Optimism is nice until reality sets in

As featured in the Herald Sun – Friday 29th July 2016.
By David McCulloch – Market educator and consultant to Share Wealth Systems

Everyone wants to be a winner; at least, they think so. Unfortunately, most are not willing to perform the tasks necessary to become a consistent winner.

Winners generally achieve success by being focused on a goal. Being focused allows winners to remain committed to the tasks at hand. Most winners perform a lot of hard work; including a willingness to deal with sometimes mundane duties. Most of all, winners perform with an “I am responsible for both my failures and successes” attitude. Just the other day a friend of my daughter wanting to learn about the markets exclaimed, “Have you seen the price of the company that makes that Pokemon go app….I reckon that’s got to be a good thing, I’m going to buy some”. I admire him for having an interest in the markets at such a young age, but clearly the focus here is based purely on optimism, and the risks have been completely ignored. Who knows, he may be right, but a winning investor will always consider the risks first…always.

So, how does the would-be investor start to become a success? By focusing on the tasks at hand. Most of all, treat trading as a business. And, as in any business, money management is critical.

Money management, next to trend, is probably the aspect of investing most overlooked by smaller investors. People, by nature, are generally optimistic and the amateur investor often acts instinctively. Unfortunately, this instinct or optimism is often the undoing of the inexperienced.

When a person enters a position, they do so with the hope it will be a winner. When the position goes against him, they often keep thinking (or hoping) “it will come back.” They knows they should have a stop in place, but hope keeps telling them to stay just a little longer since everybody knows “you always get stopped out the day the market turns.” Eventually, hope turns into frustration, desperation and, finally, panic, prompting the investor to issue a GMO (get me out) order.

If the investor hasn’t learned their lesson by this point, they develop the “I have to get it back” syndrome. They generally rush into another poorly planned position, throwing good money after bad.

Winners show several different characteristics. They enter the market knowing they can be wrong and, in fact, are wrong as often as they are right. They have learned markets don’t run on hope. They understand markets tell them when they are right or wrong. When a trade is losing money and getting worse, the market is telling them to get out. A bad trade is like a dead fish: The longer you keep it, the worse it smells.

When a trade is making money, the market is telling them they are right and to let the position ride. Winners don’t add to, or “average down” on losing positions. They dump the trade and go looking for a new opportunity. Successful investors may add to the winning trades. When ahead, they press their advantage while remembering that at any time the market can turn on them and prove them wrong. Winning investors keep it simple and stick to their plan, always. Do you?

David McCulloch is a market educator and consultant to Share Wealth Systems.