Invest Wisely

Warren Buffet (the world’s most successful investor) has two principal rules for investing:

1. Never Lose Money!
2. Never Forget Rule No. 1

Whenever you’re buying shares and investing in anything always set up your money management rules beforehand.  You must know when to cut your loses and sell before you lose any more of your hard earned capital. You may have a stop-loss of 10%, 15%, 20% or based on the lowest trading price in the past 10 weeks. It all depends on your risk profile and the nature of the investment.

There’s a song about playing poker. One line says: “Know when to hold them, Know when to fold them.”  Of course the shares of quality companies are less volatile than the fortunes that come and go on the poker table. Nevertheless, when you’re on a winning streak or a strong trend you stay in the game and follow the trend. But when the trend starts to weaken and you see warning signs of the tide turning you must have the discipline to fold and close the deal.

World markets are becoming more and more volatile due to the speed that investors receive and digest information through the internet. 10 or 20 years ago if you bought shares in a blue chip company and held them for at least seven years you’re bound to make money through dividends and capital gain. The sharemarket used to perform on a series of successively higher troughs and higher peaks roughly every seven years.

The changing nature of market conditions makes it harder to adopt “buy n hold” strategies. In 2010, Westpac dropped 12%, Telstra dropped 18%, NAB dropped 13%, Woolworths dropped 4%… if you held them from Jan 1 to Dec 31 you would have lost about 12% of your capital from these top Aussie stocks. However if you traded the up and down trends using technical analysis you could of gained up to 50%.

The idea is to protect your profits by moving your stop higher as the stock price moves higher instead of donating all your profits back to the market. I usually set a trailing stop of about 15% from the highest price the stock has reached since I invested in it.

Wishing You Happy & Successful Investing!

Michael