Lottery Syndrome

Wow what can I say except be glad that you own no stocks. We continue to wait for an indication that the bottom may be sight. Let’s have a little fun and include a lesson on how to buy stocks when things improve.

It would be nice if I could find the winning stocks just like finding the winning numbers in the lottery. Well I hate to burst your bubble but I cannot and neither can anyone else. If you think this blog site will find the stocks that will make you rich overnight then stop reading right now.

The secret to making money in stocks is not what you buy but how you manage those purchases, in other words money management. We have already discussed how you must cut your losses short so that they are very small losses. The reason for this is that even if you find a great company it can still go down in a poor market or may even be considered short term over valued. A bear market will pull down even the best of companies. Once you have that purchase made and you have applied the 10% sell stop your next aim is to reduce that 10% loss, eventually to your break even point. In other words as the stock starts rising you slowly move up your stop to your purchase price so if you are stopped out you can sell at break even. Once you get to this point you can do two things. Firstly you can start adding to the stock position if it continues to rise but you must recalculate your break even point so you never end up with a loss if it goes against you. Secondly you can buy an additional stock and start again with another company.

The objective is to build a portfolio of lets say 10+ stocks. Of course you don’t know which of those 10 will be a real winner because nobody can know. If someone did know then that stock would have been bid up a long time ago even before you bought it. You should keep watch on your 10+ stocks and add to the ones that are rising. The stocks that do nothing you don’t buy or sell. You keep adding to the winner or winners building bigger positions. The not so good stocks you will be adding less to. Maybe that great stock you recently bought went up 100% and you added to it 10 times. However it has now leveled out so you stop adding to it. Maybe some other stock in your portfolio of 10+ stocks will start rising so instead you start adding to that position.

Maybe that great winner you added to starts falling a little. Careful here because all winners will fall a little on low volume as each consolidation occurs. However if you see a serious fall on volume then start selling some of that position off, maybe 25% at first followed by another 25% if it continues. If the stock turns back around to continue up you can always start buying again. Let’s assume you sold off 25% which will free up some money, you can use that money on some other stock that starts rising in your portfolio.

This has the effect of moving your money into the winners and slowly taking it out of your losers or even those stocks that are flat. You don’t have to know which stock will be a winner, just keep adding to the ones that are climbing and selling the ones that are falling.

I liken this to planting seeds in a garden, some will die away (your 10% losses) and some will grow into big oak trees. All you need is a couple of great winners to do really well and they will swamp those very small losses you take on the initial investments that die (some of the seeds).

In conclusion I have no idea which stocks will do well but I take very small positions in likely candidates taking small losses along the way. The money management will move your funds into the stocks that do well and take it away from the stocks that don’t do so well. One last point, you have to realize that even those great companies will take a set back from time to time as they get ahead of themselves. That’s when you start selling off a little and if they level out you still have a position for when they start rising again.