We all know in the world of investing that there is no guarantee to make money on any investment. That explains the disclaimers on just about any advertisement from the financial services industry, “past performance is not an indication or guarantee of future results…” Buyer beware as they say. Despite the warning and precautions we all read and understand… we still like the odds or probability of making money in the investment markets and venture out to put our hard earned money to work. In the process of doing this we owe it to ourselves to spend time learning, practicing, perfecting the craft of investing and trading. Unfortunately more often than not we fail to put the effort in that is needed to become a wise manager of our money.
As you can read in any self-help or personal development book there are two valuable lessons when we fail or in this case lose money. First, there is a reason things did not go according to plan; and second, we can bounce back from the loss assuming we understand the first reason and have attained the necessary education to correct our errors. The question we must ask ourselves: “are we willing to do what it takes to be consistently profitable as an investor/trader? Am I committed to learning and perfecting the craft of money management?” The answers to those two questions will hold the answer or solution to the second reason above, can we bounce back from our losses.
This begs the questions: why do we fail, lose, or quit? And, how do we fix it? Below are some common mistakes/problems and some simple solutions to overcoming each:
1) Forget to Keep it Simple. Investing is one area where the process can get complex quickly. The more complex the process the less likely you will stick with it and accomplish the objective. I like to say, ‘Keep It So Simple — You Can Do It! For me simple is the primary ingredient to success in managing money. Start with the simple, be successful with the simple, then add complexity if you feel the need. If it ain’t simple the issues below compound in our response or lack of simple. Insanity is doing the same thing wrong over and over again and expecting a different result.
2) Lack of Practice. The old saying is that practice makes perfect, and when it comes to the world of trading/investing I believe that is true. The key is to building a solid foundation and educating yourself in the areas that match the style and type of investing you want to perform. While you practice the process of investing and trading focus on building rules and techniques that fit your personality. If we attempt to do things that go against our nature or beliefs we will only end of hurting ourselves financially in the end. Know why you are investing and focus on accomplishing the why versus a random strategy. Being a good investor is a result of doing the process well, and that comes through practice.
3) Change Course Midstream. Rationalization. Emotions play an important role in the process of investing and trading. The challenge comes when we buy a specific investment with a specific plan laid out relative to time, entry point, stop/maximum loss, target/taking profits and risk, but things don’t go according to the plan. This is where we change course due fear, greed, jealousy, etc. We lose sight of the goal and anxiety or fear step in to produce irrational actions. The key is to persist in what must be done according to the plan versus doing what should not be done. This could be selling too soon, holding too long or never buying the position in the first place, i.e. procrastination.
4) Dismissal of Mistakes… Ego. Face your mistakes and accept responsibility for each trade you make in your portfolio. Blaming the market isn’t going to do you any good, the market is always right. Investing is not about being right or wrong, it is about making more money when you are right and losing less money when you are wrong… in other words it is simple math, making more than you lose. Dismissing mistakes is a mistake! Learn from them, reapply the basics and focus on maintaining your discipline. Losses are a part of investing, controlling the size of those losses is a matter of discipline over ego.
5) Lack of Discipline. While this topic tends to speak for itself it is important to learn discipline of trading and investing using number one, practice and number two being persistent, and number three not allowing our emotions to change your objective but learn to push through the fear and resistance. It is not important to know what the market will do… It is important to know how you will respond to what the market does. Proactive reaction to the market comes from experience through disciplined practice. You get to chose your response! The challenge comes in understanding we will never eliminate emotions in investing, we will all experience emotions, but we can keep ourselves from being controlled by our emotions. Learning to cut our losses and letting our winners run is the process by which we react and control our emotions with discipline through practice. This is where commitment to the process truly begins and ends.
6) Lack of Why. When teaching money management I always start with the question; why are you trading/investing? Too often the answer is, ‘make money’. I say, dig a little deeper… is it satisfaction, financial freedom, security, happiness or self-worth? Many times it comes down to a feeling and that is the root of the motivation or the why. If we are not in tune with our ‘why’ the challenges listed here plus others will get in the way of achieving our financial objective or the emotional need being attained. Know what your ‘why’ is and you will be ahead of all most everyone else.
7) Lack of Risk Controls. To quote former Presidential candidate Ross Perot, “the devil is in the details.” Managing the risk of money invested in the market is paramount. One simple process is the use of stops. I have heard many reasons not to use them, but none of them measure up to the one key reason to use them… Take the emotions out of the selling process in the heat of the battle. The challenge with selling is emotions period. Those emotions are compounded when the market is working against you. If you are losing money and need to cut your losses it is hard to sell. If you can take away the emotions on placing the trade versus it executes automatically without your interference, you build in a control process to keep your emotions from overriding our logic. Risk management is the heart of money management.
Control, Alt, Delete are the three key on a keyboard when pressed simultaneously will reboot the operating system of a computer. It erases the RAM and lets you start over. This process is most often used when the computer is stuck, hung up, or simply will not allow you to enter any executable commands. By clearing the RAM and allowing the computer to return the foundation or starting point we get to make progress using the machine again. Sometimes in the investment/trading process we need to hit Control, Alt, Delete! We are out of control, cluttered, not thinking clearly and unable to go forward. Stop and reboot, return to the foundation and principles of disciplined trading, then go forward with a clear mind.
Many challenges face us as investors and the one most common is looking for the perfect strategy or system for investing. I will say after thirty plus years of investing professionally and personally I have come to the sound conclusion that there is no perfect strategy. In fact, if you are looking for the holy grail of investing it only exist within you. It is the system you design, practice, implement and use successfully. We all struggle and get off track, the key is to have a good foundation and strategy that will always bring you back to the basics and keep you focused and committed to doing it right simply.