Risk & Reward…Avoid win-or-bust trading!

Thursday, 8th April 2010 17:29 - by Robbie Burns

I've seen some real heartbreak stories on the bulletin boards and mailed to me regarding the huge markdowns in some of the Falkland Island oil shares. For instance, shares such as Desire Petroleum which halved on some not-so-great drilling news. Stories included one guy who lost £70,000 and wailed: "Now how am I going to tell my wife?" Another said that he had his whole Pension fund in Desire and was shocked to lose half of it. Many other stories abound of investors who have, at the moment anyway, ‘done their money’. While I do have some sympathy for them, part of me is also unsympathetic. First off, they didn’t seem to realise that putting money into small oil exploration companies is a real gamble. If they find good oil, fantastic, you make a mint. However, if the oil isn't there or it's not good oil, the shares will sink faster than the Titanic. But, above all, the one thing that shocks me is this - so many investors put nearly EVERYTHING they had into one or two of these risky shares. It's amazing really. I mean, would you go to a racecourse and put your life savings on a horse? You've got to have a balanced portfolio to make consistent money on the markets. Putting everything on small oil shares is simply asking for trouble. Remember, a lot of ‘hope’ is already in the prices of oil shares, so any disappointments and the shares get hammered. It's fine to have small oil shares and I sometimes do - but only in small amounts compared to my overall portfolio. Indeed, a small punt can be fun…but it should never be more than that. It's even worse than people losing money they had. Many had these shares with spreadbetting firms on credit. Their positions would have been closed out, and a chilling phone call would have been made. "Sorry, sir, your account is in debit by XXXXX, and we need the money now..." Don't have the money? Too bad. See you in court. Watch out for the bailiffs. Another point is what tends to happen after investors lose their shirt on any share, oil or not, is they hang onto them. At seminars I run there are always many who hold portfolios with shares down by 50% or more. I just think it's crazy - it's bad psychologically to start the day with a bunch of stinkers. Much better, in my view, to get rid of them and start from scratch. A hard thing to do because there is nothing harder than crystallising a bad loss. It is human nature to hold on to losers because you "haven't really taken the loss yet." But it is bad practice. After all, you can always buy back in. I don't advise people and I wouldn't personally know whether these Falkland Island shares will come back. They will if the oil is there. If not, they will retreat further. If it had happened to me, I'd have been gone by now. The main thing always is - a cliché though it may be - never ever ever put all your eggs in one basket. Otherwise, get set for a very uncomfortable talk with your Partner. For more from Robbie, please check his website www.nakedtrader.co.uk