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The Benefits of Investment Formulas
by Rebecca Dajarda
http://www.fyinvesting.com
There's a famous story about a young man who wants to
become a professional speculator on Wall Street. He
decides to go to an expert in the field to get some
advice about making investments.
The fact was, the young man said, that he had taken on
quite an extensive line of stocks, but the market looked
high - maybe too high - he thought possibly his position
carried with it too many risks, and wondered if he
shouldn't perhaps sell. He was so worried about this,
he said, that he couldn't sleep nights.
The expert colleague gives him a wise response: "Sell--
sell 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.
Like the young man, you should follow the recommendation
to use a sound investment formula. But just as the elderly
man left the details up to the newcomer, it is up to you
to pick the precise formula you will ultimately follow.
Take into consideration your personality, your financial
situation, and whether or not you can sleep at night when
you've taken certain risks. The beauty of a formula is
that it can be adjusted as needed to fit any person, and
any circumstance.
Although formulas are designed to give unhedged and
unambiguous indications for action, the investor should not
feel that he is therefore giving up all personal control
over his investments when he adopts a formula, since he
selects it himself to fit his own requirements. A formula
does not try to tell you what to do-it merely helps you do
what you are already doing more profitably.
Don't expect them to take care of everything, though. If you
are interested enough to be reading about investment
formulas you probably know which stocks you want and
which to avoid, and that's great.
Where a formula comes in is in helping you manage that
portfolio you've put together. It will help shape your
existing knowledge of stocks by helping you decide how
many to own, and when to buy. A formula will take your
investing to the next level.
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