Use This Alternative Investment Strategy
Direct From The Investment Trenches
Smart Profits Report #512
By Marc Lichtenfeld, Senior Analyst
When it comes to financial management, I employ an alternative investment strategy comprised of rock solid discipline. No ifs, ands, or buts. It’s a way of life that has kept me out of sticky situations.
In my Smart Profits Report Issue on March 25 I outlined another five-step alternative investment strategy for you to consider. In the article I outlined how maintaining the discipline that comes from my F.I.R.S.T. research methodology kept me from recommending Accentia Biopharmaceuticals (Nasdaq: ABPI). It was crucial, too. When the company’s new drug didn’t meet its Phase III clinical trial targets, the stock blew up and lost two-thirds of its value.
Rather than following the ‘main-stream’ way of thinking, I adopt this alternative strategy for one simple reason: I’ve learned the hard way through years of investing experience. Like many folks, I made my fair share of mistakes when I first started out. I’ve seen winners become losers, and small losses that I was convinced would bounce back proceed to create nauseating sinkholes in my portfolio.
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Trust me, this is truly hard-fought and “battle-tested” knowledge! So here’s what you can do today in order to stop the same thing happening to you…
An Alternative Investment Strategy With Stops And Puts
Last week, one of the smart investing tips I discussed was the advantages of maintaining a trading log - jotting down some brief notes explaining the reasons for entering and exiting a trade.
It doesn’t matter what your investment strategy is, what philosophy you have, or what your price targets are. By writing down the key elements of each trade, you’ll have a harder time ignoring them when you go to sell (or in many cases, when you choose not to sell).
I’m not suggesting that you adopt an entirely inflexible approach… smart investors have to be able to adjust their thinking. But I know that if I’m changing my exit strategy on a stock, there better be a very compelling reason, other than “I think it’s going higher.” Making notes just serves as a reminder of what got you into a position in the first place and to not dismiss your ideas.
But there are two other excellent ways to maintain your own alternative investment strategy…
- Set a stop-loss.
- Buy put options.
If it seems like we mention this a lot here, it’s because we can’t stress enough how important this is, as it removes emotion from the decision to sell a stock. Unless you go in and change the stop (which almost all investors have done), the decision to exit the trade is predetermined.
The thing is… buying stocks is easy. It’s selling them that is the hard part - and it’s what separates the smart investors from the bad ones.
Let me give you a couple of examples…
Another Investment Strategy To Ensure You Bag Profits
To give you another example, staying disciplined helped ensure solid profits for me on a recent gold trade. When I trade for myself, I’ll sell half my position when a stock hits my profit target and let the rest of it run, while maintaining a trailing-stop.
That’s precisely what happened in this gold trade. While I didn’t cash out at the top of the run, I was able to stay calm, safe in the knowledge that I’d already banked some profits and that if further declines occurred, my remaining profits were locked in.
Investing is an incredibly emotional endeavor. When trades go to plan and you bank profits, you feel great. But when you absorb a loss, it can rattle you. I still encounter those feelings or variations in almost every trade I make. But I no longer allow those emotions to control my actions.
Now if I could just lay off the cookies…
Marc
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