When it comes to a success story, I've enjoyed following the career of Porter Stansberry, the remarkably prolific Founder and Executive Editor of the organization that bears his name, Stansberry & Associates Investment Research. In a recent edition of his S&A Digest Mr. Stansberry gave two very important reminders on how to be "smart" with our money.

"First and foremost, the No. 1 goal for 2013 is to not lose money. We manage the risk of loss in three important ways. First, we do our best to only buy investments when they are attractively priced. That means, you have to know how to value operating companies (on the basis of their cash flows), asset development companies (on the basis of their proven reserves), and bonds (on their discount to par and yield to maturity). We've written about these topics many times. This year, promise yourself that you will fully understand the value of what you're buying. And no matter what… don't pay too much for your investments.

"The second way we avoid losses is by using trailing stop losses. These are mechanical exit points where we will sell a stock if the price has moved against us by a predetermined amount – normally 25%. We don't tell our brokers about our stop-loss points. We don't enter the stops into the market, either. Telling the market where your stops are is just like showing your poker buddies your hand before you start the bidding.

"Keep your stops on a spreadsheet. Or even better, use software like TradeStops to manage your portfolio. Make 2013 the year you fully embrace trailing stops. Make this the year you don't ignore any stops or hold onto any losing positions."

Kudos to Mr. Stansberry for prioritizing our investment goals for the year ahead! He gave the other financial and investment goals their proper due and I'd encourage readers to subscribe to Stansberry's excellent publications so you'll receive The S&A Digest on a regular basis.

Our readers here at ChecktheMarkets know that I've been openly "bullish" about trading disciplines such as having a "Safety Net" under our stock, options and ETF investments. Equally important, when we buy a stock, an option or any exchange-traded investment, we need to have an exit strategy to protect our principal, limit our losses and to insure that we will capture our gains effectively. How do we accomplish that reliably and consistently?

My answers  derive from the work of Dr. Richard Smith, the Founder and President of TradeStops, which Mr. Stansberry mentioned and is clearly the best, most complete way to not only use trailing stop losses but to also track the performance of our investment portfolios.

Frankly, the trailing stop loss features and trigger alerts available at online brokerage accounts have too many drawbacks, not the least of which is that they can be "seen" by the exchange's "Market-Makers". This allows these orders to be potential targets when the Market-Makers are matching a buy order to a trailing stop order. For more information due your own due diligence and searches using the terms "flash crash" and "mini-flash crash".

Dr. Smith writes on the topics of having a safety net under our investments and the importance of an exit strategy, "As an investor, there’s one simple step you can take to protect your investments that stands out above the rest. This simple step is often overlooked and undervalued, yet it's incredibly vital to the kind of results you experience.

"It’s more important than what stocks you buy, how you invest your money,or which way the market moves. Rather, it is a time-tested mathematical formula that, when applied to your portfolio, pinpoints exactly when you should exit or stay in a trade in order to maximize gains and minimize loss. Not only that, but there’s an automated program out there
that will apply this formula to all your stocks for you."

"When trading, you need to have an exit strategy so that you’re confident exactly when you’re going to sell. However, many investors don’t really know exactly when to sell a falling stock, or how long to let a winning stock gain. From experience, I can tell you that it’s just as hard (if not harder) to let your winners run, as it is to cut your losers quickly."

How else can we become more adroit at not losing money as well as developing the acumen to be a successful investor and trader? Dr. Smith asks, "Beginning to see a pattern? Reflect on your own experience as an investor – see anything familiar? If this doesn’t at least somewhat mirror your own trading activity, then congratulations:
you’ve beaten the odds. But for most of us, it’s a struggle.

"Not having a basic understanding of this human tendency will relegate you to the investing under-class, consistently taking small gains and larger losses. However, understanding this reality and putting a plan in motion to counteract this tendency will help control your losses while increasing your returns."

That's why TradeStops is a suite of user-friendly "tools" that anyone who wants to be investor-savvy and be numbered among the few we call "The Smart Money" will use religiously. As we wouldn't jump from a plane to enjoy the thrill of "free-falling" or parachuting without complete training and a back-up parachute, we don't want to jump into the investment markets without a carefully honed back-up plan to preserve our investment capital. That includes a well-defined exit strategy.

"It’s pretty difficult to change long-standing habits, though. That’s why a mathematical formula [Dr.Smith has a PhD in mathematical systems theory] is so valuable: it automatically signals when to sell, no matter how you feel about the
investment or company. It’s the same exit strategy, across the board. Pretty cool, huh? It’s not just me, though. Studies have shown that it’s just human nature", Dr. Smith reminded me in a recent interview.

For example:• According to a Bloomberg study of 88,000 investors, “people are one and-a-half times more likely to sell a winning stock than a losing stock."

 A study of 10,000 investors by the University of California’s Graduate School of Management similarly finds that the two most common mistakes investors make is that they “disproportionately hold onto their losing investments and sell their winners too early.”

 • In Nov. 2006, universities from around the world jointly analyzed all trading activity on the Taiwan Stock Exchange (TSE) and found that investors are about “twice as likely to sell a stock if they are holding that stock for a gain rather than as loss.”

"Not having a basic understanding of this human tendency will relegate you to the investing under-class, consistently taking small gains and larger losses. However, understanding this reality and putting a plan in motion to counteract this tendency will help control your losses while increasing your returns."

That's why encourage all our readers to always choose best-in-class investments and the best, time-tested disciplines to go along with every stock, bond, commodity, exchange-traded-fund or option we own. We can't afford to forget that the most important way to make our wealth grow is to start by putting in place a fool-proof way to preserve that wealth from the get-to.

As Dr. Smith emphasized in our interview, "What I’m trying to say is this: the losses we incur today are compounded over time. It doesn’t feel that way because we’re only losing “potential” earnings. But potential is still important, and a major part of becoming a successful investor is learning to make decisions based on facts rather than feelings."

And as we all have experienced at one time or another, our emotions and feelings aren't the safest gauges for financial success. That's why the great investors like Warren Buffett remind investors repeatedly to "Always have a margin of safety, in case something goes wrong" and to "Decide on your investing values and criteria [disciplines] and stick to them no matter what!"

That includes disciplines like "Position Sizing" and the diversification principles involved in Asset Allocation. When investors lose money its usually due to fear or greed and human nature's proclivity to ignore the rules and falsely assume that we are the exception to those rules. Often as investors and traders we (our emotions) are our own worst obstacle.

This is the year of becoming more aware, thinking smarter, and experiencing more rewarding investment results. To do that we can't keep doing the same things we've done in the past. That's why I encourage you to join me as a subscriber to TradeStops--and become a serious subscriber who derives many times your money's worth by using all the features that TradeStops has to offer. Serious subscribers=serious investors. Serious investors make fewer mistakes and seldom loose serious amounts of their hard-earned money.

The technologies and tools that make up those "features" are reliable and will keep you from losing money if you diligently apply them. You'll receive alerts based on your personal investment criteria and goals. As a TradeStops subscriber you'll know how your individual investment positions are performing and you'll be alerted when they reach the limits you've set for them.

As you put TradeStops to work for you you'll be armed with the "safety nets" and the exit strategy that none can afford to trade or invest without. This is all about being a proactive investor and trader as opposed to being a reactive one.

Take control of your financial destiny and fortunes this month, this week, today! If you're new to the financial markets and the science of investing you can use TradeStops as a simulator or "virtual reality" platform for learning to hone your investor skills and instincts. Most importantly of all, you'll develop the habit of excluding your emotions when you trade or invest.

You'll be well on your way to investment competency, preserving your wealth intelligently and doing what the "Smart Money" does to experience the pleasing good fortunes of increased prosperity. Carpe Diem !

 

Disclaimer: Nothing in this commentary should be construed as investment advice or guidance or any recommendation to buy or sell any financial instrument. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All content of this commentary is solely an expression of his personal interests and is posted as free-of-charge commentary and is subject to error and change without notice. Please do your own due diligence before investing in ANYTHING. The presence of a link to a website does not indicate approval or endorsement of that website or any services, products or opinions that may be offered by them.

 

 



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