Investing Tools for Investors Looking to Excel
10/21/02  

Objectives

The internet craze has warped many inexperienced investor's perspectives about legitimate Rate of Return (ROR) objectives. Unfortunately, those that didn't know what they were buying, had no sense of value, didn't understand risk, had no idea about overbought and overvalued, will definitely not know when to get out.

Historically, the least experienced investors buy at the top and sell at the bottom, while the institutions do the opposite. The internet craze has reversed the old rule, but is the rule inoperative. In two month, many of the Internet stocks have yielded 25% to 50% of their value. Many new investors, including those who call themselves day traders (and who did quite well buying only Internet stocks), now are faced with a question of whether to buy more (called catching a falling knive) or exiting their original position at breakeven or at a loss (after having the money in the market for over a year).

Objectives that exceed historical norms (like 10% for stocks), better have a great system. Rather than focus on an absurd target for performance, better to focus on the means to achieve out-performance overtime. Here are some of the critical components of out-performance;

• Diversification (avoid concentration). No position should represent more than 10% of an equity portfolio.

• Do your homework, have reasons to buy and price objectives.

• Look at and evaluate all the alternatives for your money, including international.

• Use computers to aid your search for technically and fundamentally attractive stocks.

• Exit positions where the initial premise breaks down.

• Have mental or actual protective sell stops (orders to sell at preset prices) in long positions or protective buy stops in short positions.

• Use as many tools as you can without confusing yourself.

• If you can't find something to buy that meets your criteria, park in cash, don't chase ideas you don't even like, just to be in the game. If there's no wind, don't go sailing, or, don't fish in the Love Canal.

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