Psychology And Discipline -- Stock Investment (14)
Psychology And Discipline -- Stock Investment (14)
If you want to win in the stock market, you must try to understand the behaviors of different groups of players. I have talked about the behavior of the big players before, which is a very small group but with great power to influence the market. The rest is the great majority, the so-called herd. You and I belong to this group. The question is, do we want to be the smarter herd? You can if you are willing to learn.
Herd Behavior
The cardinal rule of investment is to buy low and sell high. Do you think the herd follows this rule? They want to but they actually dont. The reasons are a combination of the following:
• They are easily seduced by irrelevant or dated information.
• They are swayed by their friends or self-proclaimed insiders.
• They don't have a historical perspective of the stock price.
• They don't appreciate the market fundamentals.
• They are intoxicated by some narrow news, reports, and analyses.
• They buy when the rest buys (euphoria or fear of missing the boat).
• They sell when the rest sells (panic).
• They don't have good discipline: objectivity, calculation, calm and patience.
Self-Discipline
As you know, self-discipline is difficult to cultivate. The following are some guidelines:
Everything flows from the stock price and the money you possess. The cash available determines the price range of the stock you can purchase, and how much. Once you know the price range, you have plenty of companies to choose from. Then you sort out the good from the bad (See my later videos).
What if you bought the wrong stock? This is normal for any business investment. You should not do it if you dont have the stomach for mistakes. The key is to minimize your risk and compensate for your loss. A rule of thumb is not to bet the whole nest. Save some money for later recovery.
Diversification is a good idea if you have plenty of cash to invest. For the average small investor, you just have to focus on one or two companies that you know best, and switch targets if your choices do not work out.
Three factors always hurt your chances: no reserve cash left, a time limit when you buy options, and borrowing money from your broker when you buy on margin. When you put a time limit on the price movement of a stock which you have no control, the chances are slim for you to make a profit. Besides, your options and margins are in your brokers records. They share information with other big players who may conspire to act against you. On the other hand, if you buy with cash, they dont know when you want to sell.
Stock price movement is difficult to predict. The price is always driven by big players as they buy and sell in large volumes, to be followed by the herd. Do not guess the intentions of big players, sufficient to say that they do it for their own benefit. In addition, do not assume that they see what you see. Just stay calm and watch objectively. Buy some when there is a significant drop in price. Sell when you want to reap the profit. You have to play like a fox stalking a prey. Remember, a small investor is just eating the crumbs left over by the big guys.
Stock investing is like a business. You work and act on it in the short term in order to build the long term. If you manage to make $100 on average everyday, all the small profits will add up for the year. The important thing is that you learn as you go. You will not win every trade. Your goal is to wind up with a reasonable net gain over a period of time.
Never let other people decide for you on a buy or sell. You have to decide out of some conviction that makes practical sense.
You should have the discipline to stay calm in the face of volatility. If the Dow falls 1000, it does not mean the end of the world. It only means that the big guys want to sell part of their existing holdings. If the company is good, they will buy back later at lower prices, maybe more. In other words, they want to reshuffle the cards in the game. View this as a new opportunity. You may be able to afford something that you could only dream of before.
In conclusion, although being part of the herd, you must learn to be smarter than the rest. My advice is to stay cool, watch the drama unfold, go in and get out when an opportunity arises.
For further information, please email to stockfessor@comcast.net
