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Investing in the stock market can seem difficult. There’s a lot to learn and understand. Your psychology will influence your actions, good or bad.

Often a lack of knowledge and experience only adds to the challenge of turning your starting pot into something meaningful. And we’re not talking about wild claims of ‘make millions in your pyjamas’ either. I’m talking about structured, disciplined and informed investing and trading.

Why What You ‘Think’ Doesn’t Always Help You

One of the major factors that I see time and time again that stalls growth in a client’s account is stock loyalty. Holding a stock because you think you know a lot about it, you used to be employed by the company, or have followed that company through thick and thin, has seen many portfolios implode.

I’ve seen this psychology cause many investors  to sit still like the proverbial ‘rabbit in the headlights’, watching their stocks move in increments, waiting to prove people wrong from 10 years ago who said you should have sold that stock when it was 15% higher. That reluctance to sell now sees you looking at some positions that refuse to go back to when you bought them, but you still feel there is a chance it’s going to fly up 30-40% within a short space time.

At that moment you can stand up and let everyone know you were right, a moment you have been waiting on for a while.

Get Over Yourself

Does the phrase “don’t worry it will come good” seem familiar?

If you’ve ever said that to yourself or others in the face of overwhelming evidence to the contrary, then you’ve experienced this. You’re actually attempting to impose your will on the markets. Unfortunately the market doesn’t listen. This is an egotistical trap that so many people can fall into, and it’s one of the most dangerous states of mind you can ever adopt.

Ever set a price target? That moment when you finally get up 30% and think YES! I did it! But what if it goes higher?

You look at the stock and all the new flow around it and nothing has changed, but you have the “hunch”…

You look back at the stock a week later and you’re up 24%, still up but not where you were, but that’s just those short term profit takers.

Now it’s two weeks later, you’re 10% up, things aren’t what they were and now that profit you wanted to take isn’t there and 10% just isn’t enough to take, but don’t worry, it will come good.

Now you’re negative and in an uphill battle to get something back from your initial investment, that 30% now seems like pie in the sky.

Kill Your Emotional Attachment, for the Sake of Your Account

This is where the problem so often lies. Investing into the markets needs to be emotionless. It’s cut and dry, with no sympathy for those that bet on hopes and dreams.

The profitable investors are the ones who actually take the profits or losses according to their pre-defined parameters. It’s a simple formula that is actually a lot harder to follow than most people truly understand before they start investing.

Too Many Contradictions?

Many growth investors will preach to hold a stock and never sell; short term traders are the complete opposite where they take small gains frequently. Not to mention, value, income, fundamental (looking into company financials), technical approaches (following charts). They’re all different. They can all work if followed with discipline and consistency.

The most successful are those who have a structured approach, a trading or investment plan with clear objectives that dictate their actions according to their pre-defined set of guidelines. Crucially they understand themselves, have control of their emotions and follow an approach that is suited to their own psychological make-up.

Some are able to balance between a numbers of approaches and are able to hold a stock for a few months or even a year or two. They don’t lose sight that this is only a stock position and that once it hits full potential it is then sold and the cash is moved into something else that has more growth opportunity.

Make it Simple

Trading and investing isn’t easy, but it can be simple if you choose to make it so. Sell when you reach your profit or loss target. Follow your strategy. Don’t hold on dreaming for more. Don’t fool yourself thinking it won’t go further against you and wipe out your account.

Just because your company gave you these shares or you ‘have a good feeling’ about a company, it doesn’t mean you should keep them.

If you can keep the beast of attachment at bay, you’ll be putting yourself on the right foot to turn your starting pot into the meaningful asset you are working so hard for.

Does any of this ring true for you? What are your experiences? Please let me know in the comments sections below or email editor@css-investments.com

Thomas is an Investment Advisor at CSS Investments. He has been working in the stock market since 2008 and provided his clients with a structured and well balanced approach to portfolio construction and maintenance.

Comments

  1. Tom says:

    Hi my name sake you talking about me , good article most Thomas’s are like me doubting hence we cling onto our secure dividend making safe company’s like the preverbable S _ _ _ t to a blanket , hence we sleep comfortably in our cosy beds . Craving for guarantees and reassurance’s that one day we awake as millionaires , so Thomas can you provide us with reassuring advice to turn my pennies into blocks of gold ???? Balls in your court .
    Regards and good fortunes
    Tom ,
    now you have a good day

    • Thomas Pattenden says:

      Hello Tom,
      Thanks for your comment, I had no idea Thomas’s were renowned for being so doubting, I’m relieved to hear I’m bucking the trend.

      Holding on to a stock because it holds a degree of sentimental value or simply letting the fact that it has a reasonable yield distract you from the realisation of it being an unsuccessful purchase is a common mistake.

      These mistakes can be easily avoided by having an impartial view, unfortunately no matter how much knowledge one may have on a stock to help them determine what action to take, emotion more than likely ensures that a contrarian view is adopted.

      I’m encouraged that you ask for reassurance rather than guarantees! There is no such thing as a guarantee in the stock market, however you can be reassured that if you follow a good structure that suits your style, follow it with consistency and learn to control the emotional and psychological impact, then you stack the probabilities in your favour over the long term.

      If you haven’t already, please take a look at Wayne’s post on Is there a ‘secret’ to successful investing?, as this covers this point in more detail

      If you have other questions please feel free to contact me directly or connect with me on LinkedIn. Equally if you want to see anything specific covered in future blogs drop Adam an email on editor@css-investments.com.

  2. W J Badham says:

    Very good,a most enjoyable article.

  3. Andrew says:

    This is very good advice but the best way, not mentioned, to keep distance between your shares and your emotions is to set limits on every trade. Very few of us have the time or luxury to be able to sit in front of coloured numbers changing on a screen but if you set a target and a limit on every single trade you may be disappointed if it seems you’ve sold early sometimes but the amounts you’ll lose will be small and controlled.

    • Thomas Pattenden says:

      Good point Andrew, setting your stops and limits on the opening of a trade does remove an element of emotional attachment, however I do feel that stops and limits are dependent on time horizon and market conditions.
      Short term trades often benefit from having a stop-loss and profit limit, longer term trades that you are looking to hold over a period of months (or longer) whether it be for dividends or simply capital growth can often be cut too early, especially in a bull-market supported by such factors as QE and the ‘desired’ election result. Locking in profit on such a trade with a trailing stop-loss above your entry price can often help you to stretch the profit margin a little more.

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