Wednesday, October 15, 2008

Stay in the Game! (Written by Daniel Kertcher)

Stay in the game.” What do I mean by that statement, and what does it mean in relation to share investing? Well, I want to share with you a powerful lesson I saw demonstrated recently that will help you improve your investment returns.

Each month we conduct a one-day investment seminar teaching covered calls and option trading. At this seminar, I run a game called the “Ring Toss”. It’s a fun game where we re-create an options trading environment. Players (the course students) have to buy “Rings” from a “Market Maker”. There is only one Market Maker, but over 30 Players. The rings represent options in the real world.

When the market opens, players can buy 4 rings. The price of the rings vary as market demand forces the prices up and down. Each player has to jostle with each other for a good position in front of the market maker in order to get their order filled at the best possible price. There are not enough rings for everyone, so competition is very high, often turning mild mannered adults into crazed ring-grabbing maniacs!

Well, during one of the games we were playing, one rather large gentleman worked his way through the crowd and positioned himself directly in front of the market maker. He had one of the best spots to buy rings when the price was right. As soon as the market opened, the buying frenzy commenced. The market maker sold rings to a person on the gentleman’s left. He then sold more rings to another person on the gentleman’s left. The market maker turned and faced the gentleman. Our player was the next to buy rings. However, all the buying activity meant that the price of the rings had risen quite substantially.

Our player decided that he did not want to buy, as the price had gone too high. This in itself is a wise decision. However, what he did next was very powerful. He stepped back! He physically moved away from his excellent position and allowed someone else to take his place.

Sure enough, within a couple of seconds the ring price hit a high and started to fall. Eventually, the ring price fell back to a point at which our player wanted to buy. Unfortunately, he was now not physically positioned to take advantage of the opportunity. He couldn’t get his order in quick enough to buy the cheap rings. Before long, the rings were sold out and the market closed. Our player never bought rings and missed out in making money, despite the fact that he was involved in the game itself.

The moral of this story is quite interesting, and very powerful when you relate it to your own investment philosophy and strategies.

How many people do you know have invested in the stock market? Often, most people invest based on tips or become serious and buy trading software and attend training courses. However, after a while they become distracted, or complacent. Ultimately the market turns against them and they lose money on their shares. At this point, many novice investors leave the game. In other words, they stop looking for profitable opportunities in the market on a daily basis and put their losing shares in the bottom drawer, vowing to look at them in 6 months.
Sure enough, the market recovers and presents many chances to make strong profits. Unfortunately, for all the people who left the market, they miss these profitable trades. Eventually, the market recovers so strongly that the media highlights all the money being made by clever investors.

At this point our original investors decide to re-enter the market, but now the market is peaking again. Not the wisest time to re-join the game.
The point is, once you enter the market or “The Game”, stay in. You don’t have to trade money if the market is not offering opportunities. But keep looking at your investment strategy, keep watching the market. This way, you will be in the right place at the right time, and you will recognise the profitable trades when they become available.

Our ring-buying player lost his opportunity to buy rings cheap because he left the game. Don’t make the same mistake!

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