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Building A Stock Investment Strategy
Just in case anyone was interested in building their own stock investment strategy, this is what I would recommend.
If you want to make some money with stocks...you need to basically become an expert on the industry you plan to invest in (I would recommend choosing one). It doesn't matter what industry. (although the more volitile it is, the better. This provides for more opportunities) Learn what rules the industry plays by, who the major players are and how a company is valued, this will lead you to understand what is creating peaks and valleys in those stocks. Becoming an expert takes some time, learning and experimentation, but once you get a feel for it, it's easy. Think of it like buying a car. When I was younger then 16 I didn't know what any cars were worth, but once I started shopping around to buy one, I understood what made them worth more or less. When your looking for stocks to buy, don't think of it like your buying a piece of a company, think of it like your buying the entire company, if you wouldn't buy the whole company for the current market cap, then don't buy one share, wait and look a better opportunity, there will always be another opportunity.
The above paragraph has to do with knowledge and understanding of information available, the other half (and more important half) on stock investing is temperament. You need to be able to control fear and greed, this WILL give you the ability to buy low and sell high. I talk about this alot on my blog, stop by to learn more. http://krazology.com (this isn't a plug, that's just where the info is)
Lets look at an example.
I starting buying LVS in mid Feb for an average prive of $3.15. I was able to control the fear on the way down to $1.38 (greater then a 50% loss) because I knew the company was worth more then what I had paid for it, and was willing to wait.
After it hit it's bottom of 1.38$ on Mar 9 like most stocks, it's took off, but this time I was not able to overcome the fear and sold right under 5$ a share, because I was afraid it would go back down. Within another month LVS was trading over 12$ a share. I earned double digit profits but it could have been triple digit. Lesson learned for next time.
Greed becomes apparent when the company you own becomes over valued and you still do not sell, don't fall for this one. Know what your company is worth and have a sell price in mind before you buy to make the execution simple.
The first step to all this: Go buy a book on the in's and out's of the industry your interested in, so you can accuratly value a company and (or) read whatever you can get your hands on for infor on that industry. If you work in that field, all the better.
Second step: Open a brokerage account with at least $2500 that you can lose, and start experimenting. If the value drops to below $1500 deposit more or else brokerage fee's take a large part of your capital. Once you make 5-10 trades in row where you make money and understand why you made money, start adding more to the account.
Third Step: CONTINUE LEARNING, industries are not static, they evolve. New laws are written, inovative products are released anything can happen, keep you finger on the pulse of the industry you trade in and be on the lookout for a complete crash in the entire industries value, i.e. The newspaper industry once blogs hit mainstream.
Books I would recommend:
Buffetology
Market Wizards (all of them, there are 3 or 4)
Industry specific books
If you want to make some money with stocks...you need to basically become an expert on the industry you plan to invest in (I would recommend choosing one). It doesn't matter what industry. (although the more volitile it is, the better. This provides for more opportunities) Learn what rules the industry plays by, who the major players are and how a company is valued, this will lead you to understand what is creating peaks and valleys in those stocks. Becoming an expert takes some time, learning and experimentation, but once you get a feel for it, it's easy. Think of it like buying a car. When I was younger then 16 I didn't know what any cars were worth, but once I started shopping around to buy one, I understood what made them worth more or less. When your looking for stocks to buy, don't think of it like your buying a piece of a company, think of it like your buying the entire company, if you wouldn't buy the whole company for the current market cap, then don't buy one share, wait and look a better opportunity, there will always be another opportunity.
The above paragraph has to do with knowledge and understanding of information available, the other half (and more important half) on stock investing is temperament. You need to be able to control fear and greed, this WILL give you the ability to buy low and sell high. I talk about this alot on my blog, stop by to learn more. http://krazology.com (this isn't a plug, that's just where the info is)
Lets look at an example.
I starting buying LVS in mid Feb for an average prive of $3.15. I was able to control the fear on the way down to $1.38 (greater then a 50% loss) because I knew the company was worth more then what I had paid for it, and was willing to wait.
After it hit it's bottom of 1.38$ on Mar 9 like most stocks, it's took off, but this time I was not able to overcome the fear and sold right under 5$ a share, because I was afraid it would go back down. Within another month LVS was trading over 12$ a share. I earned double digit profits but it could have been triple digit. Lesson learned for next time.
Greed becomes apparent when the company you own becomes over valued and you still do not sell, don't fall for this one. Know what your company is worth and have a sell price in mind before you buy to make the execution simple.
The first step to all this: Go buy a book on the in's and out's of the industry your interested in, so you can accuratly value a company and (or) read whatever you can get your hands on for infor on that industry. If you work in that field, all the better.
Second step: Open a brokerage account with at least $2500 that you can lose, and start experimenting. If the value drops to below $1500 deposit more or else brokerage fee's take a large part of your capital. Once you make 5-10 trades in row where you make money and understand why you made money, start adding more to the account.
Third Step: CONTINUE LEARNING, industries are not static, they evolve. New laws are written, inovative products are released anything can happen, keep you finger on the pulse of the industry you trade in and be on the lookout for a complete crash in the entire industries value, i.e. The newspaper industry once blogs hit mainstream.
Books I would recommend:
Buffetology
Market Wizards (all of them, there are 3 or 4)
Industry specific books
Comment
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Comment by Josh on July 24, 2009 at 11:51am - exactly Adrian, thats what I meant :)
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Comment by Adrian on July 24, 2009 at 10:56am -
Josh: I agree... trading systems are useful for practicing the mechanics of a particular system; but, once you understand how 'all the different parts move' then you should move on to the 'real thing', obviously with only a small'ish amount of money then build up from there ...
... reason? You can't simulate adrenalin and emotion!
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Comment by Josh on July 24, 2009 at 10:14am
- Hey Debbie, my opinion is - it's not like the real thing. I think they are useful to see how the whole game works and to get used to inputing your buying and selling preferences, but trading real stock with real dollars has no substitute.
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Comment by Debbie on July 24, 2009 at 8:41am - I keep meaning to try those stock simulator things. So what's the consensus- are they are similar to the real thing, or not?
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Comment by Adrian on July 23, 2009 at 9:21pm
- Thanks, KC. A brilliant web-site - and, useful companion to that wonderful book “Rule # 1 Investing”, that you refer to - is stock2own.com
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Comment by KC on July 23, 2009 at 10:15am -
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Stumbled across a blog-post on "Get rich slowly" called "Ask the Readers: Where to Start With the Stock Market?" and Phil Town's "Rule #1" gets a mention in the comments, and another commentator discounts the usefulness of using virtual stock exchanges, but I would have thought they would be very useful in getting newbies to start to log their path into exploring the various sectors of the stock market.
Nevertheless, alternative opinions there.
Where to start in the stock market/Get rich slowly
KC
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Comment by Josh on July 19, 2009 at 11:19pm
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Thanks for the comment KC. That's where I initially heard of the "Turtles" program in "Market Wizards". As for Adrian allowing me to manage his money...I'm not betting on it.
Thats def a book on my list though.
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Comment by KC on July 19, 2009 at 4:38pm
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@Adrian. Just give Josh complete discretion to trade $2M of your own money, and then there will be complete equivalence! :-)
Let's hope the outcome will be similarly profitable, as it was for both Mr Faith and Mr Dennis.
Seriously, though, I recommend this book for carefully explaining how to calculate the size of each trade, which nicely takes account of the volatility of the particular instrument you will be trading.
So for instance, if you trade something with a wide daily variance (high volatility) then you will probably end up trading fewer contracts of that one, when compared to something that doesn't vary very much. Its very neat, especially when you consider Richard Dennis was having these ideas back in the 1980's.
KC
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Comment by Adrian on July 19, 2009 at 4:28pm
- Someone introduced me to the 'Turtles', saying that the MIT program was a bit like that ... I beg to differ! :)
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Comment by KC on July 19, 2009 at 5:40am
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@Josh. I've been reading the book "Way of the Turtle" by Curtis M. Faith which confirms your assertion that you've got to have nerves of steel when implementing a system, especially when your position moves against you and you see your fine profit starting to dwindle.
He was one of the first Turtles, and was just 19 when he was schooled in their trend-following method - he couldn't understand why the other Turtles weren't trading in the way they had been taught to trade; he, on the other hand, was so fearlessly following the method that the teacher gave him a $2M account.
That teacher was Richard Dennis who appears in your recommended book "Market Wizards".
KC
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