Friday, September 16, 2016

How to Increase your stock market Returns - be an Investor and a Speculator at the same time

There are two kinds of people in the stock market: those who invest and those who speculate. 

Those who invest transact rarely. Their motto is 'buy right and sit tight'. Those who speculate transact daily. They believe in 'get in - make a few bucks - get out'.

Unfortunately, neither make much money. Why?

Many investors are really speculators gone wrong. They 'get in - but can't get out' after getting stuck with a losing position. 

Most sell-out with a loss and swear never to buy a stock again. Some switch to mutual funds. 

A handful make the effort to really learn how to pick stocks that can give steady returns over the long term.

Speculators (read: traders) are a dime a dozen. They pick up the rudiments of technical analysis and think it is the 'Holy Grail' of getting rich.

They taste success with one or two trades but fritter away all their gains in the next few trades. Those who are really hooked get into deeper trouble by borrowing money for their daily trading fix.

A handful of traders really learn the tricks of the trade and are disciplined about booking losses when stop-loss levels are hit.

Like Voltaire's "Candide", you can enjoy the best of both worlds by becoming an investor and a speculator at the same time.

But isn't an investor and a speculator polar opposites? Like day and night? 

Au contraire. They are more like the Chinese Tao concept of Yin/Yang. One needs the other to make the stock market a complete whole.

Big investors bring in big money. A large number of speculators generate high volume of transactions that lead to price discovery.

Here is the secret to becoming an investor/speculator.

Allocate 75% of your portfolio to 8 to 10 financially sound, large-cap stocks that provide decent growth and pay regular dividends.

Allocate the balance 25% to another 8 to 10 mid-cap and small-cap stocks, which you can buy and sell to your heart's content.

The large-cap portfolio will give you boring but steady returns that will keep you solvent. The mid-cap/small-cap portfolio will provide excitement, and the occasional multibagger that can finance your dream trip to Bora Bora or Borobudur.

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