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A subscriber recently asked an interesting question.
He was looking for a ratio to find companies that have high positive volatility meaning volatility with upward moving stock prices.
The ratio must screen out or avoid companies with volatility caused by falling stock prices – let us call this negative volatility.
It turns out there is a ratio like that called the Sortino ratio. Unfortunately, it can only be used to evaluate portfolios.
How to avoid negative volatility
We were able to find two ratios that could help him do this (send us an email if you want more information) but not all the time.
As you can imagine this is hard to do as unforeseen negative events take place all the time. Products become obsolete, customer behaviour changes and interest rates increase to mention just a few reasons.
You have to cut losses fast
The best way you can reduce negative volatility in your portfolio is to cut losses fast and to let your winners run.
Through all our testing and research, the best way we found to do this is to follow a strict trailing stop loss and to stop buying if markets are below their simple moving average.
We use both very successfully in the Quant Value newsletter.
For information on exactly how you can do this click here – Scroll to the bottom to see the flow charts
Now on to the Mind Game part…
The Mind Game
Rule #13: Getting Wealthy is different from Staying Wealthy
To get wealthy and to stay wealthy you need two completely different skills.
How to get wealthy
Think about it.
Getting wealthy requires risk taking, optimistic thinking add searching for new investment ideas. You think about growing all the time.
How to stay wealthy
But to stay wealthy you need different skills.
You have to be careful, consider all the risks, make sure you are diversified and can survive unknown events. Your focus has to move away from growth to keeping what you have.
What worked to get your wealth will not work to keep it. In other words, you must become paranoid.
You must make yourself unbreakable
To stay wealthy, you must make yourself unbreakable.
You do this by:
- Keep it low or avoiding debt completely
- Never making bets that can wipe you out
Even more important is being diversified in terms of:
- Investment strategy - no single strategy works all the time
- Country risk - be careful of home bias
- Currency risk - Think if and how you want to hedge currency risk
- Company risk - Never let a single investment get too large
- Broker risk - What happens should your broker go bankrupt
The best real-life example of how to stay wealthy is to read about the life of Warren Buffett.
You will learn that:
- His investment strategy evolved all the time
- He never used leverage if at all
- He never panicked in spite of all the bear market he experienced
- He kept his reputation intact
Your, helping you get and keep your wealth analyst
PS To find great companies that exactly meet your investment strategy - click here.
PPS It is so easy to forget, why not sign up now before you get distracted?