This week I will relate a real life story from a subscriber to an Australian newsletter. This story highlights what is probably the biggest problem with newsletter story writers. This problem was identified in one of the comments, by Ralph, to last week’s blog.
In David Letterman style, to a drum roll, the NUMBER ONE BIGGEST PROBLEM with the great majority of newsletters, especially those that write wonderful emotive story copy, is: THEY VERY SELDOM PROVIDE SUBSCRIBERS WITH A SELL SIGNAL.
For a portfolio of capital to make profits in the market on a consistent and sustainable basis a number of ingredients are required: viz., entry, exit, risk management and position sizing, all of which have been covered in some detail in my blogs over the years. Here’s the kicker: as important as it is, the least important of all the ingredients for ongoing successful active investment is the entry.
And which do emotive copy writers spend the most effort on? You got it, the entry. And most give hardly any or no coverage of position size relative to overall investment capital, managing risk or when to exit.
This is especially so with stock market emotive story writers. They prey on one’s emotions and lack of knowledge through emotive writing, appealing to the reader’s fear of missing out.
You see, it is a total unknown when the brilliant moving story that they have written about a stock, commodity, geographical area or sector will unfold, IF EVER. So when is it time to exit? When all the story has unfolded or just parts of it and, if so, which parts? As long as the story hasn’t yet unfolded it is implied that the subscriber should hold until the story does unfold. It may never unfold! And here’s the really important fact: THINGS CHANGE!
One newsletter subscriber told us his story. I have heard many over the years but this one sticks in my mind as it was quite recent and his loss was large. Like many before him and I’m sure many after, he was sold hook, line and sinker into a stock by emotive story writing. As a result, he rode the stock price up from around 30 cents to $1.80, adding to his position along the way.
In the absence of any money management strategy provided by the newsletter, his emotions, in reaction to the emotive writing, determined how much capital he should place in this single position.
He was in a risk-less state of mind created by such a well written story about this particular stock, he could not imagine the possibility of downside. He was emotionally attached to the subjective story about the stock rather than being objective about his share holding.
In the absence of any sell signal and still emotionally attached to the story, he held and held… and rode it all the way down… and down… and down, waiting for the story about the stock to eventuate. It never did. Or it did and it just wasn’t anywhere near what the story writers had written. Or ….. THINGS CHANGED.
The stock now trades around the 4 to 5 cent level.
This investor lost $150,000!!
Exit criteria are absolutely necessary. If for no reason other than the number of variables that affect any one stock at any given time are far more than any investor can follow and comprehend all the time, be that an individual or otherwise. Certainly more than are contained in a well written emotive newsletter story!!
If you want stories, read a fiction novel. If you want to grow your portfolio capital, become objective and consistent by preparing and executing a well-researched, structured and rigorous process.