Today’s Trading Lesson From TradingMarkets

The biggest question bouncing around Americans’
heads right now is where are their portfolios headed given the
current market environment. The norm has been 10%-12% a year in the S&P 500 over
the past 30+ years and that has been what people have come to expect for their
equity investments.

Expectations for a portfolio are commonplace, and they are necessary when
each investor is establishing goals and then creating the portfolio to achieve
those goals. Here is where the discussion begins…

Historical returns and setting goals is fine, but I believe those should be
done on a conservative basis and should be checked on from time to time. But if
you are managing your own money through careful stock selection via
intermediate-term investing or daytrading your portfolio, then it is important
to go into each day and each move without an opinion. I began by running my
money with the latter in mind, and I was my broker’s best friend. Now, I have
evolved to the intermediate term. The point is, whichever time frame, if you are
practicing a sound strategy, the profits will take care of themselves by
implementing all of the rules. It is extremely important not to get caught
saying or thinking: “This stock’s not capable of making me much money, I’m going
to pass and wait for something else.” Have NO expectations when you are making
your move. If the scenario fits the rules of your strategy, then follow it. Do
not back down because of your own belief that the investment may not perform for
some unknown reason.

© 1970-2002 Prophet Financial Systems, Inc.> Terms of use apply.

Quarterly chart of the S&P
500

Successful traders/investors are always moving into things when 98% of the
public is saying: “Are you crazy?! You must be trying
to lose all of your money by taking that trade.” When it comes time
to close the position, Joe Public is usually in disbelief, stating:
“Why are you getting out when you’re just beginning to
make money? That thing has a long way to go.” My point is that our
expectations are very often contrary to what will actually work, just like 98%
of the people out there. Solid, proven rules get us through that moment of
doubt, where our expectations are trying to take control and stop us from making
money. When Home Depot set up in its base in early 1991, few people, including
investors, expected this no-name company to power to a several hundred percent
gain over the next couple of years. Biotech stocks were where the action was,
and a building products retailer wasn’t exactly an investment to drool over next
to an Amgen.

Let’s bring these examples much closer to the present. Following the 1990s,
it was hard to believe, even for me, that you could actually make solid chunks
of money on stocks outside the technology arena. Additionally, many of the
non-technology names are unknown small- and mid-cap stocks. Mix these two
factors together and you end up with a big name that 1 or 2 people buy into at
the correct time; a few people notice the stock at the correct time, but pass on
it; and the majority of people learn about the stock and jump on as the move
comes to an end. Case in point: NVR.

The beauty of the stock market is that we can all search for and analyze
stocks. By this I mean we can keep it simple and look at three or four letters
to define our investment. A stock symbol keeps track of the investment just as
well as knowing the name of the company. This is the first step to eliminating
expectations. The second step is to fall back on your rules. I would never
recommend buying something on whim or rumor, but only on proven, sound
rules that you are comfortable with and that make sense to you. Naturally, as we
all gain experience, those rules are modified to accommodate our improved
knowledge…but that’s another lesson in itself.

Let the rules do the work for you. Do not gravitate toward XYZ simply because
it has done well in the past. By applying your rules, ABC will show itself and
allow you to make money by following an unbiased action, free of expectations on
that particular investment.

Why shouldn’t we set goals for a specific investment? Very simple: our mind
will have us setting a goal that is limited to the capacity that has been
established. When I told my dad that I was leaving my career at a major pension
consulting firm to start trading my own money with about as much money as I
needed to make each year, he thought I was crazy and taking on way too much
risk. After all, he had seen as many people lose all of their money as those who
made more than 12% a year in the stock market. Obviously, the rest is history,
since I am writing this article as part of the business that I began over five
years ago and still working for myself.

It is equally important not to expect too much out of an investment. You may
find yourself “milking” it for much more than it is capable of, and you may be
putting undue pressure on yourself by setting expectations that are too high.

Greed is one of the driving emotions behind investing. When a stock becomes
highly profitable for investors, greed takes over as the sky becomes the limit.
Logically, we all know that is not true, but when emotions are involved, this
can cause enough of a hesitation in selling correctly to give back significant
profits on the position.

If you find yourself looking at an investment with little or no expectations,
check that opinion against the rules you have established for your analysis and
see if they agree with you. Additionally, when you find yourself in a successful
investment where your expectations are high, continuously check that opinion
against the sell rules you have established for yourself.

Good Trading!

Timt@tradingmarkets.com