Smart Profits Issue #510
By Marc Lichtenfeld
Senior Analyst Investors can have selective memories. Here are some tips and best practices you can use for smart investing as well as some techniques to avoid falling into what can be a more damaging habit than you might think...
Ever met those folks who do nothing but yap on and on about their winning investments? You know, the ones who spent all night long regaling you with tales of the mega profits they've amassed and how they timed their investments and the market perfectly. Anyone would think they should be a professional money manager on Wall Street, instead of working for their father-in-law's pool cleaning business! Of course, they don't mention anything about the losses they incurred, or margin calls. The other camp - and I fall into this one - obsesses over the losses. But not in a bad way. While it's human nature to sometimes remember the losses more than the winners, rather than beating yourself up over them, it's much better to view them as a learning opportunity. After all, it's easy to chalk up an investment as a loser and just move on. But smarter investors take the extra time to figure out where their analysis was faulty and ensure that they don't make the same mistakes again. Not only can investors learn a lot about investing, but also about themselves by keeping a simple investment logbook.
It doesn't have to be detailed or complicated - just a documented record of why you picked a certain investment, rather than relying on a selective memory. A few simple sentences should do the job. That way, the next time your buddy Larry gives you a stock tip, you can go back and see that his last tip sank 15% before you cut your losses. Do this over time and you might also see certain trends develop and get a clearer picture of your strengths and weaknesses as an investor. For example, do you have more success when you judge a stock on fundamental or technical analysis? Was your analysis of a particular macro trend right on the money? Are you in tune with a particular sector like technology, which brings you the best success rate, but you just don't get the gold market? Story Continues Below...
If you do this, you can work on the areas of weakness, while allocating more money into your areas of strength. This is a process that has proved particularly effective for me throughout my investment career. When I first started out, for example, I found that I was quite adept at making money by shorting stocks that were approaching resistance in two particular chart patterns. That served me well during the bear market. What's more, this simple technique is one I still use today - it takes just a few minutes when you enter a trade. Review it when you exit the trade, too - and be sure to jot down a few notes about it, so you can see if you're habitually getting out too early or late. After a short period of time, chances are that your investing memories will be stronger in both mental clarity as well as performance. Until next time... hoping your longs go up and your shorts go down. Marc Today's Smart Profits Notes: - Although the stock market rocketed higher on Tuesday, that doesn't disguise what was a very poor first quarter. The Dow Industrials shed 1,001.93 points (7.6%) over the first three months of the year - its worst quarter in five years. The Nasdaq Composite fared even worse, crumbling by 14% (a loss of 373.18 points). The broader S&P 500 lost 10% of its value (145.66 points). But considering it once slumped from a 52-week high of 1576.09 on October 11, 2007 to a 52-week low of 1,256.98 as recently as March 17 (the day of the Bear Stearns fallout) - a 20% plunge - one might say the index actually showed some pretty strong resilience to bounce back. Still, the index has now racked up five straight losing months.
- Even as stocks soared on Tuesday, news filtered through from Switzerland of yet another enormous quarterly loss and billions of dollars in write-downs from one of the world's biggest financial institutions. UBS AG (NYSE: UBS) will suck up a first-quarter loss of $12.1 billion, following write-downs of $19 billion. That brought the total amount of UBS write-downs over the past nine months to $37.4 billion - the largest of any bank - and was enough to force the resignation of Chairman Marcel Ospel.
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