Money Management - The Focus Of Expert Investors
Many people have been through it all, they've lost money and made money in stocks, they've lost and made money in poker, and they've lost and made money in options, and they've even lost money and made money in gold. What separates the winners from the losers and the haves from the have-nots? What do people that go through those experiences ultimately learn from?
The rookies are always looking for the penny stock, the hot tip, the day trading, the options, or something that can make them rich quick. They are essentially looking for that lotto ticket in hopes they can put all their money in and have it pay off. The experts are focusing on protecting what they have, even if they're just starting and it's just a little bit. Although experts often use trading and investment systems, the fact is that it almost doesn't matter at all how good the method is, if you cannot manage your money well. In stocks although people who can read financial statements and charts, and understand if a stock is likely to go up, or do back testing on certain method and estimate a probability that stocks using that method went up in the past, it is difficult to pin point the exact odds. That makes managing your money more difficult. However, just because you can't know the exact probability, doesn't mean you can't use past results to estimate a probability range, and manage your money well. Lets just assume for a while that you could know the exact probabilities. If you know that you will win 3 times as much as you lose when you win, and you know that the win will take place half the time, do you know for sure that you will make money in the long run?
This is a trick question, you can never know with certainty that you will make money, but is it probable? Again, that still depends. How can this be? It's easy to say that if you invest $100, you will turn it into $200 (gaining $100) half the time, and you will lose $33 the other half, that in 100 one hundred dollar investments you can expect to make $5000, lose $1667 and net $3333. However, this fails to take into account how likely you are to be able to afford the $1667 in losses and maintain that $100 investment every time out of 100 times.
In other words, the $3333 net gain is theoretical, and takes absolute no consideration on how likely you are to be able to afford those 100 investments. What if you only had $100 and you bet it all, you have a 50% chance that you lose $33 of that 1000... what then? You can't simply make another $100 investment, So instead you have to make a $66 investment, now your win will be significantly less. If you lose yet again it will become even more difficult to get back to even. Although on paper this is a good investment, it is not a good investment without proper money management. You may have built a very safe car that drives straight, but if you are a bad driver you still could crash.
Unfortunately many people don't learn how to drive their financial investment vehicles, and instead rely on money managers, financial advisors, mutual fund owners, and company CEOs to do everything for them. This isn't a bad thing for those unable or unwilling to learn. However, the risk is not only that these people won't manage your money well, and not only that if they do, you still may pay them so much in fees and expenses that it's not profitable, but also that by handing the keys to your investment vehicle over to someone else, you lose control and you fail to learn anything. Although you may accomplish your goals with the help of these people, you also could do this yourself with a good trading system that uses good money management. - 23212
The rookies are always looking for the penny stock, the hot tip, the day trading, the options, or something that can make them rich quick. They are essentially looking for that lotto ticket in hopes they can put all their money in and have it pay off. The experts are focusing on protecting what they have, even if they're just starting and it's just a little bit. Although experts often use trading and investment systems, the fact is that it almost doesn't matter at all how good the method is, if you cannot manage your money well. In stocks although people who can read financial statements and charts, and understand if a stock is likely to go up, or do back testing on certain method and estimate a probability that stocks using that method went up in the past, it is difficult to pin point the exact odds. That makes managing your money more difficult. However, just because you can't know the exact probability, doesn't mean you can't use past results to estimate a probability range, and manage your money well. Lets just assume for a while that you could know the exact probabilities. If you know that you will win 3 times as much as you lose when you win, and you know that the win will take place half the time, do you know for sure that you will make money in the long run?
This is a trick question, you can never know with certainty that you will make money, but is it probable? Again, that still depends. How can this be? It's easy to say that if you invest $100, you will turn it into $200 (gaining $100) half the time, and you will lose $33 the other half, that in 100 one hundred dollar investments you can expect to make $5000, lose $1667 and net $3333. However, this fails to take into account how likely you are to be able to afford the $1667 in losses and maintain that $100 investment every time out of 100 times.
In other words, the $3333 net gain is theoretical, and takes absolute no consideration on how likely you are to be able to afford those 100 investments. What if you only had $100 and you bet it all, you have a 50% chance that you lose $33 of that 1000... what then? You can't simply make another $100 investment, So instead you have to make a $66 investment, now your win will be significantly less. If you lose yet again it will become even more difficult to get back to even. Although on paper this is a good investment, it is not a good investment without proper money management. You may have built a very safe car that drives straight, but if you are a bad driver you still could crash.
Unfortunately many people don't learn how to drive their financial investment vehicles, and instead rely on money managers, financial advisors, mutual fund owners, and company CEOs to do everything for them. This isn't a bad thing for those unable or unwilling to learn. However, the risk is not only that these people won't manage your money well, and not only that if they do, you still may pay them so much in fees and expenses that it's not profitable, but also that by handing the keys to your investment vehicle over to someone else, you lose control and you fail to learn anything. Although you may accomplish your goals with the help of these people, you also could do this yourself with a good trading system that uses good money management. - 23212
About the Author:
Maclin Vestor teaches about varioustrading systems and teaches you system trading skills that can make you a better trader.
posted by X - Men @ 7:02 AM
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