Tuesday, May 8, 2007

Before you open any trading/investing position

Before you open any trading/investing position, please ask yourself three questions:

1. Do you have any idea of the downside capital risk of this position?

2. Do you have an exit plan for both profit taking and loss control?

3. Do you have any idea about the company you are buying? While reasoning this trade, do you have minimal hope of excessive return overnight and maximal awareness of any possible downside risk?

If you have 3 firm "yes" to the questions,congratulations, you can open the position.

Otherwise, please wait.

If you have no clue of question 1.

For traders:
you need to do some TA support/trendline/double bottom research.

For investors:
you need to find out how to make an intrinsic value estimation of this business. Double check if you have a good-to-superb margin of safety to that valuation?

For instance, if you estimate that the intrinsic value of this business is $1B, and it is selling for $500M, this is called a good margin of safety. If it is selling for $250M, it is superb (something Buffett would be interested in buying)

If you are both the trader and investor, and have evaluated the downside risk from both aspects, it is even better. My call of HNR @10 is an example.

1 comment:

Taikonaut said...

Ben Garahm说需要钱的时候再卖股票。所以对investor来说,不需要考虑profit taking plan. 不过这样的话,对picks的要求很高啊。