Waiting In the Wings

As you might have heard by now, GM is preparing itself for bankruptcy:

General Motors seen filing for bankruptcy Monday.

Depending on the type of investor you are, this could mean sell, sell, sell, then head for the hills, or it could mean big opportunity. No doubt that GM is one of the largest companies in the world, and to see it crash means there will be a major impact on the stock market. Most likely, it seems like the stock market could take a huge dip. If you have noticed over the past several years, whenever a new report comes out to tell us how many billions of (taxpayer) dollars GM has bumbled away this time, the stock market always seems to take a plunge. This time, I’ve decided to be ready for it, and this is how I plan to do it:

Firstly, I think it would be a good idea to have some money freed up so I can grab those stocks that are dragged down with the plunge. Stocks that are still strong with companies that will probably be around for a long time, but are suffering along with the rest of the economy for the time being. One example I found recently was Office Max (OMX). Although Office Max is facing some strong competition, especially from Staples (SPLS), Office Max seems to be making the right decisions to cut costs and stay in the market: 

 Staples quarterly profit beats Street by penny

From my research, the management at Office Max seems to know what they’re doing, and they’re taking aggressive measures to make sure they can keep up with Staples. It is a little bit of a gamble, but knowing that the economy is most likely going to rebound within the next year, there is going to be a lot more hiring by companies, which means a boost in demand for office supplies.

Although OMX is selling right now at $8, I’m expecting it to take a dive on Monday, and the price can be even more enticing. This is a a type of company that has a strong potential to turn itself around and that can be bought right now at a pretty good bargain. Keep your eyes and ears open! I think we’ll have some deals to look out for!

– The Sluggy One

STOCK FARMING

No, I’m not about to give you advice on how to best utilize the goats and cows and your farm. But I am going to try and sell an idea that reduces risk in those questionable times when the market seems extremely volatile. My stock just skyrocketed, and now it has leveled off, so should I sell? Or should I buy some more? What happens after my stock unexpectedly nose-dives? Should I cut my losses, nurse my wounds, and reinvest elsewhere? Or should I stick with it and hope it will rebound?

All of us would like to reduce the risk in our investments. If there was a crash-proof method that ensured that our portfolio would balloon, there would be no questions. Unfortunately, such a method simply does not exist. All we can do, however, is take some educated decisions on how to best reduce the chances of waking up one morning to notice our investment reduced to pennies.

When I first started investing, I always thought in absolute terms. If I bought shares, I bought thousands of the them. If I sold, I sold off everything. But does it have to be this way? Why? When I first invested in Wells Fargo, I but a good chunk of my money in it. When I decided to sell some shares recently after my investment increased by 150%, a nagging thought kept telling me, “It can still go up some more! It can still jump!”

This hesitation is what has cost countless investors millions of dollars over the years. Remember, you’re dealing with the stock market, and the market won’t wait for you to make a decision. I decided to sell off most of my shares in Wells Fargo, but still kept some money in it so that if it does take another leap, then I can still make a decent amount of profit. But if it happens to plummet, then it won’t hurt so much, and at least I can still walk away with hefty gains.

Of course, Wells Fargo isn’t in such a dire situation. I think that this company has proven its resiliency over the past year. But for those of you who are investing in some shares that are a little more shaky, this idea, when applied with a balanced approach, can tip the delicate balance of risk vs. rewards in your favor. You can increase your profit yet cut down your risks by gradually shifting some money out, but still keep some money in that stock in case it jumps up.

How much should you leave in? I base this in the dollar amount that equals the amount of risk I am willing to take on such a company. For example, I recently sold off shares of LJPC because I felt that I made a good amount of profit from that company, but I knew that even though this company doesn’t seem to have an extremely bright future, it might be bought out or merged, which often times makes the shares jump up. I was fully aware that the chance of this happening was slim, so I left $50 in LJPC. Now, if the company crashes, it’s not a big loss for me, but if it happens to jump, then at least I’m still in the game (even if it’s not by much, at least I won’t completely lose out!).

It’s important to keep in mind that this is a juggling game that does require some research and energy, but can help save you from making some terrible mistakes in the long run. After playing with this method for some time, you can develop a sense of how to weigh your risk in terms of dollars, and make more informed, less risky decisions on how much money you should leave in a certain company’s stocks.

As a mild-risk investor, I do my best to not get caught up in the “what ifs” of life, because those “what ifs” will haunt you forever. You can only base your feelings towards your investment on what you currently have, and make educated decisions on what works best for you. I’ve been practicing this method for a few months now, and it has worked wonders for me. Sure, my rewards might seem modest at first, but if you take into account the amount of losses I avoided by using this method, then you can see the advantages of learning how to perfect this method.

-The Sluggy One