Points one and two (Don't
buy into companies unless you know the debt level
and Don't
buy into companies with high debt levels)
cannot be overstressed.
The main cause of really bad sharemarket losses is
company failures, and these occur when the company's
creditors realise that debt levels have got out of
control and decide that their best chance is to appoint
an administrator, receiver or liquidator to try and
recoup their money.
Liquidators are generally like bulls, no...brontosauruses,
in a china shop and often any hope the company had
of trading its way out of trouble disappears the moment
the administrator gets their foot in the door and
starts flogging off assets at garage sale prices.
Certainly a liquidator's loyalty lies with the creditors
of failed companies, not the shareholders, so keeping
the company viable as a going concern is not their
highest priority. Getting cash for the creditors (of
which they are one) tends to be paramount. Creditors
are often not shareholders in the company and are
likely to be banks and financiers, or trade creditors
owed money for inventory or work. Shareholders are
unfortunately like untouchables in the pecking order
of failed businesses!
Point three (Give
your selection a reasonable amount of time in which
to perform) refers to an
oh-so-common scenario. The intrepid plankton gets
a hot tip and jumps in with great excitement. A few
weeks go by and nothing happens, so punter plankton
realises the money could be better used on some other
activity with quicker gratification profile. Another
month goes by and stock suddenly soars, quadrupling
in the space of two weeks, but alas, without punter
plankton on board.
The point is, why should a stock suddenly surge the day after you buy in (and
the day after someone else sold out?) It may have been around its current level
for months or even years, so be reasonable. Don't expect stocks to behave as
if they owe you a living at everyone else's expense.
Point four (Never
allow your bids or offers to be affected by fear of
upsetting a broker or looking stupid)
is one you may never find relevant, but can be very
important under certain circumstances. You may have
good reason to believe that a stock is going to fall
to a certain level, or only be interested in it at
that level. If you place a bid at that level some
brokers may tell you, 'I don't think you'll see any
action at X price, how about we go in at Y price?'
The investor may feel embarrassed or guilty about
looking like a tightwad or wasting the broker's time
and may end up being talked into paying too much.
Or the investor may place a sell order at a high
price, notice that the market is rising strongly,
but feel too intimidated to ring and cancel the order.
Don't feel that way!
Failure to follow your instincts could be very costly
and remember, your broker, however nice he or she
may be, has a vested interest in turnover and will
be naturally less inclined to haggle than you are.
Stand your ground. Your broker is not going to starve,
but you might. Your broker is working for you.
Point five (Try
to generally buy stocks at historically low levels
in spite of market sentiment) looks
like an exercise in the bleeding obvious and yet,
if you look at a share price chart, no matter how
precipitous the highest peak, some unfortunate people
thought it was a great buy at just that moment. This
point is quite controversial, as technical analysts
usually recommend buying stocks on an uptrend, and
an uptrend takes time to identify, by which time the
stock is not usually near historic lows. Nevertheless
I believe this a good rule.
It is usually not a good idea to buy a stock
that is consistently falling, even when it reaches
an historic low, because it may well be in the process
of setting a far more enduring P.W. (personal worst!)
However, a stock that has found a long term support
level and has bounced along that floor for some time
is very often a good investment for the patient punter,
provided it has some other attractive feature going
for it such as endorsement from a friendly Shark who
can be trusted.
Point six (Try
and buy in sectors of the market that seem undervalued
or out of favour ) may
be a little controversial in that good money can certainly
be made out of the latest Tulip frenzy or South Sea
Radio craze. However, in the speculative sector especially,
upside is always there, but minimising risk is a much
harder task.
One good thing about being a countercyclical investor
is that even if you are inexperienced in the market
per se, you might have a talent for picking economic
trends or identifying the next boom sector. It did
not necessarily take a brilliant share trader or clairvoyant
for instance, to guess a few years before it happened
that internet and technology stocks would at some
point become all the rage.
Point seven (Don't
overreact to blind panic - Be prepared to sometimes
be brave) refers to the
old adage, 'buy in gloom, sell in boom'. The
trouble is, it is actually terribly difficult to buy
in gloom, as there are always 101 good reasons why
everything appears doomed and nothing will ever be
any good ever again. Hence the comment about panic
and bravery.
The final flourish of a falling market is often
blind panic, frequently bouncing back a bit and then
staying flat for some time and history shows that
in general (though not always) it is better to be
buying at such times than selling. One rider is that
if you have been foolish enough to buy into a 'hot'
market and suddenly a market crash starts to occur,
then get out fast! Stocks were probably grossly overvalued
and usually do not correct to a sensible lower value
in one day, so an early exit will usually preserve
capital. Also, markets always overreact, so if you
can get out early it is usually possible to buy back
later on when the overreaction has become obvious
and stocks are much cheaper. Point seven assumes that
you have followed the other rules and made what appears
to be a hard headed investment based on fundamental
value.
Points eight and nine (Never
stray too far from the fundamentals - There are lots
of stocks to choose from and
When
considering fundamentals, believe the bad but double-check
the good) both assume that
you will be looking at some of the fundamentals of
the companies you buy into. There are other ways of
investing, but learning to understand some of the
basics of balance sheets, p/e ratios, management quality
and so forth will certainly repay the effort.
The important point is that with many hundreds of
companies to choose out of it is not necessary to
make serious compromises of your investing principles
in order to find a suitable stock.
Point ten (When
deciding where to put your eggs, the quality of the
basket is more important than the number of baskets)
refers to the old adage, 'don't put all your eggs
in one basket.' This is sensibly motivated, but
for most people their money in the sharemarket is
not the only basket anyway. They have a house, or
superannuation, or simply possessions, as well as
their sharemarket holding.
If you carefully weigh up various stocks and one
or two appear head and shoulders better than the rest
in terms of value, don't be scared to put all your
sharemarket money into those. Why water down your
exposure with stocks you expect to perform worse?
It may be wise to keep some sharemarket funds in cash
in case another great opportunity comes along, but
don't buy a spread of stocks purely for the sake
of diversity if one or two seem far better after
sensible analysis than the others (Naturally brokers
think it's a good idea though, spending $30,000 on
5 stocks generates a lot more brokerage than spending
$30,000 on 1 stock.)
Point eleven (Be prepared
to quit the market altogether sometimes)
is another thing your broker will rarely, if ever,
tell you. But timing is perhaps the
single most important factor
in playing the market successfully. (See below) At
certain times it is simply bad value to be in the
market, as the odds of it falling are significantly
higher than it rising. When the market goes into a
tailspin, even good stocks are likely to fall.
Sometimes it is not practicable to exit the market
completely for taxation reasons and you may be a retired
person living off the fully franked dividends of blue
chip stocks whose price does not matter to you as
you are never selling. That's fine of course. Most
investors however, do care about capital appreciation
and should occasionally be prepared to exit an overheated
market altogether and buy back in later.
Point twelve (Don't rely
on formulaic rules or systems from other traders,
books, or indeed websites such as this!) is one that
is sure to arise at some point if you become a regular market player. Someone
will tell you about a charting system or some other formulaic method that is
practically infallible. Coincidentally, all such systems seem to have one thing
in common, they entail paying money for them, despite the fact that the person
who discovered the system clearly must be a billionaire from using their own
infallible system.
Do any of these systems work? Sure they do. We simply
recommend that before you send money for any system
devised by someone who used it to make a basketful
of money, you just get them to send a photocopy of
their tax returns from the years when they used it
to make their fortune. It's not much to ask and once
they've done that and you've verified the information,
we see no reason not to give it a try.
NEXT ... Timing
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