In stock or any investment, before aiming for rewards, one should consider the potential risks first:
– what are the threats (poor business, bearish price, weak economy, etc)
– how it may fail (high debt, cashflow issue, political / legislation, etc)
– how likely it may fail (record of proven business, economic moat, etc)
– when it may fail (global financial crisis, business crisis, etc)
– how bad is the potential loss (0%, 10%, 50%, 90%, 100%)
.. and many more factors to consider.
From physics point of view, an object only needs 3 legs to be supported in a stable position (三足鼎立), similar to stock investment with diversification over 3 chances:
– 3 Minimum Analysis: FTP (FA + TA + PA) = Fundamental / Technical / Personal Analysis with comprehensive views
– 3 countries of stocks: minimize regional crisis
– 3 sectors of stocks: minimize sector crisis
– 3 timing of entries (at low optimism) / exits (at high optimism): minimize surprises at certain period
– 3 types of stock players (defender – dividend, midfielder – dividend + capital gains, striker – capital gains): well-balanced investment team
– 3 timeframes – Short term (ST), Mid term (MT), Long term (LT): full coverage of trading and investment period
– 3 prices in SET in trading plan: Stop Loss / Entry / Target Prices
– 3 actions: Buy / Sell / Do nothing (Hold or Wait)
…and many more “3 legs” in risk management
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