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
But just as the investment sage left it up to the young man to
decide exactly what his "sleeping point" might be, you
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 | Work At Home | Nursing School
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