And to his credit, he’s not trying to make spending money for the latest Wii game or other frivolous purchases. He’s got his sights set on college and starting a business someday.
The kid made a killing on a small cap biotech stock that I told him about last year, and now he wants to put the funds to work in some solid dividend payers.
So, this weekend we combed through dozens of stocks as I discussed the pros and cons of each one.
One basic concept that came up several times that all investors should be aware of is the idea of risk vs. reward.
It might sound overly basic, but you’d be surprised what you can learn (or re-learn) through the eyes of a ten year old child…
His eyes lit up when we talked about stocks with 5%+ yields, but these were riskier opportunities than a company like Kimberly-Clark (NYSE: KMB), which has a 3.7% yield.
Sure, Kimberly-Clark could see its margins get pinched, lose market share or suffer any other affliction that negatively impacts a business. But chances are it’s going to continue to grow sales, earnings and its dividend at a slow but steady pace as it has done for decades.
The 5 percent yielders had unique risks. For example, there were the healthcare REITS that could be impacted by the Supreme Court’s decision on Obamacare or any reduction in Medicare reimbursements. He was interested in AT&T (NYSE: T), but that company has all kinds of technology risks, not the least of which is people dropping their land lines at an increasing rate.
Chances are, Kimberly-Clark isn’t going to shoot the lights out as far as gains in its share price. As a consistent dividend payer, it will probably do a little better than the overall market.
AT&T, if it executes properly, wins some big contracts, could be a strong performer. Same with the REITS.
So, by the end of our discussion, he was clear that if you’re going to take more risk, you should have the potential for more reward.
Active traders should always consider risk vs. reward. When I make a trade, I know where my exit will be before I place the trade. I also try to figure out what my upside is. If my potential gain isn’t three times what I’m risking, I don’t enter the trade, no matter how confident I am.
When I trade options, I use a two to one rule for speculating (although many times, the return is higher).
When investors or traders enter a position, they are often focused only on the future gains and don’t pay enough attention to risk. Knowing in advance that the higher potential means you need to be able to withstand more volatility will help your success ratio and enable you to enter positions more intelligently.
Armed with that new information, my son has a much clearer picture of how the market works and is weighing his options. He’s got a few stocks on his short list and will be putting some money to work soon.
Before we wrapped up our lesson, I told him that we were in the middle of a sell off and he immediately responded, “Good, that means the prices will be cheaper.”
That’s my boy.
————————————————————————————————-
Best Forex traders worldwide, give you advice for FREE to buy or sell. ZuluTrade converts this advice to a live trade in your broker account automatically, again for FREE! Unique service, I have already opened an account!
http://moonlightforex1.zulutrade.com
————————————————————————————————-
Marc Lichtenfeld
Contributing Editor, The Tycoon Report
Marc Lichtenfeld, Senior Analyst at Investment U, began his investing career at the trading desk of prestigious Carlin Equities in San Francisco, CA, where each day he executed dozens of trades for a varied and demanding base of clients.
During his tenure at Carlin, Marc outperformed both the S&P 500 and the S&P Healthcare Index by a wide margin.
But he really hit his stride at Avalon Research Group, where as Senior Analyst his buy recommendations advanced a full 17.8% versus the S&P 500’s 5.9%. When Marc wasn’t outpacing the S&P or performing his myriad other duties at Avalon, he found time to create, staff and manage their Technical Research Products division, and to develop another of his many passions — writing.
Marc looks at the market through the skeptical eyes of a born journalist. As a columnist for The Street he has broken several stories on companies in the biotech sector, winning the admiration of readers and the grudging respect of “insiders.” Marc has published his work in the online version of The Wall Street Journal and The Street, and he has been featured on NPR’s popular “The Story.”
Marc’s gift for seeing what others overlook has made him a champion contrarian investor. His “against the grain” recommendations (including shorts) gained 12.6% annualized versus the S&P 500’s gains of only 0.5%.
We are pleased and proud to be able to add Marc Lichtenfeld’s contributions to theTycoon Report.
moonlightforex 