Making Money from the Markets
I get a lot of e-mails from people who are new to the stock market and are keen to make money. Nothing wrong with having a go at being a stock market winner - I'm certainly glad I took the leap. But it does worry me when I get e-mails from people who, it seems, cannot really afford to be a stock market loser if the market turned against them.
I'm talking about e-mails like this one from Frank:
"Basically I have recently been made redundant and, at my age, do not envisage taking on full time employment; but I do need to have a modest income over the next three to four years, and am considering frequent trading on the stock market, i.e. as a day trader.
I have some experience of trading but, like many others, I lost a packet on the technology bubble bust.
My ambitions are, I believe, quite modest - I wish to make say £75/per day, but where do I begin, and how do I know which stock to choose? I appreciate that there are winners and losers, but a winner now and again would be helpful."
What a question! My gut reaction to Frank's e-mail is that he shouldn't invest in the markets. That's because he NEEDS an income, and he wants it from the markets.
That's a problem - I believe you shouldn't try and make money from the markets if you can't afford to lose some of your capital and, judging by the feel of Frank's e-mail, I don't think he can afford to lose money from his redundancy cheque.
Perhaps it's partly my fault. Maybe I make it look like making money from the market is easy when it isn't. But I can afford to lose every single penny sitting in my ISAs/PEPs. That's because I have a very decent income coming in from other businesses.
If I was made redundant and needed an income, the last place I would be going is the stock market. Frank really needs to look at possibly putting the money in a high interest account and look around for some work he can do from home.
I feel he should stay out of the markets - he may "only" want £75 a day, but what he must realise is that he may LOSE £75 a day.
Here's a similar e-mail from Sohail:
"For a while I thought it was the way out of the rat race, but now I think I was wrong. Last week I lost more than £5,000 on the Dow fall. Any suggestions on where I can go from here? Your advice would be very helpful, as you seem to have gone through the routine of trying to get out of the rat race, and have seemingly succeeded."
I think my major message to Sohail is: Do not rely on trading on its own to escape the rat race. Profits from trading can obviously never be guaranteed. I would never rely living off an income from profits on the market - that's why when I made a considerable sum between 1999 and 2001 I re-invested the proceeds in a good steady cash business.
You also need a hell of a lot of capital if you really want to live off trading. You'd be doing very well to make 15% a year or so on £200,000 capital - that's still only £30,000, and there's tax to pay.
My view is to never ever consider the stock market as your only source of income unless you are extremely talented. Treat all profits as if you could give them back in the future as losses. And just because you've made a few gains, don't fool yourself into believing that you're really good. The market will bite you in the bum the moment you feel smug - I promise you!
My suggestion to Sohail and others similar is to quit the rat race, and try and come up with at least two new sources of income. Play with the stock market if you want to - but put in what you can realistically afford. As the old saying goes, don't play with money you can't afford to lose.
The markets are up and down like crazy at the moment, aren't they?! I make no predictions but I've made my portfolio more defensive and added a few shorts. I suspect it's probably not a time to take "punts" on shares, but stick to more defensive, decent companies with a good cash flow.
My favourite defensive plays right now are Windsor, VP Group, Kier, Costain, and Diploma.