Friday, February 26, 2010

How to become a better Investor

by Sol Palha

The main focus of any good trader should be to spend time trying to identify new and upcoming trends; this is not an easy task. It’s a difficult task because one has to go against the herd; one has to on many occasions even go against one’s own way of thinking because one is embracing a concept that one’s own nature will naturally try to rebel against. The reason for this struggle is due to the fact that we are wired to seek the company of others; we feel safety in numbers. This may be true when it comes to real life dangers but when it comes to investing it’s a fatal error.

In fact, if one just focused on the main issues we have discussed over the years, the end result would have been quite profitable. For example, we focused quite a bit on Palladium from the end of 2008 to early 2009. In the bullion portfolio, we had the label screaming buy up several times when Palladium was trading in our suggested entry ranges. Subscribers know that we do not often use the phrase screaming buy, so when we do it usually means that we think we have a unique situation at hand that won’t last long.

Towards the end of 2008 we also spoke of the potential for bonds to mount a very strong correction and warned individuals against opening new long positions. Bonds mounted one of their strongest corrections ever and by June of 2009, they were down over 20%; a massive move for the bond market.

From roughly the end of 2008 towards the beginning of 2009 we spoke of the fact that the market was going to mount a strong rally as the plunge was overdone, and that it was trading in the extreme zones. Again patience and discipline were needed, for the markets did not turn around immediately. We issued our final targets of 10,500 plus for the Dow in February; at that time, everyone thought the world was going to end.

Towards the end of the 2009 we started to focus heavily on the markets pulling back. This is the reason we started to actively close out many of our positions and it’s also the reason we tightened many of our stops. So far, we have had a brief taste of what lies in store, but the main move has not begun yet. Most will wait until it’s too late to react, very few have the patience to take profits and wait for a better opportunity.

We also spent a lot of time talking about the Dollar mounting a strong rally and gold pulling back. Again individual could have jumped out of other currencies into the dollar, closed out some of their long positions in gold and so on. We could list many such stories; however, that’s not our goal here.

Why are we bringing this up? Well, it’s not to talk about our timing skills. Our goal here is to illustrate that most individuals are lacking when it comes to patience and discipline; most individuals want to chase every single opportunity or at least what they deem to be an opportunity. To most opportunity means following the herd. They feel that if they pay for something they should get maximum usage out of it regardless of whether they win or loss.

To illustrate this point, try this simple exercise. Choose a day and try to do nothing for 1-2 hours and by nothing we mean absolutely nothing. Very few will be able to achieve this. In fact, most will find that it’s really hard to do absolutely nothing. (Doing nothing does not mean watching TV, reading book, playing games, etc., it means doing nothing). However, many can run around the whole day trying to do something but achieving nothing. So in reality the truth comes down to this. As long as one can fool oneself that one is doing something (even if one is achieving nothing in the process) its fine, but to actually sit down and do nothing, now that is a terrible and undoable deed. Now apply the above concept to investing and see how true it is. Many feel that they should try to do something all the time, even if they achieve nothing or even loss money in the process, its fine because they are doing something; sitting down, doing nothing and waiting for an opportunity to present itself, now that is simply unimaginable.

Patience and discipline are the most important traits any trader can hope to master. Would it not be much easier to focus on your real needs and not your fantasies? Why not sit down and look for 1-3 great opportunities and wait for the trades to come to you instead of chasing them

We are almost certain that if a subscription service stated that after they produced 6 or more plays that produced wins in excess of 30%, they would issue no more plays, that the majority would throw a fit and cancel their subscriptions. This clearly illustrates the principle of wanting to get something even though nothing might be achieved by forcing a move. The wise man is happy if he can find 1-2 good opportunities a year. There is no need to chase them, just wait for them to come to you. Sometimes you have to wait a few weeks for them and sometimes months and this is what we focus on. We do not like chasing for it usually leads to trouble. All one really needs is one great opportunity a year and one will achieve spectacular results over the long term.

Is it not funny that most find it difficult to sit down and do nothing for 1-2 hours, but as long as they can pretend they are doing something while achieving nothing they are happy? There is a huge difference between the two, in one you are dealing with reality, in the other reality is eluding you; you are just living in an illusory phase.

Thus going forward, try to find out what you really want, who you really are, what are your needs, what are your goals really are? When you know what you really want, achieving it becomes a lot easier than simply aiming for some arbitrary pie in the sky dream.

Tactical Investor

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