Investors will typically experience a wide range of emotions depending on their level of experience. There is little in life that truly prepares us for the uncertainty of the markets. Investing in my opinion is essentially a risk management process. Understand the risk, quantify the risk and manage the risk, simple as that. To think that we ever know what is going to happen is a waste of time and detrimental to your inner investing psyche. So what are some tips for maintaining a level head when all others are losing theirs? Here’s just some that are seriously worth considering.
Firstly, there is no Holy Grail, and trying to look for one will most certainly be a waste of time, effort and money. There are a number of investing systems that work well, but a good system still won’t make money if you don’t understand risk. A quote from Curtis Faith, author of “the way of the turtle” reminds me of this. “Good investing is not about being right, it is about investing right. If you want to be successful, you need to think of the long run and ignore the outcomes of individual trades”. Interestingly in that book, the difference in outcomes following exactly the same system came down to individual psychological makeup. If you come into investing with the idea of making big money, you are doomed. This is the mindset of the inexperienced. Be patient as your best trades will take time to pan out.
Being excited and impulsive is a punters mentality and is not appropriate for the markets. If you have that type of personality trait, you’ll find investing for yourself a never ending battle. Stay relaxed and know your exit strategy. Once that point is reached, simply exit and preserve your capital. That’s your job as an investor. Every big loss started out as a small one and the professional investor takes their losses quickly and moves on.
Remember getting back in is just a commission away and is a small price to pay for protecting the further erosion of capital. If you happen to have some stocks moving in the right direction, stick with them as long as they continue to move your way. The use of a trailing stop really helps to do this and keeping things simple will allow you to implement your exits easily, and you’ll feel so much better for your actions.
If you find yourself saying, “this is a good stock” it’s time to take a step back and have a think about what you just said. There is no such thing as a good stock or bad stock and thinking like that will continue to feed your inner biases and cause you not to take action when you should. A simple game plan will certainly help and keep you focussed on the job at hand.
In the words of the great Hawthorn coach John Kennedy, “don’t think….. just do”!
David McCulloch is a market educator and consultant to Share Wealth Systems