Sunday, July 19, 2009

OTT Defensive Money Management

Lately, I've perhaps been comforting myself a little bit too much with all the couch-jumping and boundless enthusiasm. So, it's time for a bit of self-reflection and condemnation.

I took some time to really look at the extent of my past financial mismanagement more closely this weekend. I asked myself, if someone else who was serious about financial management was managing my finances, would I be in a better position today? I can't be sure, but I looked at some examples of investors who have consistently gotten everything right the majority of the time - Warren Buffett, George Soros, Carl Icahn, Bill Gates, etc.

What I realised was that if we manage to steer clear of financial mistakes, this ends up putting us in a much stronger financial position over the longer term. Keeping in mind that the historical annual return from the stock market is only 10%, what we stand to gain is small in comparison to what we stand to lose.

Defensive money management is much more important than we give it credit for.

1. Guard what we have. I think this is so important that I'm going to put my money where my mouth is and be 70% cash and 30% investments all the time. Now, I need to find a safe way that I can grow that 70% cash position whilst safeguarding against inflation.
2. Establish a long term investing philosophy. Laugh all you want, but I've always wanted to have my own mini fashion and luxury conglomerate. I only realised recently that I'm already on my way. So far, I've only got Bulgari and Harry Winston in my portfolio, but I'm going to add others as well. By owning small shares in great companies that I really believe in, I am essentially building up the mini fashion and luxury conglomerate I've always dreamed of. My shares may be small, but I'm realising my dream.
3. Don't be afraid to start small. If you're investing in a new financial vehicle you haven't traded before, start with a small amount of capital. Do not invest too much too soon. This will give you time to learn the particulars of that market. One of the reasons I blew up my forex account so soon was because I hadn't learned all there was to know about the market. Whilst it is something to regret, I think I've learned my lesson now.
4. The same thing goes with trading a new currency pair or a new sector. If you usually trade GBP/USD and would like to switch to another pair, or if you're usually in energy stocks but would like to switch to financials, then test the water first.
5. Know what your mistakes are and learn from them. Don't beat yourself up though. Just do everything you can to prevent similar future mistakes.
6. Always go couture. You need to have a strategy that is custom-tailored to the individual that you are. If you try to take someone else's strategy and make it work, it might not necessarily fit you so well. I'm always trying to contradict people, myself included. My boss once told me that to get me to do something, he has to tell me to do the opposite of what he wants me to do. LOL. So that's why contrarian / counter-trend strategies seem to work well for me. But if you like to follow the trend and are good with that, there's nothing wrong with that.
7. Ultimately, the perfect trader will probably be one who can master both trend-following and contrarian investing. They would have the logic to see when it is most profitable to follow the trend and when it might be a better idea to take the opposite side of the trade.
8. Always take an OTT view. Once you have a strategy you're confident with, continue trading and finetuning it. However, don't forget that you have to look at the broader picture as well. (OTT = over the top).

Now, I hope I follow my own advice!

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