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Investing, the Emotional Head-game

Higher returns are available with this three-step agenda
In anyone’s trading experience, Anyone’s, there will be losses right along with the wins. That is true of the most experienced professional as well as the greenest novice on the globe. Even the snake oil vendors who promise trades “worth $150,000 with a 30 minute effort one night a week,” admit something less than 100% success from their system. We will have losses, I will have losses, you will have losses! Additionally, we never know where or when they will show up. That, dear friends, is the reality of trading in the market place.

The great majority of investors find comfort with their money stashed away in the market. Why has the market been so popular for so long? It has returned an average of about 10% each year for over 80 years. What a great place to just put your money and forget about it. The market has been, through the years, the default repository for billions of dollars in mutual, retirement, insurance fund monies, etc., etc. But what about the losses? The operative word in the 10% reference above is “average.” Because of the upward growth of the U.S. economy over these years, the average of the wins and losses returned the +10% figure. In the mutual fund arena, each fund invests in dozens, even hundreds of different companies, providing diversification. Sure, there have been losses, but always more wins than losses! This is how the investor can sleep at night, leaving the managers of their fund to shift dollars around to maintain the positive averages.

Now, lets do a little exercise. Suppose as a young high school graduate we started our first job and stashed $20 away every week. Let’s see, after one year (50 weeks, for the sake of argument) we would have $1,000. If we did that for 40 years, the amount would increase to $40,000. But that would be the result if we put the money in a sock. What would happen if we put that money to work those years, drawing interest? If we could put that money to work at 10%, we would have after 40 years $400,000, not $40,000.

Because of the magic of compounding, where the interest draws interest, putting money away for retirement is a very positive effort. Albert Einstein once observed that the most powerful principle in this world is that of compound interest. Now, ten percent is not a bad return for the mutual fund gang. But for a measly 2% more (12%), that $400,000 would double the return (nearly $900,000)! Higher rates of return are better!

This, in part, is what drives the trader to move in and out of the market, seeking an edge, taking higher risks than the investor who is happy with 8%. The market pays for the risks taken; higher risks, higher potential rewards (and higher potential losses). That said, since we know we will have both winning and losing trades, we need a strategy that stops the losers and runs with winners. In the words of a Wall Street axiom, “Cut your losers short and let your winners run.” That is simple and sound advice. This way, all our losers will be small. Many of our winners will also be small. That’s about a wash financially. The money will then be made on the few big winners that show up from time to time. Many successful traders claim their losses actually outnumber their gains, but they make money with a few killings and no large losses.

By properly managing our positions, we can come away with higher returns. How much higher rests on our ability to do three things: First, find a plan that works for our own


personality, second, have the inner strength to follow our plan, and thirdly, keeping an open and creative mind to adjust to the changing market personality. This is simple, but it is not easy.

The first issue requires the most time, finding, trying, using, testing, trading, different strategies and plans. It has been said that the difference between success and failure in the market is razor thin with the balance tipped predominantly to those that learn as much about themselves as the market. For example, if you’ve learned the importance of cutting a loss short, there is only one thing that can go wrong. You! You are the weak link in the chain, by hoping the stock price will go back up, by hoping for hope. Trades can and do go against us. But we never have to accept a big loss. These subtle mind-games can lead us to success, as we learn what for us works best.

Inner strength in the second step comes with the territory as confidence becomes our trading companion. By setting and executing stops, learning to create setups, exercising “If – Then” scenarios, scanning for higher probabilities, listening to quiet market voices, and managing positions, we will gain that strength. Lastly, keeping an open and creative mind comes through experience and study, finding as many viewpoints as possible and looking at every situation through many focal angles.

As we each work through these three steps, the importance of Paper-trading cannot be over-emphasized to provide experience in the many strategies. This is a low-cost education into market mechanics. One gentleman I worked with years ago paper-traded with diligence for over a year before he invested his first dollar. He was manager of a grocery store at the time, he now trades for a living. I know, many market pundits pooh-pooh paper-trading, saying its not the same as investing with real money. Guess what, nothing is the same in practice as the real thing. But does that mean we should never practice anything first? Give me a break!

Most traders have sufficient native intelligence to benefit from this three-step training agenda. You can find a trading system that perfectly fits your own personality, without going broke in the process. We all bring to the table our own risk tolerance, expectations, intuition, training and a host of other issues. All these, taken together, make each of us very unique and different. We need to match the trading system with that uniqueness. In this three-step agenda, we cannot find lasting success simply following the guidance and direction of someone else. The greatest traders are those who learn to think for themselves. This is not an arena for those who want nothing more than to be told what to do. Rather, we need to encourage trial, error, success, failure, realization, discouragement, joy, and all the accompanying emotions. I’ve said this is simple but not easy. Why is it not easy? Because it is an emotional head-game. Understanding that is requisite to success. Higher returns are possible as we control “self” in response to our selected workable system. Its that “control” that is not easy. However, once controlled, it can be easy.

About the Author

Bob is the co-founder of Pro-fundity, an Internet forum for beginning investor improvement, helping investors think and do for themselves. The difference between success and failure in the market is razor thin. That balance is tipped predominantly to those that learn as much about themselves as the market. Pro-fundity helps that happen!


 

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