SHOWCASE MAGAZINE | 2018
taking a catastrophic loss. Andrew
Carnegie is reputed to have said,
“The safest investment strategy is
to put all of your eggs in one bas-
ket and watch the basket.” That
said, do not make the mistake of
thinking you are either Buffett or
Carnegie – especially in your first
years of investing. The popular
way to manage risk is to diversify
your exposure. Prudent investors
own stocks of different companies
in different industries, sometimes
in different countries, with the ex-
pectation that a single bad event
will not affect all of their holdings
or will otherwise affect them to
different degrees. Imagine owning
stocks in five different companies,
each of which you expect
to continually grow prof-
its. Unfortunately, circum-
stances change. At the
end of the year, you might
have two companies (A &
B) that have performed
well so their stocks are up
25% each. The stock of
two other companies (C &
D) in a different industry
are up 10% each, while
the fifth company’s (E)
assets were liquidated to
pay off a massive lawsuit.
Diversification allows you to re-
cover from the loss of your total
investment (20% of your portfolio)
by gains of 10% in the two best
companies (25% x 40%) and 4%
in the remaining two companies
(10% x 40%). Even though your
overall portfolio value dropped by
6% (20% loss minus 14% gain), it
is considerably better than having
been invested solely in CompanyE.
of borrowed money to execute
your stock market strategy. In a
margin account, banks and bro-
kerage firms can loan you money
to buy stocks, usually 50% of the
purchase value. In other words, if
you wanted to buy 100 shares of
a stock trading at $100 for a total
cost of $10,000, your brokerage
firm could loan you $5,000 to
complete the purchase.
The use of borrowed money
“levers” or exaggerates the re-
sult of price movement. Sup-
pose the stock moves to $200 a
share and you sell it. If you had
used your own money exclusive-
ly, your return would be 100%
on your investment [($20,000
Leverage is a tool, neither good
nor bad. However, it is a tool best
used after you gain experience
and confidence in your deci-
sion-making abilities. Limit your
risk when you are starting out to
ensure you can profit over the
long term.
Final Thoughts
Equity investments historically
have enjoyed a return significantly
above other types investments
while also proving easy liquidity,
total visibility, and active regu-
lation to ensure a level playing
field for all. Investing in the stock
market is a great opportunity to
build large asset value for those
who are willing to
be consistent savers,
make the necessary
investment in time
and energy to gain
experience, appro-
priately manage their
risk, and are patient,
allowing the magic of
compounding to work
for them. The young-
er you begin your
investing avocation,
the greater the final
results – just remember to walk
before you begin to run. What
additional tips can you suggest for
successful stock market investing?
The popular way to manage
risk is to diversify your ex-
posure. Prudent investors
own stocks of different com-
panies in different indus-
tries, sometimes in different
countreies
6. Avoid Leverage
Leverage simply means the use
-$10,000)/$10,000]. If you had
borrowed $5,000 to buy the stock
and sold at $200 per share, your
return would be 300 % [(20,000-
$5,000)/$5,000] after repaying
the $5,000 loan and excluding the
cost of interest paid to the broker.
It sounds great when the stock
moves up, but consider the other
side. Suppose the stock fell to $50
per share rather than doubling to
$200, your loss would be 100%
of your initial investment, plus
the cost of interest to the broker
[($5,000-$5,000)/$5,000].
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