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How To View Stock Market Formulas Professionally

By: Jimmy Cox

A famous Wall Street story concerns a young man who was in the early stages of learning to be a professional speculator. He had a problem, so he went for advice to an elderly sage noted for his shrewd investment judgment. The fact was, the young man said, that he had taken on quite an extensive line of stocks, but the market looked high - maybe too high - he thought possibly his position carried with it too many risks, and wondered if he shouldn't perhaps sell. He was so worried about this, he said, that he couldn't sleep nights.

The old man's counsel was simple and direct: "Sell," he said. "Sell back to the sleeping point."

Although there is no doubt that this advice smacks of imprecision, there is a good bit of wisdom in it. We may fairly assume that neither the young man nor his adviser knew for sure 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 cynical on the old man's part not to outline for his protege an exact and detailed course of action. But he could not honestly 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 at a critical point, and the help he got seems eminently sensible.

In a real sense, the 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 from rising prices for common stocks. Moreover, once you incorporate a formula into your investment program, it works more or less automatically, thus allowing you to sleep nights in the knowledge that you are continuously hedging against various possibilities.

But just as the investment sage left it up to the young man to decide exactly what the "sleeping point" might be in his particular case, you can select a formula appropriate to your own temperament, financial circumstances and proclivity to insomnia. As will be made clear in later pages of this book, any of the formulas can be adjusted to suit the needs and preferences of any investor.

Although formulas are designed to give unhedged and unambiguous indications for action, the investor should not feel that he is therefore giving up all personal control over his investments when he adopts a formula, since he selects it himself to fit his own requirements. A formula does not 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. This book assumes that anyone interested in formulas is already a relatively sophisticated investor and knows what kind of stocks he wants to buy, how to select them and where to go for advice in his particular areas of interest. But - by supplementing his knowledge of which securities with considerations of the equally important questions of when to own them and in what quantity - formulas can supply a valuable added dimension to his investment results and help put the management of his portfolio on a more professional level.

Article Source: http://www.articlemanual.com

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