January 15th, 2008

moneybear

Making Money Work - January Update

Last night I attended a free seminar put on by my online broker. I thought it was nice that they would do such a thing for their customers, but then it just makes business sense. If you are an informed investor, you make money. If you make money, you will make more trades. How does the broker make money? By trading commissions. The more we trade, the more money they make.

Much of what was said were things that I had already learned, sometimes the hard way. The prime rule is to not let emotions get in the way. Investing leads to 2 emotions, greed and fear. If the stock goes up, we get greedy and not sell when we should. If stocks fall we tend to panic and sell at a loss. My problem is that I am a buy-and-hold investor. There's nothing wrong with that overall, but I tend to hold on to my turkeys way too long. I lost a bunch on Cisco Systems several years ago. I should have just written it off and moved on. It's still in my portfolio because it has been rising. The problem is that it would probably take 10 more years to get my money back. I need to just jettison it, move on, and buy something that will actually make me money.

The investment tool that was talked about exclusively last night was technical analysis. This is a purely statistical approach to investing. You make money by simply riding trends in the market. If you see a company that is starting to rise, you jump on. When you see the company starting to peak, you jump off. You don't try to buy at the lowest and sell at the highest, but rather make money in the middle as it's going up (or down if you're shorting). Of course you should know what the company does and its overall health, but you don't sweat the balance sheets. You rely on others doing that which then gets reflected in the stock price and how it is trading. If you want to immerse yourself in the company's balance sheets, that's fundamental analysis, a different investing tool.

The other key point that was discussed was discipline. If you like a stock and it's at a price you have determined to be a good one, buy it! If it starts to fall, have a price where you will jump ship. If it hits that price, sell! Take your loss and move on. You should also have an upper price limit. If it hits that price, look carefully at the current trend. Does it still look good? If not, then sell and take your profits. If everything still looks good, set new goals. If the stock starts heading down, sell!

So I picked up some good tips on how to invest smarter. I will have to work on controlling my emotions, but I'm getting much better. I try to use my scientific thinking to approach things logically. I did this last week. One of my success stories has been Costco. I bought some shares a few years ago. It has been going up very nicely. When analysts talk about the retail sector of the market, Costco is always one that is on the "good list." With everyone talking about an economic slowdown this year, however, I figured retail would not be a good place to be. I told myself I would sell if it hit $70. It did, and kept going up. I balked. It then fell below $70 and I kicked myself. A few weeks later it went back above $70. I sold. Today it's at $63. Woo hoo! Good move! I might buy it again once it looks like our economy gets on better footing.

I will take what I learned last night and continue to build and manipulate my portfolio. I need to better define my goals and my strategy. It seems that investing is a lot like Vegas. The casino just has to have odds where it will win 51% of the time to come out ahead. Smart investors only need to pick winners 60% of the time as long as they don't let their turkeys pull them down. That's where discipline is key.

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