Stock lesson III

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Set a realistic goal, e.g., 20% return in one year. Don’t get too carried away from other people’s success and try to emualte it without learning its risk.

I have some hefty goals in the past two years. To be more exact, although I don’t have a number (for percentage gain), I know I have some wild expectations from time to time. When I bet on the earning reports of Netease (NTES) last November, I have two chances to make 10% gain but I was expecting more. Eventually I lost 20% instead because the actual earning report is not as good as wall street expected. Note the “Wall Street expectation”. We know the stock price is ultimately determined by the earnings (how much money the company make), but in the short term, it is also related to the Wall Street expected earning and the actual earning. If it beats (like Google did in last few years), the stock soars; if it misses, the stock tanks (like DELL did lately).

OK so much for the expectation. Back to the goal, besides the percentage gain. I think we also need to determine how much money we want to put in the stock market. This is important because we also need to pay bills (food, cars and house), and save for retirement. I like Jim Crammer’s “mad money” definition on this. Basically as the name suggests, we should only put the money we don’t need to use for a while (maybe 6 months to a year), a.k.a., the mad money into the stock market. I made mistakes on this because twice I had to sell the stocks because I need the cash for something. We should never let this happen. This is just a sign of poor budgeting. We should sell the stock only if “we think the stock price peaked, or we are confident there are other investment opportunites with better return/less risk”.     

This planning and expectation thing also applies to other aspects of life very well. I think a lot times we feel disappointed about someone or something because we had too high expectation. Another good example, Saint Louis Cardinals won the 1st division series games against San Diego Padres this afternoon. Because a lot people expect Padres will win (low expectation for Cardinals), I feel very happy now.  

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