What does this word mean? Greed? To remind myself I had to look at dictionary entry again. “Greed (also called avarice) in psychology is an inordinate desire to acquire or possess more than one needs or deserves, especially with respect to material wealth.” There is no doubt I have been greedy in my life in different ways. Whether wanting more food, drink or money. Yes, I am a sinner! The sole purpose of playing in the stock market is to make more money than what I need. I now know when the greedy snake does peak its ugly head. That I have to be very aware of its existence and respect it when I see it!

The vision and payout from the greedy snake

In October 2008, I brought a £500 worth of Mwana Africa stocks for 3.5p each. In January 2010 I sold that same stock at 13p. I made £1500 within 15 months, on my original investment of £500. But during this process of selling that stock, my greed played a few games with me in my head.

It said…

The Devil (Greed) spoke these words: ”This stock has already earned me 300% gain, it will make me more money over the coming years. Leave the investment in!”

Then…

The Angel (Logic) spoke these words: “I should be happy with the money I have made 300% which most people wouldn’t make in a year. The 300% profit you see before you isn’t profit until you take it out of the market.”

The logic behind my reasoning of taking the profit

It’s very hard not to be greedy, your mind is your greatest enemy in making or losing money. The art here is not to control “Greed” but respect and be aware of its immense force in wealth building within the financial realms. The following points show the reasoning behind why I didn’t let greed take over my wealth and profits.

• The profit I made was 300% some fund managers don’t even make this in a year.
• Being greedy would have meant risking the 300% which could decline to 200% or 100% profit.
• The money is still paper until I sold the shares and took full advantage of the profits I had made.
• As this was a predominantly a gold mining company, if gold prices took a hit. My profit would suffer.
• Controlling my internal emotions to think I have cheated myself out of more profit.
• Weighing the risks of the company/sector and what the overall market was doing.

The conclusion and poem to the greedy snake

Here is a little poem I have adapted from the film “Revolver” to suit the financial world

Money and Greed

Money is a destructive angel.
How could anything that looks so good be so bad?
But there is no angel as destructive as greed.
In the end she gets them all.
They think they can handle her,
They think they can control her,
Greed is the only snake that cannot be charmed.
But greed of the snake can only charm you
And the mask it wears – material wealth

Step 1. You should not spend more than what you earn. If you go on doing it, you’re asking for trouble. Always cut your coat according to your cloth.

Step 2. Create an emergency fund. You must do it taking into account contingencies like unemployment, divorce or disability. Do it by earmarking three month’s expenditures. Don’t touch it for trivial reasons.

Step 3. Make cash payments frequently. Cut down on your credit card usage and use cash as much as possible for purchases. This would help you eliminate debt faster.

Step 4. Find a financial planner. You can visit the Financial Planning Association or FPA for a licensed financial planner in your area.

Step 5. Write down the names of all your creditors and the respective amounts that you are obliged to repay. This would give you an exact idea about the overall amount of debt that you owe. Get your credit report from a credit reporting agency to ensure that you have not failed to remember any creditors.

Step 6. Communicate with your creditors and try to negotiate. Numerous consumers don’t know that they can get in touch with their creditors and request for reduced interest rates and elimination of late fees or over the limit fees. More often than not, your request would be approved by them since they don’t wish to lose your business.

Step 7. Reduce spending and use your savings to pay off your debts. Always search for techniques to cut down on your expenditures. For instance, if you are a car owner, by refinancing your car loan you can save a lot of money.

Step 8. Make more than the minimum payments for your credit card bills. This would help you pay down the principal quickly and make you debt free. If possible, pay an amount that is thrice your minimum necessary payment.

When I was young, naïve and inexperienced, I bought a course from Vince Stanzione for £400. This contained a strategy guide, DVD and his secret to making more money than you can dream off! The secret was using moving averages of 20 and 40 days. These lines give you signals when to buy and sell. He made it sound so easy and yes it looked easy too! He used past charts to show how it worked and proved the moving average strategy worked. The problem was that past charts used worked. But for future market movements, I found a lot of the time I entered trades the moving average signals didn’t work! The terms he and many other trading universities use are that 7 out of 10 trades will be losing ones and 3 will be winning. The three winning trades will make up for your 7 losses and make you a profit.

[Cough, Cough]! What a load of bullshit! Pardon my French! Did you know that 90% of Spread Betters lose! The spread betting firms are making so much money that they don’t have enough Vans to take the bags of money to the banks. Why because there are traders selling their secrets (get rich quick schemes) to make you lose money! It wouldn’t surprise me at all if the spread betting companies are funding these ventures. All these get rich quick schemes all have one thing in common and that is chartism. After vast trading experience with charting I have concluded that it doesn’t work! Ok you may win a few trades with this technique. And these winning trades may well get you hooked into believing that you can make more money! Does this sound familiar? What these trading firms are luring you into is gambling with your money instead of teaching you how to make well informed educated trades into consistently making a profit. As Richard Farleigh says in his book Taming the Lion – “Chartists are the Astrologers in the Market. They use a pseudo-science.” Not saying more on the topic.

News Based Trading – After reading many books, blogs and various articles. I have come to the conclusion fundamental analysis and news based trading will give you an advantage into the stock market. There are no real books that explain how to analyse news within the stock market. What I mean by news based trading is monitoring, final results, economic events & data, sales forecast. I have found a couple of books that have helped me look for which pieces of news to trade on these are If its raining in Brazil, Buy Starbucks by Peter Navarro and UK Traders Bible by Dominic Connolly – (Quality book with practical advise and examples. Cuts the crap and goes straight into honing your trading skills.).

Putting the theory into practice

So to test this theory I started to trade purely on news and market reaction to it. Some of the news has already been priced in however some news the market reacted to immediately. And its these bits of news you need to decipher and act quickly to profit on. Even though the market may have moved a lot, you can still scalp off a few extra points on top of it as long as you catch it early enough! I proceeded to set up my blackberry to receive newsfeeds straight from the Reuters/Financial Times website and acted on news that I felt which would rise/fall the individual stock price. One example of a trade I did was when Remy Cointreau issued a 15% drop in profits before the French Market opened, I set an order to open at 0.50p a point. Left it till mid-afternoon and took a nice £150 profit. The share prices dropped further I could have made more of a profit, but had my exit strategy set! As they say “Proof is in the pudding”, click here to see a few of my profitable News Trades (with links) along with IG Index Dealing tickets.

The trick is with News Trading is finding event worthy news that will cause a reaction to a share or sector. But also try to find out what the market expectation is too as this can sometimes throw a spanner in the works. For example if “Company A” makes a loss of 10%, that to us means that’s generally bad news and we would expect the stock prices to fall. But in reality “Company A’s” stock prices would to rise. And then I am left scratching my head thinking. Why? The stock price would rise because “Company A” had done better than Market Analysts had predicted of a 20% loss. Get the picture. Some news can create an instant reaction to an equity/stock, some news can take longer to penetrate the markets reaction. Therefore different types of News can impact different depths and layers within the Stock Market.

The Conclusion: Chartism vs New based trading

If traders and trading universities are trying to get you to trade purely on Charts then don’t listen to them, just remember get rich quick schemes don’t work (If its sounds too good to be true, it probably is! Famous saying but very true!). Quite simply you cant beat the stock market that easily. If you can I take my hat off to you (And expect a free ride on your very expensive yacht proving me wrong!). Majority of successful Stock Market traders have worked hard at analysing the Markets and finding financial instruments and tools into giving them a profit. In essence any trader telling stating you can make money purely of trading charts run the other way. Have tried & tested doesn’t work.

After much searching, I have found that news based trading works and works well. However the main problems I have faced with this type of trading is finding out what the market expectation is and having real time news from a Bloomberg terminal (cannot afford one of these just yet!). I am still exploring this topic and will be writing a follow up with further findings. Currently researching pairs trading with fundamental analysis and early indications show that this is certainly a great investment stratergy to use for our current economic climate.

Having a clear picture in your mind of how much loss you are prepared to take on a stock is a good start. Should it be -10%, -20% or -30%? That’s your decision, but make sure you stick to the guideline you’ve set for yourself and take your money out when it’s time to do so. Yes, you will be battle scarred taking a loss, but even the big players suffer losses (and suffer them often). In our current climate of economic crisis having a good exit plan is more important than ever.

An example of a bad exit strategy

A few days ago I was listening to BBC Radio 5 as I headed into the office. The story was about a guy who’d purchased £250,000 (approximately 33,333 shares) worth of Halifax Bank of Scotland on the London Stock exchange at £7.50 each. Then, the mighty credit crunch crisis exploded. He kept holding on to the stock, hoping it would go up again. As you guessed, it didn’t, and now his shares are only worth £0.70p. He took a tenfold loss. This is a perfect example of someone who didn’t have a clear exit strategy and has paid the price — literally. A clear exit strategy would have been to get a grip on his fear and duck out with only a 10% or 30% loss.

What would you have done in that situation? Hoped the stock would have gone up at £6.50 or at £4.50 or maybe at £1.50 (by £1.50 you’d be praying!). Everyone will take losses on their shares at some point but how much you lose is partially under your control and can be minimized. Set a sensible target. For example, if a stock drops by 25% of its purchase price, sell it. Do you have a similarly clear and concise exit plan for when the market turns against you?

The same strategy can be applied even when you are making a profit from a stock. If a stock goes upwards you can lock in your profits. If you have a stock that has gone up by 70% and there’s still potential growth then consider putting in a 50% stop loss if the market turns so that your profits are protected.

Scary moments in my own portfolio and exiting to make a less profit

A few years ago (2005) I brought heavily into mining/oil gas shares. One of them was LSE:AIM Victoria Oil Gas at 52p and it went up to £2 (happy days!). I doubled my £4500 portfolio within 6 months. I was chuffed and thought that it couldn’t end, but the end came too soon. My 100% profit then slid to 90%. I thought the market was having a glitch and it would go back up, but then my portfolio went down further. It dropped down to 80% and then to 60%.

I maintained hope that the market would go up and even took up praying to God. It didn’t work, and I’m not the religious type. Slowly, my profits started to slip through my fingers. Eventually I took a stern approach when I finally realized the market was not going to go back up anytime soon. I took my profits at 40% and ran to the hills!

Once again my emotions and undefined exit strategy prevented me from taking an 80%-90% profit from my portfolio. I hope you can see that it’s crucial to have a well thought-out exit strategy whether your stock is flourishing or failing, and especially considering the market volatility we’re seeing today. Make sure you know which exits to take for financial success. Don’t let yourself be a rabbit caught in the headlights.

Guerrilla forces are also expected to live off the land and a tiny amount of food. By the end of the war the majority of equipment used by the Guerrilla forces was American, stolen, captured or purchased from the opposition. One of the Guerrillas’ key strengths was that they where determined not to give up and used their greater flexibility to move faster than their much more numerous opposition.

What can we learn from the Vietnamese Guerrillas?

That the same tactics can be used in investment. Like resourceful Guerrillas, private investors are subject to larger financial organizations that drive markets. Private Investors have to find weaknesses in the system and exploit the small opportunities that the market provides. The private investor must adopt a survival strategy entirely different from how big financial firms operate. This provides the opportunity to gain an advantage, even if it’s very small.

You must remember, however, that the Private Investor has many advantages over big financial organizations. One fundamental rule is to make the most of these and refuse to play the game on their terms!

Here are just some of the tactics used by Guerrilla Investors to gain a competitive advantage:

• Guerrilla investors are not in competition with anyone and no-one needs to know how well or badly you are doing. You are not under pressure to produce huge gains for clients. As a private investor, the only person who can fire you is… you!
• Guerrilla Investors rarely listen to tipsters, even if they are close friends, newspaper journalists or TV experts. Everyone is a potential enemy. Use your own research on a company alone to judge whether or not to buy a stock.
• Guerrilla Investors only use money that they are prepared to lose. If you can’t afford to play then don’t. This is a fundamental rule to remember when trading.
• Guerrilla investors choose shares that have been discarded by major investors and pick them up at low value when the bigger boys are running in the opposite direction. They wait and stealthily sell when the time is right, not attracting attention to themselves.
• Always know your exit out of the stock. Do you want to gain 10%, 20% or 100% before you sell? Guerrilla Investors will be actively building an exit strategy for each of their share portfolios.

Finally, remember that if you’re succeeding with a stock that there is always someone else losing out. This is a cut-throat market. Don’t overestimate or underestimate your target, just make sure you’ve done  adequate research to make sure you’ve found that winning stock.

Good Private Investors are just like Guerrillas in the Vietnam War.

We are outnumbered by large financial firms (with money and political influence) but still have many ways to win psychological battles on the market floor and achieve investment gains. Still, every private investor must be wary and realistic at all times when choosing which battles to enter and which battles to avoid like the plague.