Making a return in the stock market is the same as making money in life. It involves timing, having momentum on your side, not making big mistakes, and facing up to reality not wishing away what is happening.
Now ‘luck’ so often mentioned by people for their fortunes just means that the environment they don’t control, moved in their favour. A good investor/trader is set up to capture those opportunities – they put themselves in a position to get lucky.
The key rules with timing are to make sure you can get in early enough, without waiting too long. But that you get in at a low cost in case the market does not follow through and give you a return. The rich rarely go ‘all in’ but ease in, increasing their position and investment. The reason is they are always cautious and clear about what will make them money and keep an eye on the exit.
Once they know things are going their way they keep a route to be able to increase their bets. You probably have not looked in detail at some of Warren Buffett’s bets – for instance into buying a chunk of Goldman Sachs, but that’s what he had, an option to buy more if the price went his way.
Dealmakers, traders, have an ability to structure trades this way. Most people think trading, making money is simply about buying, holding, then selling. And sometimes, few times, that will work. But it won’t work often enough to make good big returns.
Now, on the other attributes, such as not making big mistakes. This is where they do not get locked into deals/trades which could turn out bad. They have an exit, a stop loss. Otherwise they know for all their profits, one bad move will eat everything away.
They are therefore very considerably focussed on losses, and protecting them. They would rather sacrifice a huge potential gain, than have a huge potential loss. So they will look for trades where they can enter in small pieces, small trades, and then add up, as things work out for them.
Why don’t they just wait? Because if they waited, they may move much of the move in prices in their favour.
Finally good traders face up to reality. They do not expect prices only ever to go up and up and up. They know prices are volatile, they rise and fall. So they ensure with the volatility that they look over the right time frame. For Warren Buffett that time frame is decades. For traders it may mean moving from looking at prices by the minute to by the hour or the day.
Flexibility to exit, and re-enter if they are proved right about their original decision is more important to them, than going in first time with all their money and hoping they are right, or waiting too long and missing the opportunity altogether.
Alpesh Patel
www.alpeshpatel.com/go
