly long one without much of a problem.

I wonder if there’s a lesson in that.
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There are risks involved in all investing. The skill of investing is knowing which risks are worth taking, and which should be avoided. Finding and knowing which risks to take is the essence of good investing and the whole reason that investments can pay such a high reward. It cannot be done without careful research and analysis. You must give yourself every chance to make the right decision. Investing without carrying out sufficient research is like playing roulette. You are giving yourself virtually no chance of covering your investments and avoiding disaster.

There are certain steps you will have to take in order to give yourself a fighting chance of being a successful investor. If you are considering investing in company shares on the stock market, then you should be aware that all publicly traded companies must provide investors and potential investors with access to company financial data. This data is generally available from the company so if you are considering buying into a company, then get access to this information and satisfy yourself that the company is in a good financial state before parting with any money.

If you do research a company, and are taking a look at its financial position, then you should look back two to three years into the past. You probably don’t need to go back further than this but if you go back less, there may be important trends in the finances that you will miss. Take special note of the quarterly statements and the revenue and earnings per share.

You should be trying to identify trends in certain figures. While these are no guarantee of what might happen in the future it is undeniable that an upward trend in revenue and profits will be a positive sign to look out for.

Once you have satisfied yourself with the basic financials of the company and that the prospects of making good profits into the future are favorable you will be in a position to consider putting money into the share.

There is an ongoing debate over whether it’s preferable to buy shares that will increase in value or shares that pay good dividends and the answer to this question must always lie with the individual investor.

What must be remembered however is that there is little point in chasing dividends? This refers to the practice of buying a share just before a dividend is expected to be announced. The price of the share will already have taken the dividend into account so you will be paying for it in any case.

Are you thinking of entering the fast-paced world of day trading? Arm yourselves with the information from this fact sheet on day trading.

What is day trading? Day trading is an investment tactic that does online daily stock trading with a relatively short investment. Those who do day trading usually buy and sell securities during the same market day and, as a general rule, do not hold stocks overnight. Many day traders make dozens of trades every market day hoping to capture profits that arise from small intraday price fluctuations.

How is day trading different from swing trading? Day trading relatively holds the stock for only the day. After the stock market closes, a day trader has no stock in his hands. Swing trading holds a stock for at least a few days, waiting out for the best price before dumping it back to the market. Day trading is much more stressful and requires guts and a keen business sense. Once you get good at day trading, you can earn up to $50,000 from your initial investment.

How much capital would you need for day trading? You need an investment equivalent to buy 1000 stocks. That is roughly around $20,000. Because the chances are small that you will find a marketable stock with a price of under $20, this is enough to get your day trading underway. However, you must remember that this is a 100% risk capital so do not worry too much if you lose this amount very early.

What are the general rules for day trading?
– Always trade with the trend.
– Cut losses short
– Never get emotionally involved in your trades.

What are the most suitable stocks to trade for day trading? It is advisable to trade high volume stocks. Go with the trend with the popular stocks available. It’ll be easier for you to sell those stocks at the end of the day trading.

How does a usual day trading transaction occur? For example, at 10:00 AM a day trader might buy 1000 shares of stock XYZ just as the price begins to rise on good news, then sell it at 10:04 AM when it’s up by 1/2 ($0.50). The day trader makes $500, minus commission. With today’s cheap commissions of $29.95 or less per trade, that’s a quick $440.10 or better, excluding taxes.

Most people who deal with day trading spend all of their time in front of the computer, watching the slightest change in the stock price. As the prices go up and down, the day trader must be alert as to when to sell his stock or wait for the moment to hold on it. This can be a very stressful lifestyle as a mere second could mean an increase of half the stock price and missing that moment for any person engaging in day trading could mean a loss on his investment.

Day trading is not a get rich scheme. It is serious business where you could lose everything within minutes because of wrong information. Before jumping into day trading, remember to do your homework first. Go to seminars on day trading, use simulations if possible and practice reading market indicators. To be a successful day trader, you don’t just need luck. Knowledge and experience counts. Welcome to the world of stock markets and investments!

Stock trading has numerous benefits as a viable part time occupation.

In contrast to a second job, there are no special qualifications to begin. The stock market doesn’t care about your level of success, education, ethnic origin or any personal characteristics. Additionally you have the freedom to trade from any location. If you follow a few simple rules you can run your business on your own terms.

The most important factor is to be clear about why you want to trade stocks. What do you hope to gain financially from learning to trade?

Are you looking to: Create an enhanced lifestyle with supplemental income? Replace a full time income with a passive income stream? Become independently wealthy by creating a financial base independent of other income sources?

What would being a successful trader mean you? Imagine yourself making successful trades and gaining financially. Think about what it would feel like to have extra money in your bank account and to achieve your targets. With a clear picture of what you want and how that would feel you will be able to remain focused and motivated.

Your first task is to put one primary goal for your trading plan in writing. Additional goals you set can then support your primary plan.

Know Yourself. As well as learning to trade stocks it is essential that you understand yow you react under stress. Being aware of your own behavior patterns and common causes of and reactions to stress when trading will help you to master stock trading.

The reason that many people lose money in the stock market is because they lack the proper knowledge base. Independent of trading styles there is one thing common to all successful traders; the use of a tested and proven system.

In learning to trade you must be willing to let go of pre-formulated ideas and start fresh, develop new successful habits, and the discipline necessary to trade successfully over time.

Are you willing to do this?

Successful stock market trading eludes many people because they don’t have contact with an experienced, successful trader or trading system that actually works. Going it alone can be potentially expensive when learning by trial and error. Investing in a solid education and taking advantage of the insights and experience of successful trader makes a lot of sense when learning to trade successfully.

They’re boring and passive. They are run on autopilot by hands off managers. Instead of making decisions about the best course of action, the managers merely try to match the overall market’s performance. They strive to be average. But an investing strategy built on these funds will soon bring higher returns than chasing after the best actively managed mutual fund.

A portfolio manager actively manages the traditional equity fund. They buy and sell stock frequently in attempts to “outperform the market,” usually defined by a broad measure.. Index funds are passively managed. Their manager’s buy and hold only the stocks contained in their chosen benchmark. Their aim is to imitate returns, whether the market goes up or down.

They sell only when an investor redeems his investment or if a stock is kicked out of the Index. This passive investment saves money on research, salaries, and other overhead, and it avoids the emotional traps of buying at the top and selling at the bottom that torment active managers. The biggest saving for Index funds is the brokerage and other trading costs which active manager incur on their hyper active trading. In theory, this all leads to higher returns.

Which of the two is better? Let’s look at the odds. But with their growing numbers, it is difficult to guess how many will beat the benchmark in the long-term. And as the number of fund increase, it will get tough to pick the winners. And you will have to work to pick the right ones. But it takes little effort to pick an index fund that delivers almost the same return. You certainly won’t beat “the market,” but you’ll beat almost everyone working hard to make a choice.

Besides, index funds give you the diversity with discipline. You don’t run the risk of building large position in a small, illiquid company that concentrates you in one industry. Index funds give you a healthy dose of large companies that represent many industries, and the shares of these funds are easily bought and sold.

Which index fund should you pick? Every thing being equal the least expensive fund will be a winner. And recurring fund expense is a function of a funds size. The larger the fund, lower the expenses.

Besides, as an Index fund investor, you’re not getting any extra value. After all, the fund is merely trying to match the index. As you don’t need an advice to buy an Index fund, so you should never pay a sales charge on an index fund. But every Index fund (barring the tax saver) available today charges a load as they pay the fund sales man to sell the concept.

Stocks not Best Investment for Quick Returns

Did you buy a stock to turn $20,000 into the $60,000 you need for Junior’s next year in college? If so, you’re not investing, you’re gambling, and, unless you are incredibly lucky, you will not meet your goal. The expectation of a high return in a short time frame is not realistic. Do stocks ever shoot up like rockets?

Yes, some do. However, you must understand that the market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward. Investments that offer an extremely high potential reward invariably come with a high level of risk.

For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards. As an investment choice, stocks have historically returned 11 to 14 percent.

This does that mean that every stock should return in that range? Not at all – that is simply an average. You need to assess the risk of investing in a particular stock before deciding what an acceptable return is.

An investment in a young high tech company should have a higher potential payout than putting your money in a “blue chip” company that posts modest growth and pays a regular dividend.

What would be the risk factor for a stock that could potentially triple in price over a short period? The answer is very high – in fact, so high that the odds of it succeeding would be very slim. There is no safe (or legal) way to earn a very high return on your money over a short period.

Investing in stocks is best done as a long-term effort, which allows your money to grow and permits time for course corrections and adjustments.