Monday, April 5, 2010

Perfectionism, the Art of Losing

I don't like these cold, precise, perfect people who, in order not to speak wrong,
never speak at all, and in order not to do wrong, never do anything.

Henry Ward Beecher 1813-1887, American Preacher, Orator, Writer


According to the low of paradoxes one never gets what one desperately chases or needs; one only gets it by seeking it. Desperation blinds the mind from being able to function optimally and therefore failure is all but guaranteed. Everyone enters the markets thinking they are going to win yet only 10% or so win in the long run; despite knowing these statistics there is never a shortage of new entrants.

Trying to win 100% of the time is another sure fire way to make sure that you lose almost all the time. Perfectionists usually have some deep rooted psychological fear which probably has to deal with some form of rejection earlier on in their lives. They try to compensate for this lacking (usually this is not real but just a false perception) by going overboard and trying to be perfect in every thing they do.

It is a given fact that long term traders by far win more often then short term traders; the reason is simple they are relaxed they have more time to analyse their moves, have patience and generally are much more disciplined then their counter part short term traders.

We are going to list 6 of our 13 investment rules below:

Tactical Investor Investment Approach

   1.       Divide your money into 10-15 lots. When you add additional funds to your account, divide the new money by 10 or 15 or create a brand new lot. In other words if you currently have 10 lots (lets assume each lot is 500 dollars) and you add an additional 500 dollars to your portfolio; divide the 500 by 10-15 and spread the money equally into each lot or create a brand new lot.

   2.       Each holding should have the same amount of money assigned to it. Never invest more in any one recommendation; this way if anything should go wrong you won't be blown out of the water. Most investors tend to lose not because of bad choices but because they are found to be lacking in the area of money management. The fastest way to lose is to spread your money unevenly.

   3.       Never dedicate more than 10% of your entire portfolio to options investing. Of this 10% never invest more than 2-3% per position. If you are options professional you could dedicate up to 20% of your portfolio to options (but do not invest more than 2-3% of this 20% per option play)

   4.       Remember that no one can win all the time. The market operates in cycles. Some quarters it is very easy to make money and some quarters are  a struggle just to stay alive. Do not fight these cycles; the market always goes through these phases. What you have to do is recognize them and act more conservatively during these very volatile and nerve racking times.

   5.       Have a goal, 20%, 30% etc; when your entire portfolio has hit your mark, consider taking a break or better yet risk only some of your profits. Just because you are paying for a service or services does not mean you need to try to squeeze the maximum out of it. If you hit your targets earlier consider it as surprise bonus and take time to enjoy the other simple things in life.

   6.       Try not to let your emotions influence the way you trade. There is no room for emotions when it comes to investing. Emotional traders almost always end up getting buried before their time.

Some more random thoughts on becoming a better investor

The long term Investor looks for a trend and buys early in the trend; he/she then rides the trend till it ends. You can get more information on this topic by clicking here. Let’s deal with the topic of Trading vs. investing. Short term traders look for  rapid gains, they prefer to extract the maximum profit they can from a stock, option, future etc. At least that's the concept behind trading, unfortunately most traders end up losing more than they win, and even when they do win, they usually end up making less than the long term investor.

A few traders do extremely well, these chaps fall into the 2%-5% category of overall players. Their gains are huge, but for the rest of the players loss is all they can hope to look forward too. The investor on the other hand, looks for a new trend and usually tries to get in right at the beginning of the trend. If he/she is more aggressive they try to get in when that particular market is putting in a bottom and has been trending sideways for sometime, indicating that the worst is behind.

Another error that is often made is to confuse long term investing with the rather falsely promoted policy of buy and hold. Long term investing is getting in early and selling when the trend is over. A classic example was the Internet mania of the 1990's. The time to buy was in 1995 and 1996 and the time to sell was late 1999 and early 2000, when many of the Internet stocks started violating their main up trend lines. Those that bought the buy and hold lie, ended up poorer then when they opened their initial positions in these stocks.


To be clever enough to get all the money, one must be stupid enough to want it.

Gilbert K. Chesterton 1874-1936, British Author


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