How do you avoid a permanent loss of capital? Simple. Have a pre-defined exit strategy before you ever enter a market. What is another way to answer that question? Motley Fool offers this:
1. Shareholders who didn’t anticipate the newspaper’s gradual obsolescence and bought shares of New York Times around $50 per share back in 2004 have probably suffered a permanent impairment of capital.
2. Understanding where a company is in the life cycle of its industry is crucial for an investor. Companies that lose competitiveness to new technologies might never recover, and that dissolution will result in a permanent loss for investors who arrive too late to the party.
3. Investors are sitting on some fairly large losses so far this year. True, many stocks are down because of overall market volatility, and prices will eventually reverse as our economy strengthens over time.
So let me see as long as you can: 1.) anticipate “gradual obsolescence”, 2.) understand “life cycles” and 3.) wait for the “eventual” rebound … you will be fine. No wonder people are going broke! Lunch is on me if anyone can explain exactly how I am supposed to execute the three points from the Motley Fool.
February 14th, 2009 at 9:32 am
This covers a great example of one of the “five questions” regarding ANY trade posted on Mike’s site. The “how to” questions “how do I get in a trade” etc. Great stuff the five questions.This addresses when one has not answered the “how do I get out” question in advance. Buy and forget about it is dead folks!
February 14th, 2009 at 11:04 pm
“Lunch is on me if anyone can explain exactly how I am supposed to execute the three points from the Motley Fool.”
Since I’d LOVE to have lunch with Mr. Covel, I will respond….
1) I read #1 as a simple observation of fact, not a strategy. I cannot help but read it that way since I follow, not anticipate. I’ve never looked at the NYT stock chart, but if it’s generally going from upper left to lower right (down), then get the hell out…no clairvoyance required.
how to execute: prevent yourself from being a bag-holder by using stops:-)
2) “how is “life cycle” not just another word for “trend”? As long as you can take a phrase like “life cycle” and turn it into something measurable I don’t really see what the problem is.
how to execute: follow trends
3) This is just another statement of fact, not a trading strategy (I hope). If you are reading this to mean “losers average losers”, then sure #3 is stupid; but just reading the statement STRAIGHT, he’s pointing out that there is a large correlation between the overall market for stocks and some particular stocks, and some stocks that suck now will suck less later. This is no doubt true. He’s just not telling us how to figure out which ones:-) He’s also not explaining how/why the economy will improve in the future, and is just assuming it will. Again I just call this a statement, not a trading strategy. Statement was written with an obvious long-bias, but I have no problem with that.
how to execute: look for new trends where ever they may happen to appear(as he suggests they will), then ride’em.
So How about it sir? Lunch? Downtown Dallas?
Gene
February 15th, 2009 at 1:28 pm
Gene, I mean explain how those Motley Fool points work! And all lunches are San Diego!