I made my very first investment in the stock market when I was
ten years old. Ever since then I have been hooked! Now I check
out hundreds of trades each year with the same excitement andenthusiasm, and each time try to find that one market at the
right time that could dramatically create wealth.
If you would've been fortunate enough to invest $1,000 in
Microsoft when it first came public, that initial investment
would be worth close to $300,000 today. In the last 10 years
America Online has been up 12,000% and it has come creashing lower as well! Although statistics like this are advocated regularly by journalists and brokers the majority of investors have a very difficult time staying in an investment for that long of a period of time even though they know they are in a good company The financial markets are a never ending source of temptation trying to lure you into a new position with each passing second. The belief that the grass is always greener in another market is a distraction that every investor eventually has to contend with. Even if you are a MUTUAL FUND investor the fact is that you are always looking for the BEST return available.
Years ago when I worked as a broker I was confronted with this
dilemma. One of my clients told me that he knew the BIG MONEY
was made in holding on for the LONG TERM but that he liked
trading the short term swings. He asked my advice and I had to
think long and hard for several days before I could respond.
Eventually, I presented him with the following strategy that
literally combines the best of the TRADER and INVESTOR worlds.
Traders are looking for the quick hit and run. Investors seek
their advantage by looking at the long term. Long term
investors quite often benefit from allowing dividends to be
reinvested into purchasing more stock in the company and the
very real possibility of the stock splitting in the future. If
you combine both of these apparently opposite perspectives you
end up with a very unique viewpoint that eliminates a lot of
stress associated with decision making. This strategy will
bring home the perspective that within every seed that you plant
in the financial markets lies the promise of ten thousand
forests. I refer to it as my FOREST STRATEGY! It is another
way to make your short term efforts as a trader pay you
dividends by also recognizing the importance and significance of
long term investing.
Let's say that your initial investing capital is $10,000.
1) Find a company, preferably in the Standard and Poors 500
Index that you understand and are familiar with. If you want
to narrow down your group you can select companies that are in
the Dow Jones Industrial Average which include only 30 stocks.
These are established companies with long financial histories
that can be researched to your hearts delight.
2) Study the companies Price Earnings Ratio. Where is the Price
Earnings ratio now? What has been The highest and lowest points
of the price earnings ratio over the last five years? Look to
buy a company with a historically low price earnings ratio that
is a leader in its industry. Use the Price Earnings Ratio as a
guide. Don't try to pick bottoms.
3) Look at a chart of prices to see what has happened recently
and to determine where a good buy point is.
4) Place your trade with the intention of a 10% profit
objective. Once you reach your profit objective, sell enough
shares in the company to remove your initial $10,000 investment
and only leave your $1,000 profit in that stock.
5) Repeat steps 1-3 as you search for another company to trade
for a 10% profit and plant the Remainder for the long term.
6) Repeat, Repeat, Repeat.
The drawback on this type of trading is that when you are with a
great company you do give up a lot of upside. However, if you
look at the PROBABILITIES how many IBM's, Aol's, Yahoos! Or
Microsofts are there out there in relation to the entire
universe of stocks? What I personally like about this style of
trading is that it eliminates the GREED factor that most
investors have of trying to hold on for the top tick. Secondly
it also allows you to build a nice diversified portfolio.
Thirdly, trading becomes a very fun game with potentially
lucrative long term implications. It is very possible to trade
this way once a month planting a seed in a quality company that
can easily become a Forest of Wealth for you.
Some trades might take the better part of a year to pan out.
Some trades might achieve your profit objective in a matter of
weeks or days if you are really fortunate.. Keep in mind that
you still have to manage your risk on each and every trade. Let
me be perfectly blunt, if you don't manage your downside there
will not be an UPSIDE... It is acceptable to use any of the
RISK Management Techniques that I advocate by doing Partial
Covered Calls and other Option Selling Techniques. When done
correctly those techniques can dramatically accelerate your
returns.
I must admit that I truly enjoy this type of trading. (My
broker likes it as well as it generates many more commissions
for him.) However, part of the reason that this method sits
well with me is that I hardly pay any attention at all to my
profits after I take them. It becomes very stress free to know
that you have increased your wealth 10% and are just interested
in planting seeds all over the financial landscape in companies
that meet your criteria. I must however stress the point that
you make sure that you are aware of the downside. This method
is by no means RISK FREE....but for the individual who likes to
trade and invest simultaneously it truly is ideal.
Guard your investment principal at all costs and let your profits run. Just one more way to look at the
bigger picture. Kind of like a Johnny Appleseed meets the
financial markets. Many extremely successful investors do this
with Initial Public Offerings as well.
Study away.and remember,let's be careful out there.
Dowjonesfully-
Harald Anderson
http://www.eOptionsTrader.com
Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of
Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.