Investing - Part I - addendum I

OK, so I've got the first section of my treatise up and I've had a chance to watch both episodes of South Park tonight, so I need to add a couple of additional points.

First, what I write is not the gospel of investing. There are as many different investment theories as there are brokers out there. No one theory is right and very few are completely wrong. What I discuss is but one single theory.

But I discuss it because my personal experience as a broker showed me that these ideas worked. I saw literally hundreds, if not thousands, of trading schemes. Most were abject failures. Why?

Investors have a notion that the more complex the formula, the more likely it is to be accurate. So much attention is paid to the most miniscule details of a company, that the overall picture is never actually viewed (can't see the forest for all the trees?).

I found that people who looked at just the basics, and nothing more, were more likely to be picking winners than the nitpickers. Why? They better understood the company, the industry and the environmental pressures they might face. As a result they had a better data set for making decisions, even without the mini-details.

There were also two other traits of successful investors. They were disciplined and they used as many of the tools available as possible.

When I say they were disciplined, I mean that they could set a plan and stick to it, come good times or bad. I still have trouble believing the number of people who lost money on positions because they would not take a profit. They kept holding out for more and more and more. Eventually when the stock began to fall, they would hold it on the way down waiting for it to rebound so that they could get out with a profit. The disciplined investor would have taken their 10-15% gain in a week or two and they would have gotten out. If the stock keeps running, that's ok. If it reverses, they would look to see if there was opportunity to pull the same trick again. Discipline is easy on the downside; it's nearly impossible on the upside, but it is every bit as important.

And when I say that they were using all the tools available to them, I don't mean that they were using every formula or rule of thumb out there. They would use fundamental analysis to identify good choices, they would use technical analysis to decide when to enter or exit a position, and they would look at using options to hedge or to enhance the profitability of a position. But it was rare that they would use any one technique in isolation. Doing so gave an incomplete picture, a very dangerous situation.

Simplicity and discipline. Those are the two hallmark traits that I saw of successful investors. Fellow brokers that I have advised in the past would attest that those are the messages that I preach.

Also, everything I relate in these posts is completely based on experience. I have no research papers or sites I can send you to for fact checking. This is my experience. This is what I have seen working in the past (past performance is, of course, no guarantee of future returns).

There are a lot of brokers out there who are interested only in their next commission. I want to help to provide you with an ability to protect your own interests. Even with the biggest firms, don't assume your broker has a clue as to what he's doing. Ask questions. Make him prove himself. After all, you're paying him to play with your money.