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Risk Control

Everything you invest in has risk so you want to do your research before you put your money on the line.

For example, when McDonald's opens a new restaurant (please, don't call it a hamburger joint) they will investigate as many of the relevant facts as possible. The demographics of the area - age and income of those within a certain driving distance. Who, where and how much is local competition? The number of cars driving by each day will be counted and will be tallied at one-hour increments. Local labor costs must be figured in. The cost of acquiring the land and construction of a new building or rental of an existing location is estimated. These and many other factors are added up to get an idea of the approximate operating costs and amortization of fixed assets.

When they have all that then they will be able to figure out how many hamburgers will need to be sold to break even. This true and meaningful research to decide whether to risk money for investment - in this case return on investment or as Wall Street calls it, ROI.

Unfortunately, Wall Street also tells you to do similar research before you buy stock in a company. There is almost no correlation between doing research for ROI and doing similar research to determine if a stock is going to go up. There are thousands of companies that have excellent Operating Statements, but the stock goes nowhere year after year. One of the easiest ways to see this is to go to www.bigcharts.com , type in the symbol of the stock and check back on its price performance for the past 5 to 10 years. If it doesn't have a nice steady upward movement it will be best not to buy it. Also if the price action is extremely volatile you should also pass even if your broker says to buy it, especially if your broker says to buy it.

The type of research brokerage firms tell you to do means absolutely nothing as far as finding out if the stock price will go up. Wall Street-type research is basically worthless.

Let's says you have done some intelligent research and have found a stock or mutual fund that has been going up for the past several months or even years (these are very rare) and you decide to buy it. There is no guarantee it will continue to go up, but you want to limit your risk. How? There are a couple of very simple things you can do.

The first and simplest is to determine how much you are willing to risk in this investment. Maybe the stock cost $60 per share and you are going to buy 100 shares for $6,000. You decide you are willing to risk $1,000, no more. At the time you make the purchase you also put in another order with the broker. Tell him to place a Good Til Canceled Stop- Loss Order for $50 per share. If the stock drops to that price you are out.

The second way is to go back to the Internet and the above web site and print out a chart for the past one, three or five-year time periods. Then draw in a trendline along the bottoms of the price action. Connect a straight line along the lowest price. Usually you will have at least three places that will hit this line as it is progressing upward. When that line is penetrated you want to sell out.

Investing in anything without risk control could mean large losses of capital. Wall Street trained brokers are not taught risk control. If you want to preserve your capital it is up to you.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005

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