I think television anchors and ‘stock market experts’ on T.V. have a really difficult job. Advising others about making tough investing decisions while being live on T.V. is surely no mean task. Imagine having to answer a guy who asks you this (with no time to rehearse):
|Trader:||“I have 100 shares of Jindal Steel & Power that I purchased at Rs. 290 in August. What should I do?” (Current Price of JSPL – Rs. 146)|
Usually the standard operating procedure for such shows is for the analyst to ask:
|Analyst:||“Did you buy this for trading or investing?”|
On a lighter note, in this case it begs the question – How does it matter – whatever it was – it did not work, it is already down some 50% (from 290 in August to 146 in November). What do I do now?
|Analyst:||How long can you wait?|
I mean the fact that I am calling you today; does it not tell you something? I want to get rid of this ASAP.
|Trader:||3 month more|
Irrespective of what happens next, 2 things come to mind here:
First, how long did the trader want to hold this stock when he made the initial purchase decision?
Second, at what Point should he be selling his stock? What if the stock continues its downward spiral over the next 3 months?
So did the caller really purchase the stock for trading? Hell no!
They say a man cannot live without hope for even a minute. The trouble with the markets is that people often mix hope with rationality.
Money for a trader is is raw material in business. What the hell was this trader doing as the stock fell – 5 – 10 -15 – 20 -30 – 50%!! He was hoping that things will improve? That not only will he cover his 50% loss but will also go on to make a handsome profit over and above that. The title fearless trading is dedicated to those who like to hope and believe in stock market miracles.
In the above scenario, just as the trader hoped for a profit, he should have expected a a loss and set targets for where he would like to sell – both on the upside and on the downside. “Something like – sell at a 5% up or down movement”.
How Do You Make Tough Investing Decisions
Making tough investing decisions requires the ability to rise above emotions and to look at personal finance just as a doctor would look at a patient. May be for this reason it is difficult for people to manage their own finances as well as professional money managers do.
But unlike doctors who can not operate on their own body due to obvious physical constraints, managing your own money is possible so long as you can stay disciplined and can control your emotions. Remember these rules:
1. Never more than 20% in a single stock
One of the most frustrating situation for a trader is when the broader market rallies and his money is stuck in a stock which he had purchased at a higher price. No serious trader should ever have more than 20% of his cash in a single position. In other words at any given point of time, a trader should either have sufficient cash reserve which is ideal and if not, he should have 3-4-5 or even more open positions.
2. It’s about Money Making and not Money Saving
Going back to the topic of fearless trading, an even more interesting case came from the caller who asked if he should buy more shares in GTL infrastructure at the time when the stock was trading at Rs. 2.5. He wanted to average his cost. His prior purchase was made when the share traded at Rs. 8.5, nearly 2 years ago. I think he was trying to save the loss on his initial investment.
With this attitude in time he will become chairman of the board of directors of the company. Just keep buying at every 50% correction, until you are majority shareholder. This can not be you. Some trades work, some don’t. Your goal should be to do more winning trades and not try to make money on every single trade. You just cant.
3. I am a _______. Understand your Personality and Stick it on top of your trading station.
Often people say – I don’t care about trading or investing. I just want to make money. If this is you , your money will be better of with a professional money manager. Trading is mostly about your personality type. Are you a disciplined risk taker or do you invest money for a really long time and do not get worried about short term price movements? Are you fearful or too optimistic or pessimistic? Unless you know your personality type, the broader market will keep beating you for you will either hope for an improvement and not sell or you will get greedy for more and hence – still not sell. Trading is about buying and selling – TARGET is a very important word.
4. Do not listen to everyone
When it comes to stocks, everyone has a way of doing it. Momentum traders, technicians, value and growth investors etc. Naturally each one of them will have a different approach to investing and perhaps different approaches will work for different people. If your style is a hybrid mix of what everyone else does, then how can you even expect to make a profit. Often people listen to others for their view to find stocks which will rise at some point in future or to find risk free trades . This will only dilute your original thought. If you believe in your skill, avoid listening to others as much as you can. Believe that in most cases it is just unnecessary noise.
5. Relax – Take a break
If you are working on weekends its bad for you. Your mind needs downtime. Do whatever ELSE makes you happy other than stocks. Let me tell you the story of one of my ex colleagues whose senior stopped giving him work once he realized that my colleague was clocking 200 + hours of client billing month on month. His senior was concerned. Concerned not for his health but for the quality of work he would be sending out to the clients (I know those firms are ruthless).
The point is that if you are working or thinking about just one thing non-stop, then it is unlikely that you will get any fresh ideas. Needless to say that you will soon get exhausted and burn out. Do not treat your body like a trading terminal. Relax and take a break.