Saturday, July 9, 2016
"High Reward" usually comes with "High Risk"
I subscribe to the theory of quality buying over quantity buying. I try to invest in about five or six stocks that I have researched and followed sometimes for several months. I spent the first part of my investing years buying into a story someone else dug up and ran with quick profits to the next big hype. But soon you find your profits are smaller and the pool you have built is empty. I started off with a Government pension and rallied it into a position that has grown on strong fundamentals on an otherwise risky exchange. Some people like to call the Stock Exchange the Vulture Exchange. There are several reasons for this in my view. The main reason seems to be all of these commercials on TV that have tried to push Mom & Pop traders into full time do-it-yourself millionaires. In creating these ads they are now showing Grandma taking control of her investing future with an electronic trading account. Someone seems to have presented the riches made by high profile traders as luck that can come easily if you have the access to the trading platforms. I'm not trying to say that Grandma and Mom & Dad are not doing a little bit of due diligence but lets be honest here, most seem to get caught up in whats hot on the boards. A good friend of mine who works as a financial advisor called me to say his father in law gave him a tip on a hot stock. When he asked why it was a good stock he said he read all about it on the bullboards and everyone says its going to be great. I almost spit up my coffee laughing. Everyday I go through who's trading high volume and who's share price is rising but that's not a simple science to follow. This is a good start point if your looking for the next big runner but now the hard work should start and intense due diligence is the only true way you will know if its a good fit for you. I get hundreds of tips and I can honestly say I have looked at every one of them but rarely find what suits my level of risk vs reward. I research new trends and try to get ahead of where I think the masses will be in weeks or months to come; and then I get a position. Its not a very exciting way to play the markets but its better than being an action junkie. When I feel my investment has flat lined or the selling pressure exceeds the buying then I take out my position. Sometimes I only take out my original money but usually when I am done with a stock this means I get out period.
In my opinion some investors have recently focused not so much on high or higher gains but more on acceptable losses or even a safe stable place to park money. The world crisis has pushed precious metals up but not to ridiculous levels yet. The average investor self directing pension or topping up pension with unregistered funds is trying to find a safe haven. GIC's seem to be a favored place to "park" funds and if that's your style then ask your bank what the current rate of return is for locking up your money for a year or two. I am guessing its about 1.75 % and that could move up slightly on the short term. That's better than a loss and although its not a very sexy way at making money it may help you sleep at night. I like the stock market and live with the ups and downs. No one is always up no matter what they say to your face. This is similar to the gambler in Vegas who says they always make money. There is built in risk and some games have a higher reward based on risk. This is not a good way to look at investing. If a stock has dropped below 5 cents I tend to expect a reverse split. If I want to wait it out I could be there a long time. Not too many people want to finance a stock at that level so a reverse split helps to hide dilution. Sometimes it works well but that's not typical on any market.
If you have decided to trade you need to spend the time working on where the value is. When you get a new fence built you shop around for a few quotes right? Well the reason we do that is so that at the end of the day we know we got the best value that's available. The market is similar. If I decide I want to get behind a junior gold stock then I dig in and start reading up on who's drilling, who's got a good land position and who has cash. If your company is cashed up and has a low entry price then this is a good start point. Now look at the management, the property they are exploring and the government support for the project. Set a realistic time line on your investment. Mining companies have a honeymoon period of excitement when the drills are turning but when they stop some investors quickly forget about all the good that has been done. This can cause the stock to go to sleep temporarily while the company moves towards production or a compliant estimate on its resources.
Don't forget to pay yourself along the way for your loyalty. No matter how much hype there is about the company you are watching always make sure you buy it based on your needs and goals and you will be fine. Very few traders get rich overnight and some that do lose it later on another high risk play. Remember "high reward" usually comes with "high risk" and one big hit and your out of the game for good.
at 6:25 PM