How Wall Street Pros Find the Best Investment

May 22, 2011 - PRLog -- What is the best investment? It's easy. The best investment is the one whose profits can be kept. If profits vanish because investors -
•   Hold until a profit turns into a loss.
•   Hold until a small loss turns into a big loss, and then a huge loss.
•   Hold so long the annual return is small even when there is a profit.
That is not the best investment. So what should be done? Use Exit Strategy and Position Sizing.

Exit Strategy
Never make an investment without knowing when and how to get out. That's called an Exit Strategy.
•   Have an Exit Strategy before investing in anything.
•   Write it down. Nothing fuzzy allowed.
•   Know what will trigger a sell order.
•   Good Exit Strategies retain profits and cut losses. That is the best investment.
•   Wall Street Wisdom - "Cut your losses, but let your winners ride."
•   A few big wins and many small losses can equal a win overall.

Position Sizing
Never risk more than 3% of a portfolio in any one position. And that's on the high side.
•   Why so small? Look at what it takes to recover from a loss:
•   Lose 50% of a portfolio, and it takes a 100% gain on what's left to recover the loss. Is 100% profit easy?
•   Lose 25% of a portfolio, and it takes a 33.3% gain on what's left to recover the loss. Is 33.3% profit easy?
•   Lose even 10% of a portfolio, and it takes an 11.1% gain on what's left to recover the  loss.
•   Small losses leave enough capital to keep investing.
Control risk by controlling position size. The less invested in any one thing, the less risk. That is the best investment.

Exit Strategy affects Position Size.
•   If the Exit Strategy were to sell after a 25% loss, $12,000 of a $100,000 portfolio could go into one investment, because -
•   $12,000 X 25% = $3,000 = 3% of $100,000
•   If the Exit Strategy were to sell after a 10% loss, $30,000 of a $100,000 portfolio could go into one investment, because -
•   $30,000 X 10% = $3,000 = 3% of $100,000
•   The risk is only what the Exit Strategy will allow, not the total investment.

Mechanical Investment
•   Emotion is the investor's enemy. People hold too long because of greed and fear.
•   Greed for even bigger gains. Fear of realizing a loss.
The best investment is mechanical.
•   Follow the Exit Strategy like a machine. Automatically. No matter the emotions.
•   Place exit orders with the broker in advance.
•   Acting when the time is right makes the best investment.

Exit Strategies Explored
•   So what do Exit Strategies look like? Stop Orders are the best known.
•   Tell the broker to sell if the price falls to some specific point.
•   Some people use 8% below the purchase price. Others use 10%, 15%, or 25%.
•   Stop orders don't always do their job.
•   The price can fall way below your stop point before the order gets filled.
•   Market makers sometimes sell to force a stock price down.
•   They want to trigger other people's stop orders, so they can buy their stock cheap.

Stop Orders can also be used to sell when the price rises to some specific point.
•   Decide in advance on a good return -
•   Two or three times the amount at risk.

Stop - Limit Orders limit the acceptable price after a stop order triggers.
•   Stop-Limit Orders might not execute if the price quickly falls below the limit.

Trailing Stop Orders automatically raise the stop price if a stock price rises.
•   A $50 stock with a 10% trailing stop would start with a trailing stop of $45 ($50-10%).
•   If the stock price rose to $60, the stop price would rise to $54. ($60 - 10%)
•   The trailing stop price never falls after it rises.
•   Trailing Stop Orders are good ways to hold on to profits.

Put Options work like insurance policies.
•   Buying a put lets investors sell their stock for a safe price of their choice.
•   The cost of a put reduces profit, but -
•   The investor stays safe, no matter what happens to the stock. That is the best investment.

Now that you know about the best investment, find it at http://safemoneyproducts.com/best-investment. Subscribe at http://safemoneyproducts.com/subscribe now to get 4 Free Reports and bi-monthly Action Alerts.

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Safe Money Products, written by Dr. Bob Rubin, is a financial newsletter. Bob’s investment philosophy is to buy assets with both strong growth potential and limited risk. Bob researches both commonplace and little known investment opportunities. Visit http://safemoneyproducts.com for more information.