Saturday, April 21, 2007

The stock market is a different game

In badminton, the player who gets the first 21 points wins the game. In soccer, the team which scores the most goals is the winner. In the stock market, things are different. It is not how many times you win that count; it is how much you win when you win that matters You can actually lose ten times and win once and on balance you win.

Small losses and small winnings cancel themselves out. They are of no use except for the fun and the experience. Your aim is to win big when you are on the right stock, Just like in a game of poker, you must make the best use of a good hand otherwise the best of cards will go to waste.

If you are an intelligent investor, you will only be buying undervalued stocks. There is no need for you to cut losses. Warren Buffett says there is no need for you to panic even when the value of your stocks has dropped 50%. You can actually buy to average down. In trading, an entirely different strategy is called for. You never average down but cut your losses quickly. If you are one of those who cannot bear the pain of a small loss, never be a trader.

Prospective earnings are more important than current earnings. They are what people look at when they buy. That’s why some companies are selling at high price earnings ratio.

Do not buy anything you do not understand. If you are really serious about the stock market, keep a daily trading diary. Every time you buy or sell, write down the reasons for the actions. You will be amazed at how smart or stupid you have been when reading them a year or so later. In any case, these recordings will go a long way to grooming you as a smart trader or investor.