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Quick Buck Stocks (Part 2)

8 November 2007 - Features - Editor

Quick Buck Stocks (Part 1)

Attractions and Limits of Alternates to Stocks

Risks and rewards may be inextricably linked for individual stocks, but the best investors use hedging principles to achieve excellent financial performance levels without taking uncovered risks. The cultural roots of investing in stocks, which prevailed during the early years of the previous century, are substantially different from those marketed today.

Widows, orphans, and parishes were typical customers of fiduciary professionals in the early years, and a prudent approach to preserving capital, developed as a result. People valued steady returns more than dream gold rushes, but vigorous external marketing has changed the scene since the second half of the 20th century.

Surveys show that pension funds, financial institutions, and other bodies which own or control bulk investment funds, have quadrupled their exposures to alternate investments, as opposed to main line securities, in recent times. Alternate investments have taken center stage because they have potentials to provide superior returns consistently. However, operating such sophisticated instruments as hedge funds and derivatives call for exceptional skills, and this takes us back to simple stocks as the best compromises for retail investors.

Balances of Prudence and Profits in Stocks

Folklore and misconceptions about hedge funds plague the profits of simple investors who know only how to trade in stocks. A hedge fund may reduce risk rather than increasing exposure, and use derivatives for cost effectiveness rather than to take on additional hazards. Retail investors can use the same approaches for stocks, hedging forecasts, and keeping capital liquid to meet call and put options. Similarly, investors should be focused on their absolute returns rather than on touted indices. No risk, no matter how potentially profitable, is worthwhile if contingent actions are not firmly in place.

Selling short is a typical example of how hedging can produce quick profits without undue risk, and from negligible capital. Most investors make the simple mistakes of selling only stocks which they own, and failing to recognize prevalent prices which temporarily exceed inherent values. Hedging is not a matter of genetics but of learning a skill: perhaps more needs to be done to spread financial literacy. It does appear, at any rate, that there is no dearth of ways to make quick bucks from stocks!

 


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