LESSONS and STRATEGYMorning coffee ramble here... thought it would be timely to have this discussion now seeing as we have time before the QTR report is expected out. May be a good time for folks to rebalance their portfolios and set goals...
Thought I would toss out some thoughts on strategy this morning seeing as we have something actually happening with the stock now for the next while.
In my years of investing I have learned a few really hard lessons, here are a few things I tend to keep in mind for investing that may help some of our new investors.
1 – Protect your real dollars.
When I refer to real dollars I mean the cash out of your pocket, gains on paper are worthless until you actually sell so whatever you do, don't let missed gains bother you, that is a sure fire way to get stuck holding the bag on a stock that has topped out or one that is turning and heading for a new 15, 30, 45 day low (or zero... been there, a few times now.. that one really bites..)
This may sound pretty basic but a lot of new investors tend to invest everything they have in one shot and into one stock (Yes, I did this too about 20 years ago). Those who have been holding HIP for a long time are likely looking back on that initial decision with a ton or regret already and have learned by now that by not leaving yourself any cash on hand will severely limit your options for averaging down, making day-trades, or even going off and playing another stock.
The thought process behind investing everything into one stock and risking it all is that it maximizes your return in a short period of time. This is true, it would, however if it does not play out, or the investment takes years to mature, you can either be left broke with no options for future investments or you could be left cash-strapped and miserable for years while you wait for the opportunity to break even. Leaving with some amount of gains is always better than taking a loss (IMO), as you can always go off and find another stock to invest in and repeat the process… again and again… making money without the stress and worry of losing all of your money, or enough that will impact your financial plans. LIVE TO INVEST ANOTHER DAY…
2 – Manage the Risk.
This is more or less a repeat of 1 however RISK is such a big topic that it really should be highlighted. Risk is anything that could severely impact your position. Good examples are a business that goes under, a change in legal requirements or government policy that affect your investment. Other examples relate directly to how you invest; shares vs. warrants for example. The warrants, until they hit their strike price do have the chance of expiring and going to zero. Even if you are on a good company you may be risking all of the money you have in warrants being lost and therefore, even if the shareprice should eventually skyrocket your gains would be lost, or severely impacted, if you have to cover the losses sustained in a warrant going to zero.
3 – Set a Goal / Strategy
This one seems to be an after thought for new investors (don’t be offended, I am basing these comments on what I personally experienced). Once a stock hits a new high most new investors will think it can only keep going up from here and they hold too long. Once the retraction starts they then think they cannot sell because THE PRICE HAS TO COME BACK… no, it really does not have to come back. Stockprices do top out and you can see that clearly on each run that occurs after a News Release etc. Referring back to Rule 1, make sure you have a strategy that ties back to protecting your investment. Give a great deal of thought to what you think the company you have invested in is worth now, how long you are willing to (or able to) keep money on the stock, and where to think the price will run to. Hitting the Sell button on a high is marginally easier than hitting the buy button on a low but they are both equally important. Ask yourself this.. I CAN’T WAIT TO … then fill in the statement. Is it to recover all of your original investment dollars, is it to beat the bank and come out with 10 or 20% or is it to make a million dollars in a few days? Then revisit your investment position and figure out where the shareprice needs to be for that goal to be achieved, think about what events are expected to occur between now and when you would like to be off the stock and be realistic when you consider what needs to happen for your goal to be achieved, if they do not line up then reset your timeline or reset your targets. If you sell below the high don’t worry about it, you achieved your goal and you LIVE TO INVEST ANOTHER DAY, it is much better to come away with a decent gain than a big loss. Keep in mind whatever percentage you are down the price needs to go up by twice that to recover so a 20 or 30% gain is MUCH better than having a 30% loss as you need the stock to go up by 60% just to break even… losses are bad, very bad, and very very hard to recover from on the market.