Investing Without Fear

Ask yourself the following question, "Why do I invest in the stock market?" Your answer might be one of the following:

1. I want to generate a higher rate of return than I can get in T-bills or money market accounts.
2. I want to generate enough money to retire comfortably.
3. I enjoy buying and selling stocks.
4. I want to create another stream of income for my family and me.
5. I want to generate enough to pay for my children (or grand children) to have their college education paid for.
6. I want to make a lot of money.

All of these (and there are many more) answers are totally legitimate and reasonable. But, with the lone exception of #3, these answers can make investing in the stock market a nightmare at worst and an emotional rollercoaster, at best.

If I were to ask you, "Do you consider yourself to be a greedy person?", you would most likely respond, probably with some indignation, "Absolutely not!"

Well... let’s pursue that statement a bit and see if you change your mind:

We all (or most of us) want to make money through our stock market investments. In order to achieve a profit, one has to buy low and sell high. This builds up profit, which we can reinvest in other stocks with the same objective in mind. This, by the way, is NOT greed. The desire to buy low and sell high is nothing more than good stewardship.

It is quite the opposite of greed. It is using one's abilities to provide for the common necessities of life. We all expect to get paid a reasonable and fair return for our investments, regardless of whether those investments are money, time, effort, knowledge, etc. We are all looking for ways to improve our standard of living, provide for our families, and anticipate the unexpected emergencies of life. If we get less return than our investment is worth, then we look for better opportunities in which to invest.

Investing in the stock market is one way in which we can generate reasonable returns and increased profitability. Good stewardship would say, "Buy high quality stocks that have the propensity to increase in value, and sell those stocks for a profit that equates to a reasonable rate of return."

Greed, is something else altogether. Greed is not looking for "fair and reasonable." Greed is looking for most. Greed says, "Buy NOW before it goes any higher!" Greed says, "Hold on a little longer, the price will surely turn around." The ultimate action made on the basis of greed is that it leads people to buy high and sell low. Greed does not recognize reasonable return. Quite the contrary... A person motivated by greed will often hold onto stocks well past the point of reasonable return. Greed will even keep an investor in a stock long after that investment has suffered a substantial loss of equity.

Greed listens to the hucksters of life that say you can get something for nothing. Greed is blinding to common sense. Greed leads one to make irrational decisions that perpetuate more irrational decisions to make up for the previous irrational decisions. Greed is an anathema to sound stock market investing and leads to inconsistent results at best, and total bankruptcy at worst.

TurnerTrends has developed a stock rating and investment methodology that can virtually eliminate greed from impacting your investment philosophy. Here is how you can trump greed by using TurnerTrends:

• We rely almost exclusively on our un-biased, no-human emotion computer programs that give us buy/sell recommendations on stocks.
• We ONLY buy high-quality stocks that are exhibiting an upward pricing trend.
• We ONLY short stocks that have shown a strong cyclical modulation in their pricing over time. Here, we short the stock near the top of its pricing cycle. Then, when the stock is much cheaper, we buy the stock back and release the loan of the shares, pocketing the difference as profit.
• We IMMEDIATELY sell long positions, or cover for short positions, the moment that the stock’s price triggers its computer-generated stop-loss. For long positions, we adjust each stock’s stop loss setting each week, with the goal of continually moving the stop loss up past our basis position. We do just the opposite for short positions.

With this methodology, we typically do not buy at the lowest low. Rather, we rate stocks as a buy while it is moving upward in price. We rate stocks as a short sell while they are moving downward in price. All of this is done from the output of our software systems.

We do NOT get married to a stock. In fact, we prefer to look at stocks from a very clinical perspective. It really doesn’t matter whether we ‘like’ or ‘dislike’ a stock, a sector or an industry. It only matters if that stock has a pricing trend that is moving in the direction we want it to go. When that stock moves against us, we get out of it and move the proceeds of the sale into another more attractive position.

No emotion... hence, no greed.

Let's see what fear and panic can do to undermine an investor’s philosophy and application of that philosophy in his/her trading activities.

Generally, fear sets in when a decision is made without fully understanding the risk. This is clearly to be expected, as many investors do not know how to measure or quantify risk in their stock investments.

They fear that their portfolio has too much risk in it. There was a television commercial running recently that poses the following question to an investor, "How much risk is in your portfolio?" The investor sheepishly answers, "Too much... right?"

Fear also creeps in when an investor jumps into a stock without a valid, well thought-out plan for holding and exiting the stock. When an investor owns a stock for the only reason of hoping the stock will skyrocket in price, almost anything negative happening to the price will immediately bring fear into play.

Fear can lead an investor to sell too soon; wait too long to sell; buy too late; buy too early; buy the wrong stock; buy at the top and sell at the bottom. Fear motivates one to action, but not always the right action.

Generally, fear sets in when there is an absence of knowledge, or absence of a defensible trading strategy.

And right behind fear is panic. Panic occurs when a stock investment begins to lose more and more equity. When an investor gets into a stock without a specific plan for how to exit that stock, fear lurks in the background. And when the investor's worst fears are realized and the stock continues to lose value, panic sets in. And when an investor gets into or out of a stock because of panic, the investor is almost certainly going to lose money.

For individual stocks, risk is generally measured in terms of stock pricing volatility. Each of our stocks rated as Strong Buy or Buy also include a stop loss price that has been calculated from a combination of historical volatility and statistical likelihood of change from one week to the next. A subscription to the TurnerTrends Ratings provides investors with a technical rating, a fundamental rating, a combined rating and the upcoming week’s recommended stop loss setting. This information can be invaluable for assessing a stock’s risk due to pricing volatility.

Risk also can be measured from the perspective of an exit strategy. In other words, how long is too long to hold a stock when it has not moved sufficiently in price toward a profitable goal or objective? Again, this risk is completely eliminated if our recommended stop loss settings are followed.

Portfolio risk can be increased or mitigated depending on both the individual stocks held by the portfolio and the level of diversification by industry and sector. The TurnerTrends Report chronicles our investment team’s management of several well-balanced portfolio.

You must first define the limits of your ‘comfort zone’. How much tolerance do you have for losing money? If you have zero tolerance, then our advice is not to invest in the stock market. We all lose money from time to time. From time-to-time, you absolutely will lose money by investing in the stock market. The key is to make more money than you lose over a time horizon that you can accept; again, within your comfort zone.

Fear always rears its ugly head when you invest in a company that you know nothing about. We always want to invest in fundamentally sound companies. If you are going to own the stock of a company, at least you want to own stock in a strong, viable company.

Of course, measuring fundamentals on a company is one very acceptable way to judge the quality of a company. Another way is to make sure the stock is reasonably well traded stock. We avoid lightly traded stocks. In general, we don’t invest in stocks that have less than an average daily volume of 100,000 shares.

So, in summary here are four steps to take in reducing the fear, and sometimes panic, when investing in the stock market:

• Know your limits for losing money in a single stock investment, and do not exceed those limits.
• Follow a sound, disciplined (see below) investment strategy that unemotionally tells you when to get into a stock and when to get out of a stock.
• Keep an overwhelming percentage of your investments in high quality and fundamentally sound stocks.
• It is better to win lots of small battles than it is to try to win the war in a single shot. Our philosophy tells us we want to try to buy at a lower price than we sell at. We don’t try to buy at the bottom and sell at the top, since the odds of being able to perform that task consistently is virtually impossible. So, be content to buy stocks after they have begun moving upward in price and sell those stocks after they have begun moving downward in price.