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Stop trying to set Profit Targets

Taking on the Market

Setting targets on how much one hopes to make over a year (whether percentage or actual amount of money) is completely futile IMO. You might as well set a target for the outside temperature!

My aim is always to make as much as I can when the market conditions are good, consistent with being reasonably sensible (e.g. steering clear of hopeless illiquid penny stocks, and always using tight stops); and to lose as little as possible when the market starts getting nasty.

There is a great danger, particularly, but not exclusively, amongst newbies, of 'freezing' when the market starts heading steeply south, and then selling only when prices have fallen a significant distance. I suspect that this is what happened to many people in May, for instance.

My first real bad trading year was in 1994 when I basically did precisely that. It is very easy to kid yourself that 'good shares always come back'. Well, they usually do - but they can fall a long, long way first. But in any case, what is a "good share"? The only definition which makes any kind of sense to me is "one that makes money for you". And if it has fallen a long way below your buy price, it's hardly fulfilling that function, is it?

Nope - 'small losses' is the key, IMO. I accept that the 'big profits' side of the equation is a bit trickier; but my advice here is: rather than looking for shares that other people are raving on in internet boards, look yourself, using Sharescope and/or Toplists and/or any other means (the FT prices pages was how I started out).

Find shares that are in up trends - preferably (a personal view here; many other traders will disagree) ones that haven't already gone a long way without a significant pullback. Hop on board, and try and stick with the ride, avoiding the twin pitfalls of either jumping out too easily when there is a wobble, or of falling in love with it, and riding all the way down with it again!

No, it isn't easy. Why on earth should it be? Let's face it, most of us do this because we either want to stop working, or are doing it instead of working!

Staying in cash all year round may well be "safer" than being in shares; but only because the returns are so meagre. Given our beloved Chancellor's addiction to picking our pockets in the shape of (in my case) 40% tax on that interest, together with the fact that "real" inflation, as measured by costs that most of us can not avoid, e.g. council tax and fuel bills, is a lot higher than the official figure, being in cash means that one's capital is, in real terms, being depleted.

And furthermore, if you live off the (taxed) interest of your capital, you are in effect eating in to that capital at quite a rate.

A final point. There are some people in this world who are not suited to trading or investing. It's a painful fact, but one that has to be faced. Inability to trade successfully is no disgrace, any more than inability to be a successful brain surgeon or physicist is. The difference is, there are many more of us who would like to be successful traders than to work in these more esoteric professions!

Personality is key. Ability to face up to losses twinned with the ability to pick winners are two vital factors. Great intelligence is not necessary and is arguably a handicap, because great thinking power means one is always wanting to weigh up all the pros and cons when selecting shares. Trouble is, a lot of the time, good instincts and sheer bloody speed are much more important! I say this as one who has a brother who is far more intelligent than me, but whose trading skills are, shall we say, somewhat lacking.

Many people who have run their own businesses are hopeless at trading. Why? My guess is that such people are used to, and enjoy exercising, a lot of control. One has precious little control over the stockmarket! All one can do is, like a sailor at sea, ride the waves, and try not to drown ;-)

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