The Only Way How to Make Money so the Money will Make You
When Global Stock Markets Fall
| The end of 2007 and the start of 2008 has been a very difficult time to |
to make money on the stock markets around the world. Many... no, most of us are losing or have lost money. This does not mean we should give up though. Rather, this is a great opportunity to review what is going on around us and learn, or remember lessons, about the goals and structure of our trading strategy. It is also a great opportunity to invest in some great bargains, assuming our strategies have left us with enough cash.
The Life of a Stock Strategy
What quite often happens when you come across a successful trading strategy, such as our featured stock market trading strategy, is that you start by following all the rules and have some success. As you are making money, your confidence grows and your enthusiasm grows.
As you start feeling more confident, you change some rules so you can make more money quicker. It can be little things, like letting your margin loan exposure move out to 65% instead of keeping it at 50%. Afterall, more money on the market means you can earn more.
Or it could mean that you change the structure of your trading strategy. For example, instead of writing covered calls as per our strategy, you might start writing naked calls. That way you can make money with less cash down, despite the fact that it means you turn a risk reducing strategy into a risk taking strategy.
Typically when these changes take place, they really pay dividends for your first few trades, or years of trading. But then an event takes place such as the global correction which happened at the beginning of 2008, and things go the other way.
The problem is though, when things go the other way, if you have let your risk or leverage profile increase, you can really come unstuck. When you get called for margins, you are often forced to find money which you never intended to invest to cover your positions. Or worse, if you cannot find this cash, you could be forced to close all your positions at great loss, be forced out of the market and even be left with a residual outstanding debt.
Lessons Learned
When the markets turn as they did at the beginning of 2008, it is a very rare trader who does not get "hurt" from the experience. If you are serious about investing in the long term, you will experience these events every now and then. They will happen. So the important thing to do during these periods is to ensure you can cover you positions and "survive".
If you survive, you can make the money back once the market turns. Obviously if you are put out of the market, you will lose this opportunity and be forced to start saving again. Once you have saved enough to re-enter the market, it is quite possible you will have missed the "money making" part of the cycle again and be buying at premium prices.
So at the end of such periods, take some time to reflect on what happened. Could you have structured your trades better, could you have reduced your risk, could you have positioned yourself better to take advantage of the "bargains" at the bottom of the market? If there are things you can do to improve your trading startegies, learn these lessons and don't forget them. Implement them.
A Rare and Unfortunate Experience
I faced a rare and unfortunate situation in the middle of the stock market turbulance we all experienced at the start of 2008. One of the stocks I invested in on the ASX, MFS Pty Ltd (MFS.AX) went into indefinate voluntary suspension from trading due to debt exposire concerns. I had a reasonably large holding in this stock, in a margin loan with an original LVR of 50%. The LVR limit was 70%
What happens in these situations is that the margin lenders will review the stock, realise it has a dodgy risk profile, and reduce the LVR to 0%. This means that in the middle of a stock market reversal, when cash is tight for everyone, the margin lender all but changed their rules and demanded that I buy this stock outright. Not an ideal situation at all given all my planning and strategising expected the margin lender to cover 50% of the purchase of this stock.
In the end, I managed to find the cash to do this and stay in the market, without any massive losses on other trades, which speaks volumes for the risk profile I had maintained throughout the good times. At the time of writing this article, the stock in question remains in suspension, tying up my cash indefinately, yet still I am trading successfully. Can your investment strategy sustain such a shock? If not, it may be an idea to review what you are doing.
One further lesson I learnt throughout this period of global market turmoil was the importance of having an income generating strategy. If your strategy is producing income month in, month out, like our featured stock trading strategy, you can continually bring more cash to your protfolio, without taking it out of your living budget, which helps no end in periods of sustained downward volatility.
Good luck on the upside, it cannot be too far away
