Joe Copia's daytrades/investments and thoughts Message Board

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Strategies & Market Trends : Joe Copia's daytrades/investments and thoughts

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To: Joe Copia who wrote (24307)	3/20/2002 3:33:16 PM
From: Joe Copia	Read Replies (1) of 25711

Q: I've been pretty successful trading with our savings. How do I "turn up the volume" on the amount I put to work? Is it wrong to feel some urgency in growing the amount I put at risk? Thank you for a good, and tricky, question. In finance, part of the equation for profit is that "return increases proportionately with risk, to the point of bankruptcy." This simply means that returns are directly proportional to the amount we're willing to put at risk, until we reach a point where the risk collapses our pop stand. There are many subtle reasons behind the double-edged sword of increased risk. Running a small book-making business tempts the criminal to expand. Expansion attracts the attention of the authorities or other criminals, and the small timer is busted. Running a small collection agency tempts the entrepreneur to expand, and the increased staffing and resources lowers service levels, causing core customers to leave, damaging the business. A successful small machine-parts manufacturer occupying a great little niche is tempted to expand. Expansion attracts the attention of competition, and margins drop closer to the cost of funds. A start-up gets hooked on venture funding. The efficient operation is tempted to expand beyond revenue growth, costs get out of hand, and the VC ends up taking over the business. A growing and successful Internet business runs out of equity sources and is tempted to offer a debt round. The interest burden causes the banks to call the loans and the company moves into rough seas. Each of these examples has their equivalent in trading, even if we're only a one-person operation working out of a spare bedroom. It's logical and easy to see that bigger amounts in play mean both bigger potential losses as well as gains. What's less intuitive are "under the radar" risks where crossing certain thresholds attracts a variety of adverse attention, and "step function" risks where adding money to an account has to be in bigger increments to realize bigger gains.

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