Tom Scollon
Chief Editor		 Well poor Frank slid down the slippery corporate slide – obviously had not taken time out to read TT a few weeks ago. But over looking risk management can be costly to us all in business. Yes it is important to treat investing as a business.

In fact I am a strong believer that the successful investors thrive because they are better at risk management, in particular they are better at recognising when to throw their chips back.

Success in investing comes down to risk management. A large number of our vast readership – of several thousands – yes that is impressive – seem to have a sound grasp of technical analysis. Achieving that extra edge is developing sound risk management skills.

Picking winners, I admit is an important start, but no one – repeat no one – constantly picks 100% winners. Technical analysis is not that precise even though it has a more successful hit rate than fundamental analysis.

So as we all make mistakes or to put a more positive spin on it – we don’t always pick all winners. The first milestone is achieved when we accept that we are not correct 100% of the time. This acceptance actually helps our hit rate because if we accept we are human and leave behind that ever troublesome ego we have a better chance of improving our buy hit rate as we will have greater inner core confidence.

So we pick some losers – not a big deal but we need to be clear on what is the next step. Throw them back in! But when? I have a general rule of thumb that if I am likely to face a loss of 10% I am no longer loyal to that stock. If it is a small cap I might allow that to run to 15% as small caps can move around a lot more – but only if I am confident it can recover.

I do not necessarily place an automatic stop loss. I look at the chart and will attempt to identify a technical point where I may exit. Example AXA is stock I wish to quit. Weak on a daily basis and the weekly chart does not look too exciting. Years ago I would have already exited the stock – impulsively. However I believe that the stock will recover a little – dead cat bounce is the term – before maybe heading down – maybe.

A contrasting circumstance is SGT which I bought late December only to find it tale off as an Insto departed at what they presumably thought was a peak. In fact, what was happening was that the Insto was deserting the stock in an attempt to suppress the price, but once they were gone it ascended. An early sell would have been disappointing.

Be careful about setting purely arbitrary exits.

Another aspect of risk management is spreading risk, by spreading your investments. The average Australian direct shares investor holds about $60,000 in shares. How should I spread that amount is an oft asked question. It is important to spread that across a few stocks. For such an investor about 10 shares would be a good spread – providing they are over the right sectors.

Another very useful risk management strategy is of course options and today we run an easily understood article on options from Jordan Craw – you can’t ignore options if you want to have that investing edge! Jordan will continue with articles on Australian options over the next several weeks.

Tom Scollon
Editor