What separates the winners from the losers when it comes to investing?
I wanted to know.
Fortunately I wasn’t afraid to ask…
Early on in my investing, I had been up and I had been down… but I have to admit, it was more down than up.
What was I doing wrong?
I love to learn, and I’m not afraid to go right up to the “authorities” and ask them direct questions. So that’s what I did…
“What’s the difference between the winners and the losers in the financial markets?” I asked an investing legend at a conference once
“The winners don’t need the money,” he said.
My immediate thought was, “Ah, yes, of course. The little guy is never going to win at this game. The fat cats have the game rigged. The rich just keep getting richer and the rest of us just get the squeeze.”
That’s what I thought at first. But that wasn’t right…
I gradually discovered a deeper meaning in this guru’s pearl of wisdom.
Was there a way that I could put myself in a position of not needing the money, even though I wasn’t rich?
The answer I found surprised me…
I found a way to know the riskiness of a stock before I buy it.
This is an incredibly powerful idea. Let me show you how this idea works…
The current “Smart Trailing Stop” on JNJ, for example, is about 10%.
Let’s say that I decide to buy JNJ and that I’m willing to risk $1,000 on this investment opportunity.
When I say “willing to risk”, I mean that I’m willing to lose up to $1,000 before getting stopped out and moving on to other opportunities. (Remember, capital is finite… opportunity is infinite.)
So if I only need to use a 10% stop loss on JNJ and I’m willing to risk $1,000, how much money can I invest in JNJ?
The answer is $10,000.
If JNJ falls 10% then my original $10,000 investment will be worth $9,000 and I will have lost $1,000.
Make sense?
TSLA, on the other hand, has a Smart Trailing Stop of about 40%. That means that the price of TSLA can swing as much of 40% in its normal course of business.
If I am willing to risk $1,000 in TSLA, how much can I invest?
The answer is $2,500.
If TSLA falls 40% then my original $2,500 investment will be worth $1,500 and I will have lost $1,000.
I can invest $10,000 in JNJ and only $2,500 in TSLA and still be risking $1,000 in each investment.
That’s a different way of looking at it… and it almost makes JNJ the more exciting investment!
Let me show you what a game–changer this simple strategy can be.
I mentioned yesterday that I had always been a big fan of Dr. Steve Sjuggerud’s work.
I was not surprised when some back–testing that I helped with found out that Steve had delivered his readers annualized gains of 16.8% per year over the 10 year period from 2004 to 2013.
That’s very impressive performance.
I love to put my systems to the test to see if it is possible to improve upon outstanding performance.
Let me show you what I found.
The following chart shows how much net profit could have been made by a True Wealth reader if:
- An equal amount of money ($1,000) is invested in each recommendation (gray line)
- An equal amount of risk ($250) is taken on each position (black line)
Using the equally weighted strategy produced a net profit of $21,588.
Using the dynamic position sizing strategy produced a net profit of $32,782.
That’s an astonishing improvement of 52% on what was already market crushing performance.
Combining Smart Trailing Stops and position sizing is a very powerful method for making sure that you are “positioned for success” in the markets.
What do I mean by “positioned for success”? I mean that you are investing in your personal risk comfort zone…
Only you know what level of risk is going to allow you to sleep comfortably at night and not feel like you need to check the markets all the time to see what’s happening with your investments.
Most people think that you’ve got to take big risks to make big money in the markets. I have found that this simply isn’t true.
The secret to making huge gains in the markets is to invest in a way that you “don’t need the money” – that you can’t be shaken out of your positions before your profits have had time to fully ripen.
Smart Trailing Stops and position sizing are powerful tools for making sure that you’re one of the market’s winners. I hope I helped show you one of the reasons why today, and I hope that you’ll use Smart Trailing Stops to grow and protect your wealth…
To the growth of your wealth,
