The WisdomFolio

Separating the Men from the Boys

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That title sounds chauvenistic, but people don't say "separating the women from the girls" or "separating the adults from the children."

So now all the rookies get to experience a bear market. Thousands of people every day become initiates to the world of Wall Street. The allure of the opportunities for fortune are too tempting to pass up. Trading stocks in a bull market seems easy. Sometimes even your mistakes are rewarded with profits. The novice investor feels like a genius and starts to take outsized risks. Their online brokerage account becomes their cash cow.

But now, reality is setting in. The market is in decline. Trading strategies that used to generate windfalls fail miserably. Even stocks of solid companies with good earnings are going down. These novice investors wonder what in the world is going on. This isn't how it's supposed to be!

Yes it is.

And this is where prudent risk management comes into play. Learning to cut losses to keep them small. Being patient and waiting for the best times to buy. Taking some profits quickly rather than increasing the position. Exploring short selling. These are skills that can only be mastered in a bear market. They are important lessons to learn in order to survive.

I never win these stock market competitions. They reward people that ignore those risk management skills. And in a bull market and using phony money, there's always going to be a few people that get lucky and bet on the right stocks and rack up huge gains. That may still happen in this bear market. But at least now I have a chance!