Speculator or Investor?

Talked to your broker or financial planner lately? Probably. The slowdown in the economy is causing the stock market to go down. Of more than 5,000 stocks on the Nasdaq over 1,000 have lost 90% of their value and more than 200 have lost 99%. The Index is off 58% from its highs. Pretty scary for ‘Buy and Hold’ believers.

When you ask your broker what to do he usually gives you the standard Wall Street conventional wisdom, “You are a long term investor. You are in for the long haul. The market always comes back”. Now ask yourself, “In my lifetime?” Having traded for more than 30 years I will tell you any stock that has dropped 90% will never go back to its old highs and the Nasdaq Index will go lower before it goes higher. The most optimistic opinion I have is it will be 10 years before we see any kind of approach to 5100.

But you don’t have to worry about that because your broker says you are a long-term investor and not a speculator. Folks, there is no difference between an investor and a speculator except the time period. Yes, you are a speculator, but in order to become successful you must learn some of the basic rules.

Rule One. Never take a big loss. Know how much you are willing to risk when you purchase a stock or mutual fund. Let’s suppose you bought CatsnDogs at $60/share. You invested $6000. What if it went down instead of up? Are you willing to take a loss of $1,000? Are you willing to sell it immediately to safeguard what is left of your capital or would you prefer to watch it slowly it drift down to $12/share with a loss of $4,800 with possibility of it’s going even lower. In a heavily traded issue it could take years before you ever get back to “even”. What if the stock’s name was Lucent?

Always place an open stop-loss order when you buy any stock and have a mental stop for any mutual fund. Despite what Wall Street tells you mutual funds do go down. You should never blindly buy a “good” fund and put it away. Again, know how much you are willing to risk before you make the purchase.

Rule Two. There is no such thing as a “good” stock or mutual fund that you buy and hold forever. Yes, many stocks and funds go up, but just as many have huge price retracements and you don’t want to own them while they are going down. Is U.S. Steel a “good” company? If you had bought the stock any time in the last 5 years you would have a loss. Why would anyone want to keep it? The object of buying any stock is to make money not sit on it like a china egg.

The talking heads in CNBC-TV all tell you to buy and hold and it is a lie. It tells me they don’t understand their trade. They are not professionals because all the successful professional traders I know would never do this.

Despite what your broker tells you you are a speculator. You are a long-term speculator. If you want to double your investment returns you have to change your thinking.