Saturday, May 15, 2010


Well, recent market actions have shown us some of the emotion I've discussed in recent articles. The Dow fell almost 1000 points in a short time during a day only to regain 650 of those points in short order the same day a week ago. My phone was ringing and emails were coming from traders who had attended no seminars and who had decided against personal coaching because it was too expensive. How expensive, I asked was the market drop. Turned out in every case that it was substantially more expensive than the cost of the coaching. Penny wise and hit hard financially.

The callers were uniformly filled with panic. What should I do? "Should I hold on now because I already have big losses" was one question. "Would you prefer a bigger loss?" I asked. Fear can paralyze and it often does in the markets. The problem, of course, is one about which I have been harping for as long as I have been teaching and coaching traders. If we are going to succeed, we need a plan...PERIOD. The plan needs to include an exit strategy and the time to formulate that strategy is before the trader enters the trade. Often it is just too late to create the strategy in the middle of the play, particularly when things are going the wrong way fast. That is when fear and panic enter and control the picture. As I wrote in "Trade Your Way to Wealth," each of us needs to create a trading plan for ourselves and the plan needs to be formulated in such a way that we can cut losses in a disciplined fashion and so that we can let profits run. That book sets out elements I believe are extremely helpful in creating one's own plan. None of the panic driven callers had followed the advice.

There are many ways to make (and lose) money in the markets. I wrote my second book, "Smart Investors Money Machine" to show people at varying stages of life how to create streams of income that could add to their financial quality of life. The book details a variety of ways to add to income almost no matter who you are. Some of the income strategies discussed can be put in place and left alone so panic does not become the ruler. As an example, suppose your basic interest is in generating income and you find a strategy that fits your circumstances and yields a somewhat modest 8% or 10% a year. Further suppose, for ease of math, that you have $100,000 to invest in that strategy and what you want is a regular income. In that case, you have a vehicle whereby you are getting $8,000 or $10,000 a year and that is what you designed your plan to do. Whether that original investment of $100,000 goes to $80,000 or $110,000 you are still making that $8,000 or $10,000 a year. Is that OK? Of course, the answer depends on you. Capital appreciation is great, but in the example, we were looking for regular steady income and that is precisely what we got. Even if the principal falls to $80,000, we are still getting our income so do we care? Many would answer: "Of course I care, I don't want to be down $20K on my investment." Fact is, however, that the purpose of the investment, the plan, was to generate regular income and it continues to do that no matter how the principal rises and falls. Is that OK? For some it certainly may be; for others that may be unacceptable. It might be prudent to look inwardly and see where you really fall.

I only offer the foregoing example as food for thought and to attempt to engender an understanding that the markets offer many ways to success. Panic, on the other hand, generally only serves to defeat the trader. It can and often does lead to bad decisions and, at times, extraordinary losses. I suggest, once again, that traders think and prepare first, decide on the strategy that suits their persona, prepare the plan and then execute it. That is a ready, aim, fire approach as opposed to the all too common ready, fire, aim of those who set themselves up in advance to be devastated by their own panic.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

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To comment on Bill's article click on the "comments" link below.


~ Nona said...

The best money I ever spent to learn how to trade options (after making plenty of mistakes) was for your tutoring, Bill. Indeed, when I make more money, I want to come back for another weekend.

For example, I need to know more about buying puts. I've made money on my put positions this week, but I need tutoring to learn how to buy and sell puts much more intelligently and sensibly. Yes, I could read a lot of books, but I know (from experience) that tutoring with you will get me to where I want to go faster and with fewer missteps (a.k.a. losses) along the way.

Anonymous said...

First of all, I would gladly take 8 to 10% in today's environment! But where can we safely find that. And stress "safely". What good is that steady income if the principle investment drops steadily and stays there for years to come?

~ Nona said...

Dear Anonymous,

In investing, everyone craves three things: high returns; safety of principle; liquidity.

Guess what? No such thing as all three exists in a single investment anywhere on this earth. No. Such. Thing.

That's number one.

Number Two: Anyone would gladly take 8 to 10% in today's environment, but there is no such thing as getting such a return with complete safety and liquidity.

About two years ago, at the height of the market, I seriously considered buying an annuity. I would have enjoyed about an 8% guaranteed return; the return reset at a higher rate if the market rose but guaranteed to remain unchanged no matter how low the market fell.

Too bad I didn't buy that annuity!

Instead, I wanted a liquid investment (see first paragraph above)AND had the hubris to think that I could exceed the returns of the market.

Lesson learned.

Final point: If you're receiving the 8 to 10% return that you would "gladly take" (to quote you) why would you even pay attention to the underlying investment? Indeed, if the principle investment drops steadily, you're actually receiving a higher return. I'll take that!

Bill Kraft, said...

Thanks, Nona. I'm looking forward to seeing you again.

Bill Kraft, said...

Well, Anonymous, I guess that depends upon your definition of "safely." There are companies out there currently paying dividends or distributions in the 8% to 10% range, in some of which I hold positions. I have always considered the only true "safety" to be a good exit strategy. Remember a lot of folks considered the likes of Bear Stearns, Enron, and GM to be quite safe.
Bill Kraft

Bill Kraft, said...

Good points, Nona.
Bill Kraft

Anonymous said...

Part of the plan could (should) be to do nothing when the event trigger is outside the direct impact on the trade in progress, that is, company specific news (unless the loss exceeds the pain threshold you can tollerate). History shows near term recovery can be fairly rapid for those situations hammered by "guilt by association". So, if the pain isn't intolerable be patient and ride it out.

Anonymous said...

"Further suppose, for ease of math, that you have $100,000 to invest in that strategy and what you want is a regular income. In that case, you have a vehicle whereby you are getting $8,000 or $10,000 a year and that is what you designed your plan to do. Whether that original investment of $100,000 goes to $80,000 or $110,000 you are still making that $8,000 or $10,000 a year. Is that OK? Of course, the answer depends on you."

I know of no investment that continuously and will continually pay a consistant 8% - 10%. When the markets tanked in '08, all the safe dividends tanked as well. Not only did share prices halve or more, but then the dividends were halved, or worse. Many or most have not recovered. Retirees and soon to be retirees were whacked.
Love your newsletter.

~ Nona said...

I failed to mention when I made my earlier comment re: investing -- i.e., that everyone craves three things: high returns; safety of principle; liquidity.

One can always get one of the three, risking the other two goals. It's often possible to get two out of three -- after a lot of research and, of course, risking the unchosen goal. But all three? All at the same time?

Ah, such a lovely dream....

Bill Kraft, said...

Thanks for writing Anonymous who suggests a trader might ride out a trade until the pain is "intolerable." The question to each individual is what is intolerable pain. I am a believer in having an exit plan that gets me out before the pain gets anywhere near "intolerable" since I know I can always get back in if I have exited prematurely.
Bill Kraft

Bill Kraft, said...

Thanks, Cojo. There are ways other than dividends to capture the 8% to 10%. Covered calls, for example, can often yield a percent or more per month and the strike sold can change from month to month.
Bill Kraft