Putting money to work in the stock market (or any money market) without having a plan that fits your psychology and your portfolio size is akin to getting up off the couch, taking a few sips of beer, and stepping out onto the field expecting to compete with world class athletes thanks to the magical benefits of fermented barley and hops. Magical and beneficial though they are, you are going to need a bit more than our fermented friends barley and hops.
Written By The Best Investors In The World
Some of the best investors in the world write amazing, thought provoking letters. These people have produced incredible returns, averaging sometimes greater than 30% return over their careers. In some cases, those figures are actually audited (see Brandt, Peter). Even going with the very best, there are still a hidden catches waiting to crush your dreams and your portfolio's bottom line.
So...WHAT IN THE HELL GIVES?!?
Without Further Ado, The Catches
1. POSITION SIZING
Let's keep this simple.
Say you have a hundred bucks to invest: $100
You read a recommendation for a marijuana stock.
You LOVE weed.
The story is PHENOMENAL.
You decide to play it conservative and buy thirty bucks worth of stock: $30
You have now invested thirty percent of your portfolio in one recommendation: 30%
The CEO of this Mary Jane company uses all the cash they have to roll blunts and they go bust: -30%
You are now left with seventy percent of your initial investment: 70%
In order to simply get back to your original 100%, it will require a return of: 30%/70% = 42%!!!
In layman's terms, you are screwed.
We can keep doing math or I can just tell you: If you take more than 1-2% risk per investment/trade/whatever you call it, you are INSANE!!!
2. YOU MUST PARTICIPATE IN EVERY SINGLE TRADE YOUR GURU TAKES
SO MANY PEOPLE make the mistake of picking and choosing which trade recommendation to take when they sign up for an investment newsletter or even when listening to your HOT TIP specialist. This is setting yourself up for disappointment. Most investors are little better in their win percentage than 50%. So if you pick and choose, it is very likely that you will pick nothing but losers. Meanwhile, your guru still ends up returning 20% on the year. SHITE!!!
3. LIFE AIN'T SCHOOL!
It is easy to fall into the trap of worrying about being right, or win percentage. What you should be worried about is your ratio of the SIZE of your winners to losers. Investing is akin to hitting a baseball. You don't need to be right 50% of the time to succeed. Some all-time greats have a 40% win record. Imagine trying to convince your teacher that 40% was a good score. On a multiple choice test, a wildly wrong answer is still just as wrong as a kind of wrong answer. Not so much in the real world.
40% can produce amazing returns. Here's the math for those keeping score at home:
60% of your investments are -1
40% of your investments are +2
60 x -1 = -60
40 x 2 = +80
80 - 60 = 20% RETURN!!!!!
HAAAALLLELUJAH!!!!!!
So What To Do?
Quite simply: simplify, simplify, simplify.
Here's an idea for a strategy:
Devote a chunk of money to your guru or your HOT TIP specialist.
Risk 1% or less on each idea.
Once you are up money on one of the recommendations, add another 1% and move your exit point to break even.
Exit anything that hits your initial loss level (keep your 1% risk at 1%).
Repeat.
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STOPthere is this chinese guy, wrote a book called rich dad poor dad, powerful book, the gist of it is make money work for you & not you work for money
I've heard good things. I'll check it out.