An investment plan

Dr Steve Sjuggerud - Wed 31 May, 2006

...An investment plan...My family friend is right, investing is a game. Think of it like poker. Youve got to know how to play the game, but the game isnt about the cards youre dealt. The game is about how you manage your money... Knowing when to play it safe, when to bet big, and most importantly, when to fold...

An investment plan

"Thanks for the plan, Steve..." a long-time family
friend wrote me this weekend...

The market had fallen. And our friend was unsure what
to do. Actually, he knew what to do, but he was afraid
to follow it.

He’d created a plan this year, based on what he’d
learned from my newsletter over the years. He’d
promised himself he was going to methodically cut his
losers, and let his winners ride. This way, he’d never
risk a big loss of his investment money.

His strategy hadn’t been tested, until last week. And
he found that when the time came to actually sell, it
was hard...

"I bit the bullet and sold," he told me in his
email. "To my surprise, it didn’t hurt that much. It
sort of felt good putting the profit in the bank."
Then he said: "The game is unreal. But the money,
that’s real."

I don’t know what he owned or sold. It doesn’t
matter. What matters is that he finally has a plan...
HE KNOWS WHEN HE’LL SELL. He limits his worst-case
scenario. And that puts him head and shoulders above
99% of investors, who tend to sell at the worst
possible times.

Most people don’t think about it this way, but it’s
important that you do...

My family friend is right, investing is a game. Think of it
like poker. You’ve got to know how to play the game,
but the game isn’t about the cards you’re dealt. The
game is about how you manage your money... Knowing when
to play it safe, when to bet big, and most importantly,
when to fold.

Poker is not a card game, it’s a game about making
smart decisions with your money 100% of the
time. Investing is the same way. It’s not about picking
stocks... it’s about making smart decisions with your
money, 100% of the time. What matters in investing and
in poker is avoiding the "catastrophic loss." Always.
You never want to be in a position where you’re down 50%,
and you need to double your money just to break even.

The most catastrophic loss I can think of is a Colorado
couple I know. They invested millions of dollars – almost
everything they had – in risky, pre-IPO dot-com
companies in the late 1990s. Their plan was to leave a
million dollars to each of their grandkids. They had
retired, and were traveling the country by motor home.

The problem was, they had no exit plan if things went
wrong. They didn’t even have the ability to get out
early and save at least some of their money if
necessary. As it turned out, the worst-case scenario
happened.

That motor home is probably parked next to one of their
grandkids’ houses right now.

The quicker you recognize that investing, like poker,
is more about money management than your current hand,
the quicker you’ll be on the road to making a fortune.

I’d like to thank my family friend for reminding me of
this old lesson... and to congratulate him on sticking
with the plan he made.

I’m certain he will be successful from here on out. And
if you do the same, you will too...


Regards,

Dr Steve Sjuggerud
for The Daily Reckoning

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