I published the below article on my website www.sharechap.com and have created some discussion, particularly around how prevalent the use of stop losses is around investors. I was inspired by Ben Hobson's article, published this week and quoted him at the start,
I'd be interested to see how much people use stop-losses people amongst our community and also what other Rules people live by when investing?
The risk of not having an exit plan is that you become a hostage to some destructive cognitive and emotional pressures. These unseen and sometimes instinctive influences can be a drag on your portfolio and may even make your best investments turn sour. Ben Hobson (Stockopedia)
Some years ago, I spent some time with one of the leading companies in a notoriously cyclical industry. This particular company had managed to consistently deliver market-beating returns, performing particularly well during a major downturn. I asked them what their secret was to beating the competition.
Their answer? We understand risk like none other in this industry.
The secret to big gains in any business is a mixture of luck (often right place right time) and the ability to take a bigger risk to deliver a bigger return. This company spent an inordinate amount of time analysing all of the risks of a project. Once they had done this, their greater understanding enabled them to enter projects that the competition would disminss as being “too risky” or “too expensive to enter” and they would make big returns. Their bigger returns would then be rolled into new projects where, adopting the same approach, their financial fire power would add an extra weapon to their armoury.
Investing in shares is a risky business. If you did not realise this, then investing is probably not for you. However remaining passive and doing little or nothing is also risky, due to the ravages of inflation. So we all need to take on a measure of risk in order to deliver a reasonable return on our money.
It is reputed that around 70% of investors in shares lose money over time. To the cautious, this would be hoisted as a big red flag as to why you should never invest in individual shares. I am more interested in why the 30% do make money in shares. What are they doing that the 70% aren’t, or failing to do?
In my view, there are three key aspects to making sure that…
