Risk Is The Reason to Buy

By Al Thomas

When your broker calls you or a friend gives you a great tip on a stock they always talk about how much it will go up and the huge profits you can expect. Yes, and pigs can fly.

Mr. Broker will bury you with information with the pink sheets, green sheets and slicks and prospectuses. It is worthless as everyone already knows it. It is trading by looking in a rearview mirror. You want to know what is ahead not what is behind.

Be careful of any prospectus. It was not written for the investor. Of course, that is what they tell you. No, it was written for the Dilbert lawyer in his cubicle at the SEC in Washington. All he cares about is it conforms to all the jillion securities regulations. He knows them all, but has no idea if the information in the prospectus is true or how much it has been embellished.

Your friend knows nothing or close to it. He might have a friend who has a friend who knows someone in the company he is touting. He is trying to help you so don’t blame him if you lose money with this puppy. (It’s not a full grown dog yet.)

Now that you have all the POTENTIALS for huge profits has anyone asked you how much you are willing to lose? Huh? I doubt if you heard that one before.

Brokers never bring it up as it might keep him from creating a commission. Your friend has his head in Never-Never land and has already taken off in his hot-air balloon.

Before you become entrapped emotionally by the hype of this great stock or fund you must get a grip on reality. Not everything investors buy goes up. Ever heard that one before? The best odds are you have a one chance In four of making money with any stock or fund purchase.

Buying is not where the smart money looks. Professionals want to know the risk. How much can I lose if I put my money on this? The NYSE is Las Vegas East and don’t me give that nonsense about being a long term investor. It is still gambling.

A wise investor will always compute the amount he is willing to lose before he buys anything. It might be 10%, maybe more, maybe less.

How is that arrived at? It is a personal decision only the investor can make. Unless it is done the investor will lose money. Doing research will help. If the equity is volatile the risk could be 20%. Choosing a stock with low volatility is much preferred.

In real estate you must buy right. In the stock market the investor must sell right. He must have an exit strategy or he will never make money long term.

Do you set the amount of risk when you buy? When risk is known you are able to buy intelligently.

Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.