OH HOW I WISH that each week I could come up with a list of investments guaranteed to rise. You’d make money, I’d look like a genius and everybody would be happy. If only it were that easy.
Because while the point is to buy stocks that go up, the reality is that no matter how good your research is not every trade is a winner. There’s no certainty in speculation, and as we often point out sometimes you’ve got to throw a hundred casts just to get a nibble, let alone a substantial catch.
As we wrote a few months back, the emotional strain in trading can be downright debilitating. And while losing money and dealing with uncertainty is tough, I’ve found the most difficult aspect also to be the most important: taking responsibility for your own actions in the market.
Like many elements of trading, it’s much easier said than done. The fact is that when we lose money in the market it hurts. And what makes trading losses especially painful is the knowledge that it’s our action — or inaction — that prompted the loss. In a free market, nobody forces us to buy or sell anything. To that end, win or lose, when it comes to our portfolios, we’ve got nobody to blame but ourselves.
Playing the blame game, however, is probably the most defining characteristic of the amateur investor. Because while the experienced trader is willing to take responsibility for a loss and move on, the novice stubbornly refuses to admit fault. Consequently, when they lose money, it’s everybody else’s fault but their own. Hedge funds, Fed officials, politicians and, yes, even financial columnists are all convenient and oft-cited scapegoats.
Hoenig told me to buy bonds and they tanked. What an idiot! Look folks, as I’ve pointed out on countless occasions, I have no crystal ball nor do I make money on every investment idea. I call ‘em as I see ‘em, put my money where my mouth is and take responsibility for the consequences of my trades regardless of the outcome. In short, I reap what I sow.
Learn to do the same. Because no matter where you might get an investment idea from, once you pull the trigger on a trade it’s as much your responsibility as if you thought of it in the first place. Not only is the blame game rather uncouth, but it develops poor trading psychology that will cost you money.
As we’ve often pointed out, stock tips are a dime a dozen. Each security has a bid and an offer, so it reasons that there’s a bullish and bearish argument for every stock under the sun. But because you can’t bet on everything, you’ve got to be selective and focus on what you believe to be your best options. The point is that you’ve got to be confident about the trade personally, not simply banking on the assurance of another trader.
So you heard XYZ mentioned on TV and bought a few shares. Fine. But why? Was it because a technical indicator was triggered? Did you observe similar stocks performing well and look to play the group movement? Are you getting what you believe to be a good value on an oversold name? Do you believe in the story and feel as if the stock would make a good addition to your portfolio? All are perfectly valid reasons for taking a risk.
When it comes to the amateur, however, personal conviction stays safely hidden from any real responsibility. So when they read or see XYZ mentioned, they buy it because they’re looking for action, it sounded interesting, and, heck, if it falls well then it wasn’t their idea in the first place. And as long as you buy or sell a stock solely because of someone else’s investment hypothesis, you aren’t trading but merely following orders. It’s the Nuremburg School of Investing incarnate.
If you want a scapegoat, then buy a mutual fund or hire an investment manager. But if you’re going to handle your own affairs, then you’ve got to get used to taking responsibility for your own trades. Regardless of where an investment idea originates, when you make it in your account, you make it your own. Because as long as you keep looking to pass the buck in your head, you’ll never make a buck in your portfolio.
– Originally on Jul 07, 2003 by Jonathan Hoenig
