Script said:
+1
Yes, misinformation is high.
Regulators are clamping down on several "pump and dump" schemes where OTC penny stocks have been renamed "Bitcoin something" or other and enjoyed sales bumps.
- Any kind of leverage product is very high risk. Everybody knows (or should know) it.
Unfortunately not, for many younger people they have only seen a market that moves in one direction. Leverage has always been a way to multiply return by multiplying risk, good until it isn't and often ends badly.
- With any financial product, the 'issuer risk' is all too often overlooked.
And security of sundry cryptocoin exchanges...not to mention the crypto's themselves.
- In general, new products, like IPOs and cryptos, are by definition high risk cos they have no (long) history.
IPOs are mature while cryptos are really unknown.
Despite IPOs being mature, that market has changed with venture capital jumping in front of new venture IPOs to buy them while still private. This had lead to crazy high valuations for unproved startups and under performing IPOs that are not a new as most IPOs were.
- Stop/loss sell orders are risky and only make sense if buyer was not fully convinced of the investment in the first place, or for very short-term speculation.
It is a common practice (with active traders) to use a running stop below a rising risky stock to prevent a downside loss from a reversal, bus as we've shared this can bite you in high volatility (like in cryptos). Stock market volatility has been unusually low recently, but the recent dip seems to signal some return to normal volatility (perhaps explained by central bankers withdrawing liquidity that put a bid under all stocks).
- To my understanding, the least risky financial products are 'value' stocks, that is, companies that have been around for long and done well. Strangely enough they rank as 'very high risk' (i.e., stocks = risk of total loss).
The value of "value" stocks ebbs and flows with other types of stocks. Right now "growth" stocks like FACE, are more attractive to buyers than value, that suggests the value segment may be smarter contrarian bet. BUT all stocks are relatively expensive P/E right now, just not a bad as a few weeks ago,
Conservative risk management techniques:
- Never invest more than can afford to avoid having to sell at unfavourable point in time (always keep some cash for unexpected expenses in life).
There is an old investment axiom "the market can remain irrational longer than a smart trader can remain solvent". Humorous but also true. So not only must you be correct, but the market must be reasonably rational, or as rational as it gets (i,e, trading on fundamentals).
- Get informed about the product. It's surprising how much time people spend researching e.g. a simple smartphone before purchasing and then throw a multiple of that amount at financial products they hardly understand.
true... people are buying anything crypto, because they see high returns, not because of any fundamental value explanation.
- Never buy if not willing or able to hold for at least five years.
That depends on investments vs trades. A short term trade can be based on some specific event. I generally do not trade (I am not smart enough) but have made a handful over my decades in the market. Years ago I was watching a congressional hearing where they were bad mouthing Fannie and Freddie and the stock dropped like a rock. I didn't expect congress to anything so I bought. I ended up selling it 2 weeks later at a nice profit.
More recently (over a year ago) I bought Twitter expecting some big company to buy it because it was too cheap IMO. After waiting long enough with several companies kicking the tires but nobody stepping up to buy, I sold my position (at a nice profit). Of course after I sold, twitter reported their first quarterly profit and the stock is now rising. An old market discipline is to never turn a trade into an investment or an investment into a trade. I stuck to my discipline by selling Twitter, but in January I traded (sold) a few of my long term investments, that had run too far and made me uncomfortable due to high prices. Besides Twitter, Amazon was my only (profitable) sale in Jan that rose higher after I sold it. (I was lucky not smart, and after the dip put some of that money back to work in other quality stocks that were on sale as the whole market fell in lockstep.)
- Never 'bet' on a single horse. Make it a basket across different industry branches.
Diversification.... A common mistake is for people who work for a large company to have too much of that one company's stock in their IRA. Take advantage of stock awards and "buy some get some", but remain diversified.
- Get rid of a loser investment quickly and maybe sell together with a 'lame' winner at the same time to even out the loss.
When deciding to sell a stock you should look at future expectations not how much you paid for it (easier to say than do). If the fundamental investment rationale has changed, then by all means sell it, but sometimes a dip has nothing to do with the company fundamentals and is an opportunity to reduce your basis (admittedly I haven't seen that very often in my portfolio, with several losers that disappeared down into the dirt after I flushed them.).
- Once fully convinced of a financial product and proven right, buy more on recovery after a dip (i.e. 'stockpiling' or 'averaging down the dollar'). Could later sell the more 'expensive' position first on next high if cash is needed. (To avoid FIFO, keep in separate portfolios.)
The FIFO provision in the recent tax law was removed. They were going to insist that when selling part of a stock holding you would have to sell the oldest (lowest priced) first, generating the most paper profit. That would have complicated portfolio management even more. There are restrictions on short term sales and buybacks where too short of a non-holding period is ignored as if you never sold them.
These technique don't generate the highest ROI but yield a more consistent outcome in the long run and better sleep at night
smart traders manage upside potential vs downside risk... While the future hasn't happened yet so is impossible to know we can know in general how much is at risk. Shorting something can have unlimited risk... the recent market dip was amplified by investments that were shorting volatility that got crushed. It appears they didn't have a good handle on that potential downside.
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BTW, after touching $6,000, BTC is up to $10,000 again. Was that foreseeable? Yes and no -- hence: risky. The drop from $20,000 to $6,000 was a minus of 70% -- ouch. Back up to $10,000 is still -50% from all-time high. What's up next? No idea.
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-short term who knows,
-mid term up as more dumb money investors learn about it (with short term volatility up/down),
-long term again who knows? Not me.
Central banks regulating BTC strikes me as proof that they are taking the technology seriously.
Everybody is or should take blockchain seriously, bitcoin is too scary for this old fart to invest in. More regulation will help investment credibility, but they still need to clean some snakes out of the woodpile, and foreign governments are worried about capital controls (something that bitcoin supposedly avoids).
JR
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