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Investing - How To Profit Using Formulas
By: Kevin Erickson
A classic Wall Street yarn, concerning a young man who was in the early stages
of learning to be a professional speculator goes something like this. The young
man had a problem, so he went to an elderly gentleman noted for his shrewd
investment judgment, for advice. The young man had taken on quite an extensive
line of stocks, but the market looked a bit over-valued and so he was thinking
that his positions carried too many risks. He wondered if he shouldn't perhaps
sell. He was so worried about it that he was having trouble sleeping.
The old man's advice was simple and direct: "Sell" he said. "Sell back to the
sleeping point." Although there is no doubt that this advice smacks of
ambiguity, there is a simple wisdom in it. We may safely assume that neither the
young man nor his elder adviser knew which way the market was going, but both
were aware that the market was sufficiently shaky to cause legitimate worry.
Translated into somewhat more orthodox investment terms, the advice meant - Sell
enough of your stocks so that a market collapse won't destroy you, but keep
enough so that if your fears turn out to be groundless, and the market rises,
you'll still profit to some extent - in the meantime, get some sleep.
At first glance, it may seem a bit cynical on the old man's part not to outline
for his young disciple an exact and detailed course of action. But he couldn't
be honest and at the same time guarantee that he knew exactly what action might
turn out to be best. Furthermore, the young man didn't want someone to tell him
precisely what to do. All he wanted was some help in easing the pressure and the
help he received was clearly sensible.
How to Find the Sleeping Point
In a real sense, investment formulas are designed to help you in the same way
that the old man's advice helped his young friend - they inject an element of
caution in your investing when caution seems advisable, they reduce the
provision for caution when risks seem relatively low and permit you to benefit
when prices rise. In addition, once you incorporate a formula into your
investment program, it works more or less automatically, allowing you to sleep
nights in the full knowledge that you are continuously hedged against various
unforeseen possibilities.
But just as the investment sage left it up to the young man to decide exactly
what his "sleeping point" might be, you can select a formula appropriate to your
own temperament, financial circumstances and proclivity to insomnia. Any formula
can be adjusted to suit the needs and preferences of any investor.
Although formulas are designed to give un-hedged, unambiguous and unbiased
indications for action, the investor should not feel that he is surrendering all
personal control over his investments when he adopts a formula. The reason
behind this logic is clear. It's because each investor selects the formula that
will fit his own individual comfort level. A formula doesn't try to tell you
what to do - it merely helps you do what you are already doing more profitably.
For example, formulas cannot tell you which stocks to buy or currency to trade.
The whole premise of using formulas is based on the fact that those using them
are normally quite sophisticated and that they know what kind of investment
vehicle they are interested in, how to select them and where to go for advice in
their particular area(s) of interest. However, by supplementing their knowledge
with considerations of the equally important questions of when to own and in
what quantity - formulas can supply a valuable added dimension to their
investment results and assist in the management of their portfolio on a more
professional level.
Along this same line, it is worth mentioning that although the true purpose of a
formula is to supply the investor with an investment policy which is definite in
its instructions at all times, you need not feel that you must follow the
formula precisely in order to profit from it. You cannot, of course, ignore it
altogether if you expect to benefit from it, but you can profitably use it as a
touchstone or a general guide without swearing eternal allegiance to its
dictates. You might, for example, want to use a formula, but also desire to
increase or decrease your risks at various times for a variety of reasons. Your
use of the formula will show you how far you are departing from your original
plan and will give you a well-ordered program to come back to when you are
ready.
This article may be reproduced only in its entirety.
About the Author:
Kevin Erickson is a contributing writer to: Forex Trading
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