Risk Vs. Reward

By Al Thomas

The average trader when buying a stock or option is figuring how much money he is going to make.

The truly successful trader when entering a new position figures immediately how much he is willing to lose.

That is the reason almost everyone one who buys stock whether for the short run or long term is a loser. That goes for the manager of mutual funds also. Examine the portfolio of any mutual fund to see stocks that are selling for 20, 30, 40 even 50% less than the manager paid for them. His excuse is he is taking a long term view of the market. If he can be that wrong in his reasoning he should not be managing other people’s money.

Having been an exchange member and trader I know there is no reason at all to ever hold any equity for big losses. Fund managers, like all amateurs, don’t like to be wrong. They do not have a good money management policy.

History has shown that the secret of the stock market is not buying; it is selling. Without a proper exit strategy there is no chance to ever become a winner over the long term.

Today trillions in stock market money has disappeared. The S&P500 Index is now lower than it was 10 year ago. If the investor had bought Treasury bonds year in and year out for an average of 3% interest he would have more money than the stock investor.

Investors have been taught to buy and hold and they have been doing it. The problem is they have been good students, but badly taught.

A proper timing strategy that keeps investors out of major bear markets – and there are many of them – are not allowed to be used by brokers. Wall Street wants to hold your money even while they are going broke.

Brokers are always looking for “good” stock and have a low risk because they have proven to “come back” after a decline. Everyone seeks that $2.00 stock that will go to $200. Yes, and pigs can fly.

There are few of them, but even if one was found how many average traders would know how to handle it. I remember PMC Sierra going from $15 to over $200 and then down to $2.00. Even an experienced trader would have had trouble profiting with this monster.

Be careful of anyone who promises fantastic results. Don’t be greedy. Don’t put all your money in one program. Break your portfolio into 3 or 4 parts just in case one of them should go belly up.

You are the keeper of your money, not some broker or financial planner. If it is lost it is because you let that person lose it.

If you want a reward you must manage the risk.

Copyright 2009 Albert W. Thomas All rights reserved. Author of “IF IT DOESN’T GO UP, DON’T BUY IT!”