Thursday, June 26, 2008

How to share trading effectively and find the meaning of life in short

There are different ways to share trade. Share Trading by definition is not investing. If you are going to be an investor, you need to do a lot of research in the company/ property. And when you plunk the money down - you are going to sit in it for ... ten years or twenty. Its an investment. You sit on it - and let it grow.

Share trade is more like gambling. It really is. You are putting money in companies - and hoping for a quick return in a short frame of time - 1 week to 3 months to 12 months, depending on the risk.

Bottom line for a share trader is risk management. This is an important skill to have. Too many people have no concept of risk management. Yet, its something most people take part on a daily basis. We drive cars on roads with thousand of other drivers - and we trust them to do the right thing - ie. that they know how to drive properly, they won't speed through a red light, they have maintained their cars - esp. the brakes - and they don't drive whilst on drugs or alcohol.

You could boil down risk management to a few simple maxims.

1. The greater the return - the higher the risk. Its a simple fact of life. This doesn't mean you hide all your money under the bed and spend all your life watching TV at home.

2. New things/inventions usually involve great risk but can offer high return. Think of how many aircraft manufacturers or car makers that were around 100 years ago - or for that matter- how many Telecom and internet companies there were around.

3. "There is a time for everything under the sun". Do yourself a big favor- go and read the Book of Eccelesiastes in the Bible. Its quite short- only a few pages - but its written by one of the richest men in the whole world who had it all women, palaces, riches, political social power, more women, monopoly on trade routes, God's favor, even more women. He was bigger than Hugh Hefner, Donald Trump, George Soros or Li-Kah Shing.

You'll find that there are seaons in life when commodities, property, gold, banks, internet resource stocks all shine. The trick is to know the right season - and put your bets carefully. For the moment things look rosy but only for this moment. Know what sector investing is all about.

4. Don't be greedy. Share Trading is like fishing. You go - fish - catch a big haul. But you don't need to do it everyday. There are times when its too dangerous to go fish - storms can really wreck your boat and put you out of business indefinately.

5. Risk management- never put all your eggs - or the majority of your eggs in one basket. To a certain extent, you really ought to know what the companies are doing. If they are just flip-flam penny stocks - you shouldn't be putting more than 1% of your capital into them.

6. Never fall in love with a stock. Remember that. You form relationships with people - but when you buy shares in the company - its only just that. The CEO, directors, workers don't give a damn about you. They may say they care - but that's just pure propaganda. You put some money in it - you make 100% in one month. You move on. Don't get emotionally attached.

7. Trading has no place for emotions. Its not Superbowl. Its not the Grand Final. You shouldn't be looking for someone to high 5 when you make $10,000 in one successful day trade. Zero marks for the Proud.

Why? Because emotions cloud your brain. You need to have a clear cold hard analytical mindset to make the right decisions. This is serious. One really bad horrible decision can destroy you. Its like driving - are you going to ram the @#$ tailgater who cut in front of you and gave you the finger - and endanger your life and those you love? No, you get his car number down, go home, and call Ah Seng and his friends to go to the @#$er's house at night ... to give him a good counsel.

8. Charting. Technical Analysis. It works. But it ain't the crystal ball. So adopt good risk management strategies. Get out at 5% minimum. You've got to set a limit somewhere.

9. Know the times - usually a good market known as a Bull market - most stuff goes up eventually. If you are holding onto a good stock and it goes down - you can afford to keep it for awhile.

10. Avoid doubling up on your position. This can be a classic death trap. You've already put in 10% of your cash in the stock. Its just fallen 10%. What happens if you buy another 10% more and the stock falls 20%?? Its like buying seats on the Titanic as its sinking - OH LOOK 90% discount!! Buy morel!!

Once you've put more than 50% of your capital into a position (shares in a company) - and its fallen over 50% - you're gonna develop tunnel vision. You're going to look for any kind of good news that vindicates your crappy decision. You're not going to listen to any advice or news that tells you - you've probably made one of the worse decisions in your life. And deep down, you're reaching for your wallet to go buy more. Better idea- go pay someone to give you a good slap in the face. Wake up you moron. At this stage, you are really in a pickle. Who knows maybe in 5 years time, the stupid share price will go up 10 times in price. (Its happened to me before- ask me one day about Lihir Gold). But a good risk manager, will - most definately avoid throwing more good money in. See Rule 5 and 6.

Managing Risk. Its quite simple really. Takes a lot of maturity to handle it though.

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