Thursday, May 4, 2017

Conquer Guilt

Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The 'sure thing' boat never gets far from shore. - Dale Carnegie

As traders/investors you surely understand profits are hardly a sure thing. Even the "Market Wizards" make mistakes and pay the price. When you experience what you consider to be severe draw-downs, don't feel bad about it. You're not the first person to have this experience nor will you be the last. Understand that psychologically it is almost impossible to avoid feeling uneasy. Facing losses is one of the most difficult issues to deal with emotionally. If you are an active professional, your identity and livelihood are on the line. If you are part-time, it's frustrating to feed your account from your day job, wondering if you'll ever make back the money you've lost. Depending on your personality and experience with the market, you may have trouble handling feelings of loss, guilt, and fear. Unless you get your emotions under control, you'll never be able to get back on track.

As normal human beings we feel guilty when we break a personal moral rule. Losing money can make almost anyone feel guilty. We want to live by the rules our parents and teachers taught us, and many of them taught us to work hard and save our money. A requirement of trading/investing is that we risk our money in hopes of monetary gains, and risking money may seem to go against how you were brought up. Well, if you want to make huge profits in the end, you're going to have to risk money, and in all likelihood, you're going to lose at least some of it before you develop the skills you need to trade/invest profitably across a variety of market conditions.

Are you going to lose money? Yes. Is it morally wrong? No. You must identify the beliefs underlying your guilt and change them. Ask yourself first; is your guilt warranted? Feelings of guilt are there to protect us; it isn't a good idea however, to rack up so many losses that you can't pay it back easily. If you trade money that you can't afford to lose, or that you will have difficulty paying back; guilt is a natural reaction. You must make sure that your losses are reasonable and are actually a short term setback. It will be hard to control guilt if it realistically reflects losses that will permanently harm your financial security.

If you determine that you can actually afford trading losses, and still feel guilty look at possible assumptions that may underlie your guilt. One possible reason; you may have been taught that money is sacred and that it is morally wrong to risk it and lose it for any reason. If you want to trade actively, you have to change the way you look at money. To a serious trader, money is merely a vehicle to make more money. It is just part of the tools you need to trade successfully. They think of "money" as "points" used to keep score of how well they are doing. A second possible reason you feel guilty; is the need to be perfect. You believe that you must not make trading errors. You may believe that if you do, you are inadequate. Losses are not personal; losses are a natural part of trading. It's possible that you are merely experiencing a temporary change in market conditions. You may need to change your approach, but it doesn't mean that you are inadequate. It just means that you need to explore more options. When you feel guilty, then you mull over about how bad things are. There's no time to mull while actively trading, however. It gets you nowhere. If you want to stay ahead of the crowd, you must actively problem solve. You must find new trading solutions, and guilt distracts you from freely searching for creative, fresh solutions.

Thursday, April 20, 2017

The Mindset of the Trader

I think anything is possible if you have the mindset
and the will and desire to do it and put the time in.
Roger Clemens

Way back in the 1960's and 1970's one decision stocks became a popular way to invest. A one decision stock is one you buy and hold on to forever. Along with this philosophy a select group of stocks became known as "The Nifty Fifty". Fifty stocks that were the ultimate one decision stocks; like IBM and GM. If you talk with some people who invested back then you'll sometimes hear them say: "I learned my lesson a long time ago. I put my money in the markets and lost it; Never again!"

They searched for "undervalued" stocks, purchased shares, held them, and waited for them to increase in value. Sometimes it worked, often it didn't. The buy-and-hold strategy often misleads investors. The markets don't go in one direction forever, whether the trend is bullish or bearish. Only by anticipating the twists and turns of the market can you make "significant" profits. If you are striving to become a profitable trader, you must cast aside the buy-and-hold mindset of the long-term investor, and learn to think like a trader.

The buy-and-hold strategy is still viewed as a viable trading strategy even in many business schools. Even in the wild 1990's fortunes were lost when the dot-com bubble burst, by people subscribing to that buy-and-hold strategy. Please note I am not addressing time frame. Had you purchased some of the dot-com stocks in 1995 let's say and sold them in 1998 or 1999 or even 2000, you still traded them. Your time frame just encompasses a much longer time frame than the very short-term trader.

Whether you trade based on technical analysis or prefer fundamental analysis you must try to assess the potential for that company. Are they still growing profits? Does the company have new and exciting ideas they are or will be bringing to market?

We never know for sure what the future holds. Who could have known five years ago the energy crisis was coming relatively soon and what that crisis would do to our domestic auto companies? It's difficult at best to make these forecasts.

Stock prices do reflect the companies' fundamentals most often; however they also reflect market participants perceived notion of what the future holds. Did your holding just report horrible earnings and a not so great outlook? Did their stock price decline? No! Market participants are probably now looking to changing conditions in the not to distant future, hence buying appears in the face of seemingly bad news. Don't be confused by it, listen to the market.

It may be hard to accept at first, but trading requires you to accept risk and uncertainty. It may take time and experience to accept, and you may get hurt along the way, but after a little while, you'll be able to accept uncertainty, and thrive on it.
Reprint from 2007 Newsletter