Money and emotions are so intertwined that any change in a financial situation often has nothing to do with money, but is about a balance of power in the relationship.
~ Ginita Wall
Investing is emotional… and every investor, at one time or another, has to contend with emotion-driven investing decisions. When we make wise investment choices and we are rewarded with increases in our portfolio values, we feel gratified and confident. When we make poor investment choices and we realize our portfolio values have suffered, we feel discouraged and even depressed at times. And don’t be fooled… there is no way to completely eliminate emotion from investing. But we can limit it’s influence in our investing decisions by designing and then submitting to wise investment principles.
During the years that led to the development of the Evening Investor Strategy, I’ve allowed emotion to take the lead on numerous occasions and rarely, if ever, did it result in sustainable or successful investment practices. I backed off several times and eventually developed the Weekend Investor Strategy, designed for people who are looking to spend a little time (15-30 minutes) each week investing in their futures by taking control of their financial portfolios. This approach has served people very well by taking away most of the volatility that accompanies investing in the markets. Yet, there are those who want a more active approach… have a little more time (5-10 minutes each evening), want to be more active and trade more frequently, are interested in “bottoms” and catching a stock before it explodes upward, and don’t mind taking small gains and losses for the potential of more significant returns. Those of us who affiliate with this timeline will appreciate the Evening Investor Strategy. Personally, I find I’m interested in both approaches… so I segment part of my portfolio for the Weekend Investor Strategy and part for the Evening Investor Strategy.
The principles behind both strategies are similar… and the differences are minor. Nevertheless, we’ll take a few moments today to review the essential principles behind both strategies, noting minor differences along the way, that lead to successful investment practices… which, as you know, equates to profits within one’s investment portfolio.
- Capital Preservation – It is far more difficult to earn money than it is to lose it… so protecting your capital is paramount. For example, if you invest $10 and it goes up 25%, you’d have $12.50. However, if you have $10 and it goes down 25%, you’d have $7.50. Now that you have $7.50, to get that back up to your original capital, you’d need to make not 25%, but just over 34%. So the more you protect your capital, the less you have to make to be profitable in the long run.
- Buy the Rise – So many investors lost money in 2007 and 2008 by buying on the dip… thinking stock were “on sale” and cheap only to discover, when it was too late, that there was a fire sale and they got burnt. If you follow principle #1, you’ll not let yourself buy on dips… but you’ll buy on the rise. I don’t purchase a stock for less than it closed the day (for the Evening Investor) or week (for the Weekend Investor) before. Investing with rising momentum is critical… that’s where the two “real-time” indicators are so important. Rising price on rising volume is an equation for continued success over time.
- Minimize Losses – Sure, it’s find to say protect your capital… but investors must realize that each and every trade has inherent risk. Accepting that we may lose money prior to investing helps take the emotion out when it becomes a reality. As noted in principle #1, minimizing those losses is critical. The more you lose, the more (exponentially) you have to make in order to recoup your loss. So minimize losses…
- Maximize Gains – When a stock rises, give it room to flex. Stocks don’t travel in a straight line very often… instead, they flex with the markets. Selling positions in two or three orders may be the wisest way to putting profit into your pockets while allowing for the potential for future gains.
- Put Profit in your Pockets – Part of ensuring we are successful investors over the longer term is to take profits. Bragging about a stock that has gone up 55% before dipping to only 20% is futile… why not take some of those profits and put them in your pocket when it’s closer to the 55% than the 20%? If you follow principle #4 and use a staggered selling strategy as the stock price rises, you get the best of both worlds: profit in your pockets while still allowing for maximum gains.
- Mind the Markets – The vast majority of stocks rise when the markets rise with volume and fall when the markets fall with volume. Today is a perfect example… with hardly a stock that can buck the trend of the overall markets. It seems their fundamentals and all the lagging indicators in the worlds cannot reverse the inevitable result of “price” and “volume.” That’s why I depend so heavily on these “real-time” indicators.
- Watch the Technicals – As I just alluded to and spoke about in my last article, “real-time” technicals will save you thousands and make you thousands as well over the average investor who buys or sells based on other criteria. I often will use price and volume to lead my decisions… but I also have three other indicators I use to help me “confirm” the trend.
Of course, these principles are not exhaustive… I have several others too, but these are essential for every investor to consider. Over the next few articles, I’ll be showing you some real life examples… demonstrating how I apply these principles in real situations, with real charts. For the sake of this series on the Evening Investor Strategy, I’ll be focusing on the daily charts.
Since a recent comment left focused on two stocks with great fundamentals (both of which are in my top 10 US Stocks list), I’ll start with them. They are GMCR and AAPL. Feel free to submit any stocks you’d like to have me look at and I’ll be pleased to share my thoughts for your consideration.
Do you follow a set of principles such as these when you invest?Do you manage your emotions or do they manage you?