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The average investor is reluctant to place his hard-earned savings on the stock exchange, because it appears rather like participating in a gambling casino.

However, investing on the stock exchange can be made a procedure governed by the laws of quantative logic, the most important of which is accurate prediction. Once such prediction is possible, the undesirable elements of chance and risk are minimized.

The all-important words are "can be made". I have used them deliberately, because not every venture on the stock exchange is to be rated as a scientific investment. For it to be so, the prospective investor must go out of his way to perform certain analyses.

Why does one have to consider investing on the stock exchange? I will tell you why - these days no one with savings can afford not to.

Consider an investor with savings of $20, 000.00. He may believe that the most prudent home for his funds are in mortgage or government bonds, or bank fixed deposits or CD's. After all, they apparently offer no risk, and he will be able to sleep comfortable at night, his savings secure and affording him a guaranteed interest rate. The peaceful sleep will end abruptly, however, when he wakes up screaming, having had a nightmare about inflation. It is the current inflation rate in many countries that is to destroy all such notions of peaceful sleep with the fixed deposit savings method of investing.

(This is an adaptation of the Introduction to the excellent publication "Winning on the JSE" by Karl Posel, published by Southern Book Publishers (Pty) Ltd)

Editorial Comment:

Quoting from notes recorded at an "Investment Strategy Course", the following guidelines should be observed by the shrewd investor, especially with regard to the stock market.

  • Invest directly into the stock market, and use your knowledge of "fundamentals" and "technical analysis."
  • Actively monitor and adjust your portfolio. Be aware of important information and knowledge of the markets. This requires the reading and researching of newspapers, magazines, websites and circulars.
  • Have an objective mental posture or attitude. This means our 'emotional' response to the market as it moves up and down. See footnote
  • Managing your risk in the market by adopting a stop-loss strategy.
  • Decide if you are an investor who (a) will buy and hold, (b) be a trader (usually called a 'day-trader', or (c) try and be both, by splitting your portfolio.

Footnote

Over the past few years an enthusiastic ongoing debate has taken place between our partners related to the correct "mental posture" or "attitude" toward losses made on the stock market. We have condensed the various opinions received into 2 basic schools of thought, which reflect primarily the opinions of clients who have invested heavily in the Gold Board of the Johannesburg Stock Exchange (JSE) and the Nasdaq in the USA.

  • Opinion No.1 - I have not made any losses or not lost any money in the stock market until I actually sell my shares. I will not sell until at least my shares trade above my buying price. I accept the 'volatility' of investing in the stock market as part of the risk factor, and what goes up has to go down and what goes down has to go up again.
  • Opinion No.2 - I must adopt a 'stop-loss' policy on shares I buy. I will 'cut my losses and allow my profits to run' and this way I am guaranteed to make an overall profit on my portfolio.

We invite you to give us your opinion for our 'investment survey', which we plan to include in a future Newsletter. Select Opinion No.1 or Opinion No.2 in our Poll Box, or you may e-mail us direct.

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