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What Makes a Potential Investment Good?

20 May, 2007 (17:31) | Macro Trading, Trading Wisdom | By: admin

What makes a potential investment good is a question that doesn’t get asked enough by most investors. If you asked your average investor that question you would get one of two answers 1-One that goes up and 2-One with good management and blah, blah, blah. If you ask an excellent trader what makes an investment a good one they would say that it is a good investment in regards to risk versus reward.

Most investors don’t focus near enough time on risk versus reward and instead only see the reward side of things. For example back in March of 2000 if you had asked most people what should I get into they would have said internet stocks. Why? Because they are all growing at a bazillion% a day and in a few years every man, women, dog, cat, etc. will be doing everything online. Only a few times did I ever here someone describe XYZ or maybe more appropriately WXYZ a good investment because it has a 200% growth rate and it is trading at a good multiple and it has something else going for it so even if the internet ends up being a fad you end up doing alright in the stock. Nope I don’t think any of us heard that nearly enough.

All most people see is the upside. In order to be successful long term it is imperative that you look at and for the negative as well as the positives when choosing where to put your money. If you are looking at a stock not only do you want a good story but you should also search for the bad story. What could go wrong? What will we do if it does go wrong? What else could go wrong? These are the right questions. If it is a bond then you have to worry about the issuing country, the countries interest rates, that countries business prospects, the world interest rates, etc. For every good thing you see in an investment you should be searching for that many bad or potentially bad things. Doing this vastly increases the likelihood of coming out on top. But just as importantly it insures that even when you lose you lose small. There are no shortcuts in this business. Nothing goes up in a straight line forever but you can make your line have less big dips by focusing on the risk just as much as on the reward.

Happy Trading,

The Macro Trader

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