I’m not a professional tennis player. I’m not even a tennis player. The last time I touched a tennis racket was 5 years ago. But I did read about how a professional tennis player aims to hit as many balls to the opponent to make him miss, in order to win. An amateur , on the other hand, aims to try to catch as many balls as possible, aiming not to make any mistakes till his opponent eventually makes a mistake and causes himself to lose. That’s defensive playing.
I’m not a professional stock investor either. I admit neither I have the time nor the patience to go through every financial report, visit the companies I’m interested in buying and whatever else it takes to be really confident enough to put a huge chunk of my hard-earned money into the stock. So I have to invest defensively. I aim to minimise my losses while riding the general upward trend of the stock market, rather than maximising my gains on the individual hot stocks. It may limit my gains a little, but in the event of a crash, I hope to come out relatively intact. I basically expect a crash, even in the longest bull run ever. It’s like having a Plan B even though you hope you never have to use it, or buying insurance though you don’t really want to die or get a critical illness just to make the most of it.
So how do I play my defensive game ? I protect myself the following ways.
1. I stick with what I know. It’s easier to figure out that maybe the market has over-reacted when you are familiar with the industry. For example, I bought Bank Of America at $4 and Citigroup at $1. The prices were crashing as people anticipated a further crash and that didn’t happen. Today they are holding at $13 and $3.5 respectively. Do the exact opposite of what the average investor is doing. I bought Merck when it was being sued for one of its drugs , Vioxx. The price crashed as people anticipated huge lawsuit payouts, which never happened.
2. I buy stocks when the price is low. It works either when the market is down, or if the individual stock has fallen out of favour. If you buy when the market is down, it can only turn up. Of course, the risk is that you never know when it is going to turn up and you may be stuck with a low price for a long time. It really isn’t easy to time the market, but you can tell for example, if there has been an irrational selling off of stocks. That’s a good time to buy. The stock market has gone on sale. Stock up !
3. I try to buy stocks that are near their underlying values. I’m not very good at analysing companies, but I figure if the company has $X in cash per share, or $Y in assets that can be sold off should the company fold, and the price is within that range, it should be reasonably safe.
4. I like stocks with good dividend yields. That way, even if the stock price falls, eventually, the dividend payout becomes so good, people will start buying it again, so helping to support the stock price. Plus I figure, if the company can afford to give out dividends regularly every year, it can’t be doing too badly.
5. I have some of Warren Buffet’s stock. It doesn’t come cheap. But hey, if he can’t get his investments right, who can ?