FASE 4: TITULACIÓN

to more value and small company stocks and, secondly, include emerging market stocks in their portfolio.

Lesson 9 – Survival lessons to remain sane: These lessons are described as follows:

 Do not do totally insane things with your money. The Orange County disaster of the early 2000s was the perfect example. Part of the portfolio was a derivative investment that

underpinned how investors can make irrational decisions. The portfolio manager had offered a bond to investors that paid interest at a rate that was determined by a formula: 10.85% less the sum of the German mark, Swedish krona and Italian lira swap rate plus the British pound and Swiss franc. In other words, the interest was divided by a factor of five and traders ended up with valueless portfolios.

 Never borrow short and lend long. In fact, you should not borrow to make investments. Borrowing multiplies your risk. If you borrow R1,000 to buy R2,000 worth of stock, then you will double your original money (minus interest charges) if the stock rises 50%. However, you will lose your entire stake if the stock falls by 50%.

 Make appropriate investments. A consultant must always be with a legally recognised stockbroker or institution. In addition, it is important to continually check your own finances, check figures – never take anything at face value. In other words, trust less and ask more.

 Never have a preconceived scenario and fall in love with it. Never have an absolutely unshakeable belief that economic variable will move your way, that interest rates would continue to fall and that shares will always be positive or negative.

 Never implement a strategy without an exit window. When providing a portfolio manager with an order to buy or sell shares, make sure there is a stop-loss technique, i.e. always set a definite price for a sell order.

 Do not buy anything you don't understand. If you do not understand Future, Commodity trading, Options, Derivatives or gilts – stay out!

 Don't judge an investment simply by its track record. Some companies produce spectacular returns in the first two years of operation, but run into problems later on. The key for an investor is not merely to look at what has been done in the past, but to understand why the company has been so successful.

 In the market, no good thing lasts forever. This has been said many times, if you touch hot investments, you'll get burned.

 Believe in amateur stock market sayings and die. These include:

o Knowing which stocks to buy and when to be in the market is the key to investment success.

o A good investor can predict which way the market is going and which stocks will profit the most.

o This power is held by just a few wise stockbrokers.

o These stockbrokers will readily share their power with you for a nominal cost. o This minor cost will be repaid many times over by enhanced performance.

o However, one must always avoid the charlatans who give false advice. A wise man is one whose stocks go up, and a charlatan is one whose stocks go down.

o Knowing when the market will fall is a prime concern to the successful investor.

o One should leave the market when it is about to go down in order to preserve one’s principal investment, i.e. the capital amount.

o Successful investors trade often and dart in and out of the market or a particular stock with uncanny skill.

o Their portfolios benefit from a hands-on approach.

o It is easy to spot good companies through an examination of financial data and to determine what the stock in those companies should be worth.

o An astute investor can apply superior insight to make big killings on mispriced stocks. Using his superior insight he will be able to take action long before other investors catch on.

o Studying past price movements is an aid to predicting future price movements. This skill can be applied to both individual stocks and the movement of the market as a whole. o Economic predictions are reliable and form another strong foundation for success. It is

reasonably easy to select good advisors and managers, because their past track record is a reliable indicator of future success and skill.

Given all that, many traders tend to think of the investment process in the following terms:  What securities should I buy?

 Should I be in or out of the market now?  When should I sell my securities?

 Which manager should I hire? Or, what mutual fund should I buy?

Unfortunately, almost all of this conventional wisdom is wrong. It does not do us any good to think of trading in these terms. In fact, it creates problems and keeps us from enjoying the fruits of a game strongly tilted in our favour.

Remember that it is important to consider the merits of the investor's obsession with individual stock selection and market timing. Just how much do these two elements of the investment process contribute to overall success or failure? Is there a better way to think about investing?

CHAPTER SUMMARY

Important lessons from the past provide a direct link to establishing the three portfolios of billionaire traders.

IN THE NEXT CHAPTER

Chapter 9: The Three