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How You Can Put Investment Formulas To Profitable Use. by Rebecca Dajarda http://www.fyinvesting.com A famous Wall Street story concerns a young man who was in the early stages of learning to be a professional speculator. He had a problem, so he went for advice to an elderly sage noted for his shrewd investment judgment. He needs advice because he is having trouble getting to sleep at night, so concerned is he with his stock situation. He's bought a number of stocks but the market is volatile, and now he wonders whether or not he should sell. The problem is so pressing that it's causing the young man to suffer insomnia! The old man's counsel was simple and direct: "Sell," he said. "Sell back to the sleeping point." Although there is no doubt that this advice smacks of imprecision, there is a good bit of wisdom in it. We may fairly assume that neither the young man nor his adviser knew for sure 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." You might think that the older colleague should have given the younger man more precise advice. But the inevitable uncertainty of the market means that there is never any single course of action that is "the right one." Moreover, the young investor wasn't asking to be told just what to do. Rather, he wanted some general advice about how to approach his professional duties without losing precious sleep. From this point of view, the older man's advice is perfectly appropriate. Finding The "Sleeping Point" Any useful investment formula ought to help you in the same way that the older man's advice helped the younger man. It should be a cautionary tale as well as a vote of encouragement for taking a calculated risk when it seems appropriate. Less caution is necessary when risks are lower--this is the way to turn a profit when prices are on the rise. A situation prescribed by an investment formula works automatically, mitigating risk and enabling you to sleep soundly. To emulate the young man in the story above, pick a good investment formula and follow it. But don't expect a formula to tell you everything you need to know. You must pick the specific formula as well as the precise stocks. You will need to tailor the formula to your own financial circumstances, your personality, and your risk tolerance. And because formulas are flexible, you can tailor one to fit you perfectly. Remember, a formula helps you get where you need to go, but ultimately you're in the driver's seat. Think of investment formulas in general as guides to enable you to improve upon what you're already achieving. For example, formulas cannot tell you which stocks to buy. I assume that anyone interested in formulas is already a relatively sophisticated investor and knows what kind of stocks he wants to buy, how to select them and where to go for advice in his particular areas of interest. But- by supplementing his knowledge of which securities with considerations of the equally important questions of when to own them and in what quantity-formulas can supply a valuable added dimension to his investment results and help put the management of his portfolio on a more professional level. |