It's a clich' but it's a valuable lesson. If you fail plan you are planning to fail. It's a basic business maxim and one that every trader and investor should follow. And yet most do not. Most minor investors run around following the markets, jumping on the latest stock pick from online or television investment gurus like Jim Cramer and Jim Shepherd without a plan or an idea of where they want to go.
People are then shocked when their picks don't perform as they had wanted or, worse yet, lose them money. They then flip the stock quickly, realizing little gain once fees are taken into account or even losing money. Emotions like anger and fear cloud judgments. Without the structure of a plan, bad decisions are easily be made. The only way to make money is in cool, emotionless planned buying. Set plans and goals and then act on them. And it all comes from research.
Investing is a lot like playing Texas Hold 'Em. You might have a gut feeling about a company or a stock -- that undefined intuition that makes you think that the stock is ready to take offbut don't listen. Like poker, that sort of thinking will lose you money in the end. Betting that an ace will show up on the turn or the river in order to complete your straight is a bad idea. You might get lucky once in a while, but to be successful you have to play the odds. As often as not, you'll turn up a deuce.
Stocks too. If a company feels right, but the numbers don't add up, or they have a record of making poor decisions in slow markets or the stock price is very volatile then walk away. Conversely a good company that had one problem that they fixed but which drove down their share price might be a good bet.
But as the best poker players will tell you the best way to win is to eliminate emotion. That is where planning is important. The markets are volatile, especially today. Prices soar and crash and an investor can be quickly drawn into bad decisions. That's where drawing up a plan helps.
For example, you have discovered Techno Whiz America Inc (TWA), a company that is leading the way in some technological innovation that only some computer geeks on Digg.com have heard about and have patented something that will change the way we use, say, telephones. The company looks sound and has posted consistent profits in the last year. But because this technology is so new the company stocks are ridiculously low. They are currently trading at $4 a share. You do your homework and notice the share price for the company has being going up and down consistently over the last three quarters. You decide the best price to get in would be $3.50.
The next day, although there is no news or announcements from the company, the price shoots ups to $6. You kick yourself for not buying at $4 and your inclination is to now jump in at $6. Another scenario sees the stock price slump to $2.80. You first inclination, jump in a buy at a steal. You just saved yourself .70 cents a share. What a deal.
And these would be emotional decisions and they would both be wrong. Why? In the first case your research showed that a good price would be $3 a share. Why ditch all that information because you think you missed the boat and be willing to spend almost twice as much per share. A rash decision.
In the other case, it might seem like a great idea and a steal of a deal but you have to stop and ask yourself why the rapid slide? What do people know that I don't? Perhaps it was just a volatile day on the market and some people were selling off, dumping or taking profits.
This is where a plan comes into play. If the stock continues to climb then you missed it. But so what? There are hundreds of other stocks that offer great opportunities and it is better to have some fluid capital than have your money tied into a poorly purchased stock. It is like the poker player folding on a three and a four of spades and then seeing a five, six, seven of spades show up on the flop. Sure, you would have had a straight flush but you had to play the odds and fold, because 999 times out of 1000 those cards would not have shown up.
In our hypothetical scenario the volatility subsides and you see the TWA stock hovering around the three buck mark then go in and buy it. That was the price, based on your research you thought optimal and now is the time to bet on the stock. Stick to the plan.
But also be somewhat cautious -- if the stock is wildly going up and down over an extended period you might want walk away rather than blindly buy as the stock dashes past you buy-in price.
The best poker players know it is better to ditch a potential royal flush and win the next hand with a pair of jacks. That comes from knowledge. Savvy investors too know that they can walk away from a great find and a company they have admired for years knowing full well another potential winning company is just around the corner.
Jay Northco |
| Author: Jay Northco |
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Author Bio:
Jay Northco is the editor of www.cramerwatch.org, the internet site that pits Wall Street guru Jim Cramer??s stock picks against a stock picking monkey. |
| This article can be searched using: diversified investment advisors, registered investment advisors, financial investment services |
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