Wednesday, December 28, 2005

Speculation Success Is Dangerous

It Is easy to believe you are a genius after a string of successful speculations.

In a long bull market, everyone thinks they are above average.

When the market changes perception is slow to follow. It is easy to keep doing what you were doing, and quickly go broke.

If a speculation is easy to do, or easy to find, it will end suddenly.

There are a million ways to make a million dollars in the market, all of them are hard to find.

Decide what your target is before you shoot. After you hit the target, get smaller or even get out. It is always easier to make smart choices when you are not committed.

The key is to avoid greed. In fast moving markets like gold shares it is common practice to half your commitment if the share price has doubled. That leaves the initial investment available for another speculation and still gives you plenty to play with.

Remember to let profits run and cut losses short.

Let's say your selection and timing are bad enough only 20% of your speculations work. If you have five stocks, each with $1000 invested you have $5000 at risk. Four of the stocks drop and you sell taking a 10% loss on each. You now have $3600 cash after the $400 loss on those four stocks. The other stock doubles to $2000 and you sell half. You have one good stock now worth $1000 and cash of $4600 for a portfolio worth $5600.

Hopefully you can do better than 20% right. You can probably do better than a 10% stop loss if you are careful.

Back to the main point, this is a style of speculation that may protect you somewhat when the market turns. There are many tools to keep yourself from danger, study as many as you can find.

Knowledge is the key.

Always buy the book before you buy the speculation.

Add knowledge and thoughtful experience together and you have the ingredients, if mixed properly, for wisdom.

Wisdom will not save you from occasional losses, but it may keep you from going broke.

Tomorrow's market will be different than today's. You will have to learn and use different styles of speculating to maximize your expectation.

Just don't let success destroy your gains.



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