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Wise Stock Investing is about Much More than Being "Right"

The title may sound strange to some investors or traders, especially to
those that are new to the subject. Some people are convinced that this is
the single most important thing for success in the stock market. But the
truth is; when it comes to being a successful investor, how much money you
make when you're right really isn't all that counts. The simple fact is you
won't always be right. Oops. Bad news, right. It's not something you like
to hear, but it's true. Isn't it? Even though it's possible that some of
you may have met someone, at one time or another, that claimed to be right
almost 100% of the time. And if you haven't met that person yet, you might
run into him or her somewhere in the future. When you do, be careful. When
someone tells you he or she is always right, in general, three scenario's
are possible:

- You're talking to the world's best investor / trader
- You're talking to a textbook example of beginners luck
- You're talking to a liar

Let's take a quick look at all these possibilities. The first scenario is
of course highly unlikely. Fortunately it's easy to find out if this is the
case. Just take a look at the person's track record. People that like to
brag about being right all the time, usually enjoy making their point. So
they would love to prove their track record to you. If they fail to cough
one up, they're probably not telling you the truth.

The second scenario is a lot more likely. Only a couple of years ago, when
every idiot could make a profit because share prices were continuously on
the rise, it seemed like these people grew on trees. In todays market you
won't find a lot of those people hanging around. Most of them got more than
they could handle when the bubble burst. And many of them never had the
courage, or the financial means, to return to the game of investing.

Then of course we have the third and most likely scenario. In this case,
you would take the same approach as you did with the super investor. You
ask them to show you their track record. The liar of course will never give
you this. Instead they will try to convince you with wonderful stories. All
of which are probably fascinating. Some would be interesting enough to
serve as a plot for a Hollywood blockbuster on Wallstreet. However, none of
these stories will do you any good when it comes to making it in the stock
market.

The plain and simple truth is that nobody can invest for any period of time
and be right each and every time. It simply is not possible. Now that
doesn't mean that anyone telling you they never lose is lying. It depends
on what they're really saying. They are not saying that they never lose on
a trade or on a specific investment. What they may be saying is that they
never close out a year with a loss at the end. So how come they can make
money every year even when they lose on some trades just like everybody
else? The answer is simple; they are right more often then they are wrong.
And more importantly, when they are wrong they limit their losses.

To illustrate this, let's compare the stock market to a game of roulette.
Some people could easily substitute one for the other. They live under the
assumption that both are simply games of chance. Others may find this
comparison ridiculous because the two are so vastly different. The two
camps would probably never agree, so let's not go into that discussion
here. However there is something very important we can learn from
roulette.

In a game of roulette the odds are actually divided in a reasonably fair
way. If you were to continue playing by constantly just betting a small
amount, say $10.00. And you would consistently play the same color, say
black. You would be right 18 out of 37 times on average. Of course you
would also be wrong 18 times. If you would consistently play the game this
way, you would probably never win much, but you couldn't lose much either.
As a matter of fact if you would just continue playing long enough, you
would eventually lose on 1/37th of all your bets.

Unfortunately the same can not be said for the stock market. The odds are
quite different there. Yes, the market can go up and down, and there is no
zero, but there are many more factors to be taken into account than in a
game of roulette. The same strategy that was described in the roulette
example could work quite well in the stock market, but it could also cost
you everything you've got. One part about being a successful trader is to
be right as often as possible. And even though you cannot predict the
market, at least not perfectly. You can do your homework by studying the
technical analysis charts and doing some fundamental analysis into the
company. If you know what to look for, this will greatly increase your
chances of being right.

However, you still will not be right all the time. And that is where both
the lesson from the roulette example and the title of this article come in.
First of all, you have to place your 'bets' evenly. Stick to the $10.00
example. Don't be persuaded to invest a significantly large part of your
investment capital into any one trade just because you're so sure this
time. This may work out fine many times, but sooner or later it will hurt
you, and it will hurt bad. You see it is not how much you make when you're
right that counts. It is what you keep yourself from losing when you're
wrong that really matters in the long run. You can be right 90% of the time
and make some pretty good money. But it won't do you any good if you lose
it all on the 10% of your trades when you're wrong. Of course
diversification and proper asset allocation can help protect you, but that
simply isn't enough. You have to know when to get out.

So next time when you're about to make a trade, ask yourself: "What if I'm
wrong". And then determine a price level at which you will take your loss
and get out. Once you've determined this simple rule, just stick to it. It
may cause you to lose a little money every once and a while. Even on trades
that may bounce back just one day later. But in the long run that will hurt
far less than the losing trade you so desperately hang on to, hoping it
will recover. Only to find out that it won't.

About the Author

Jeff Stripp founded Insight Bridge in 2001, after being frustrated about the lack of central resource for expert opinion in the marketplace. He envisioned what is now www.insightbridge.com, a resource for anyone who is seeking expert insight and advice in the following areas: self-help, wealth building, real estate, marketing, sales, business strategies and much more... As an Expert Author, he is always willing to share his advice through articles, interviews and speaking engagements; visit www.insightbridge.com