The Bribble
[ October 6, 2000 ]
Looking Forward
By Richard Skerrett (Slicko)
"It's better to be lucky than to get up early in the morning."
This is a free translation of an Irish proverb, and very apposite for those indulging in the sport of trying to increase their wealth by venturing their free capital in the stock markets.
In a previous post, entitled "Looking back" (on the Investment Strategy discussion board), I reviewed some of my relatively short investment history, with particular attention to the mistakes, in an effort, by thinking out loud, to see how my investment performance could be improved. As I said there, the results so far are encouraging, although not spectacular, but the element of luck should not be underestimated.
I'm not sure that luck is a meaningful concept in investment theory. My grasp of statistics and probability is slight, as I've pointed out in another post on the Investment Psychology discussion board, but I suspect that for probability theory, good luck, like bad luck, is just the actual outcome of a universe of possible outcomes. What makes it good or bad is your attitude to it, which is not within the realm of science or mathematics. Correct me, somebody, if this is nonsense.
Having got to this stage in my voyage of discovery, without falling off the edge of the investment world, I'm now trying to formulate a clearer strategy for preserving the gains made, and restricting future losses to a minimum. It is acknowledged in investment lore that risk and reward are closely entwined. You cannot expect an above average return without taking on above average risk. Logically then, you might expect that for most people the riskier strategy would eventually lead to greater than average losses over time, and for a few, greater than average gains. Logic was never one of my strong points either, so again I'm ready to be corrected. I take it that high risk means high probability of an undesirable outcome, in other words a low-frequency event on the side you with your human attitude judge undesirable, a big loss rather than a gain.
The accepted wisdom is that you should take profits slowly and losses quickly, and since this seems to make sense it is the path I intend to follow, with more rigour in future, in other words a long-term buy and hold approach tempered with cautious profit taking and loss reduction. The investment catch phrase "nobody ever went broke taking a profit" has a seductive appeal, so I intend to devote a part of my kitty to a medium-term trading approach, using the rudimentary skills in technical analysis that I am in the process of acquiring, while trying not to neglect any help from other quarters, such as fundamental analysis. These changes in my strategy will be introduced gradually, on the "make haste slowly" principle.
We live in interesting times, and cash has its allure too, even though interest rates for small amounts are low. I think I am going to adopt a mandatory cash element in my portfolio, varying in proportion depending on how I feel about the general direction of the market. In the past I have tended to be more or less fully invested, and perhaps I've just been lucky not to have taken a big hit. I'm thinking of a minimum of ten per cent, which might be too low, but I think I would become jumpy with a larger cash element and might be tempted to break my own rules. Of course if the crash came the investor who was in cash would be laughing.
Where Next?
Fool USA
