Making Money Upside Down

First, a warning: The way the preceding discourse is going to be presented may look like a desperate attempt to sound funny. The presentation is reflective of the way the author, at times, perceive things around him. But the money that you will make, if you are able to put the ideas into proper perspective, is real. Now, consider yourself warned.

There are reasons why a neophyte investor cannot help but scratch his head or guffaw at the thoughts flashing in his mind (of course, what is funny to one may not be funny to others) while digesting the lessons gleaned from the vast repository of knowledge of veteran financial advisors and gurus.

Let us start with the richest of them all – Warren Buffet. He has a set of rules for making money. Rule Number 1. is never lose money. Rule Number 2. is never forget rule Number 1.

Now, if that does not make you smile I suppose the other lessons won’t either.

But let’s go on as we are reaching the point where I believe there will be some head scratching… Again, a word of wisdom from Mr. Buffet: “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.”

John Templeton suggests that one should: “Invest at the point of maximum pessimism.” While George Soros thinks it is fine to commit mistakes. He says: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

I don’t know if you are already scratching your head, but when I first ventured into this business I began scratching mine even before I encountered those words. (Say, what?) Well, you know, I kinda prefer seeing the solutions even before I recognize the problems.

Let’s try to put all that into the context of this discussion. If you subscribe to fresh studies that say that the modern man has retained survival as his primary instinct, how do you expect him to follow John Templeton’s suggestion to: “Invest at the point of maximum pessimism”?

That statement conjures an image wherein everybody is scampering for cover. In that situation, our primary instinct would tell us to run! Get as far away as possible from whatever is causing that “extreme pessimism.” The market is crashing down, so you better find the door fast and get your hides out of there in half a shake!

Yet, while it may sound inconsistent with Warren Buffet’s Rule No. 1, you may actually have to stay there, follow John Templeton’s advice, grit your teeth and keep breathing Buffet’s Rule No.2.

Uhh…how’s that again?
Well, see, that is why in treading the trading floor of the securities market you sometimes have to walk with you hands, feet and butt up, and your face kept a good distance from the ground. Doing what everyone else is doing can make you forget Buffet’s Rule No. 2 and lose you a lot of money.

If you still have doubts about what you should do in that kind of situation, let’s pluck one more wisdom from the World’s Richest man (Buffet). He said: “A public-opinion poll is no substitute for thought.”

Would you expect a man who thinks like that to go with the crowd?

Nope. Once in a while, in this world of upright and stiff moneyed individuals, you have to look at things upside down. Buy when everybody is dying to sell – and sell when everybody is killing to buy.

Logic would be easier to come by if you just stop for a minute and think who would be your buyer – if you sell when everybody is selling (and nobody is buying). While on the other hand, think how much you would be forced to pay if you buy when everybody is buying (and only a few are willing to sell).

If you’ve got that, let’s move on to the next.

Our first situation above presupposes an extreme condition when the market is on a free-fall with the bottom practically taken out – meaning, nowhere in site. (Scary stuff)

The next situation is a condition wherein the market is so fickle-minded it can’t decide which way it is going. One day it is up, the next day it is down. And sometimes, it is making wild fluctuations (moving up and down several times) all in the same day. An unacquainted trader can easily get rattled in the frequent “mood swings” that he might actually be swept away by the on-going trend!

Then, he would be violating Buffet’s dictum on market fluctuations: “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.”

The biggest folly, of course, will be finding ourselves buying high and selling low. Better not make an enemy of the market fluctuations.

To remain friends with the market’s vacillation (volatility), it might be a good idea to imbibe George Soros’ maxim: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

Or you may want to consider a thought from John Bogle: “Time is your friend; impulse is your enemy.”




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