Have you ever wondered how in the world large businesses or corporations such as GM or IBM just manage the small day to day tasks of operating and managing such huge concerns? It is just mind boggling to think about the millions of little details which have to be handled just to keep the doors of such complex corporations open! I'm not a CEO or CFO type and I certainly have no training or expertise in those areas, but I have spent a lot of time talking to folks whose job it is to run large and medium sized companies in an effort to understand how to better run my own, comparatively tiny business. What I found was truly amazing, if not totally refreshing! What my searching uncovered was really encouraging in that it showed me that their businesses, no matter how large or complex, all have basically the SAME three requirements. The details are a bit different to be sure, but they all depend primarily on effective management and sound decisions in three areas; cash flow (or income), a source for stabilization of that income, and long term growth. I describe this a 'encouraging' in that my small business ... in fact ALL businesses ... have the same needs in the same areas, no matter the size of the concern. Let's take a quick look at all three of these areas. The first and most important of the three is the need for consistent, sometimes daily CASH FLOW. This area is prioritized above the others because it is here where the money is made to meet expenses of continuing in business. Face it .. business have bills to pay. General Electric must meet it's obligations just as surely as we must in our family's daily existence. AT&T has daily obligations ... IBM and Microsoft face an overwhelming amount of daily expenses ... YOU and I are no different! We just operate on a different scale ... thankfully! To the extent that a business is able to meet it's expenses - pay it's bills, if you will, it should, all things being equal, remain a viable business concern. The instant a business fails to generate these very short term funds is the instant it begins to go out of existence! STABILITY in cash flow generation is almost as important but is prioritized down a notch. The main reason for the 'downgrade' if you will is the nature of the need for cash flow. The expenses must be met, even if on a 'hit or miss' basis. Consistently generating that money is 'stability', crucial in need but behind the actual 'generation' in position. It is important to be sure as stabilizing at a level LOWER than necessary to meet expenses is unacceptable, for obvious reasons! This stability is achieved in most business by keeping a 'pipeline' full of forthcoming business, designed to provide regular cash infusions periodically. In other companies, stability can be achieved by ... well, just having a ton of cash on hand! Perhaps one of the best examples of this is Microsoft. During the recent onslaught of government or regulatory attacks accusing the software giant of monopolistic practices, fines in the millions of dollars were tossed about as potential 'punishment' for these alleged violations. Can you imagine how LITTLE would be the impact of a $10 million "fine" on a company that has $50 BILLION 'unattached' in the bank??! The final area of consideration is long term GROWTH. Once a company has developed it's business plan to the point that it can remain a financially viable entity, it must then concern itself with the concept of getting bigger. While specific growth is different for everyone the fact remains that you can't just 'stand still' in business. You're either growing or dying! The easiest way to grasp this QUICKLY is to think back to the first job you had. Focus on the INCOME that job provided and now try to imagine existing today on that income. The same principles exist for businesses as well. You can't stand still there either! They must meet (and beat) the competition, so research and development are necessary. Technological advances come along and the number of employees must be increased to handle the new jobs these advances create. We could spend volumes on this aspect, but I think you probably get the picture! So, all businesses, large or small have these same three areas of concern; cash flow generation, stability and growth. Now, let's try to pull these concepts down to a level where we might be able to see a direct connection to our trading businesses. We are traders. Trading is our business. Let's agree that we have needs for cash flow, stability and growth in order to manage our trading business more effectively. Trading is not just throwing money at the stock market in some 'willy-nilly' fashion. We have to define our trading business in such a way that we can apply sound business principles to insure that we truly have a 'going concern'. Here's how I do that in my business and how I teach others in the trading labs to do the same thing. Lacking both the time and room for a detailed description let me summarize what we do... First, my cash flow is a function of my daily, short term trading. This is not day trading by design. Rather, I use one of several strategies designed to get into a trade and then back to cash in a 1-5 day period. Trade only the journey the stock normally takes each day, being content with SMALL (daily) profits. Here are some givens: You will NOT be profitable on every trade. Your business does NOT depend on the success of your next (or your last) trade, so EMOTION has no place on the trading floor! Stability in trading comes from the same place for us as for any other business; either a full pipeline of pending business or CASH in the bank. We can overcome a shortfall in COH (cash on hand) with successful medium term trades (30-90 days in length). I like to use covered calls and/or spreads to provide that regular cash infusion providing a leveling effect in the short term account. Growth comes from successful long term (greater than 90 days) trading. For this, my favorite strategy is selling naked puts on high quality Blue Chip stock (however you define 'blue chip'). A quick trip down this lane shows us picking out 'chippers' on weakness, selling puts having strike prices just below earlier PEAK values. The operative here is that we don't really care if the stock regain these earlier values ... just moving toward them will give us most of the profit we seek! So there we have all three management aspects of any successful business; cash flow, stability and growth. Treat your trading like a business and it will treat you like royalty! Make it a great day! Bob
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