Ok, it’s really a list of Don’ts:
All are related to Fear and Greed - the classic Behavioural Economics emotions.
If we continue to get difficult weeks (I suspect we will), then I hope these rules can help you stay grounded and avoid costly errors of judgement.
Never Panic - try to stay calm and control your emotions. If markets start to scare you, turn PC, Tablet, Fone etc. off and go and do something entirely different - go shopping, mow the lawn, read a good thriller (ok, not too thrilling - maybe something calming), go to the pub, go swimming - I think you get the picture.
Step back and try to look at the ‘Big Picture’ - stockmarkets go up and down, this is what they do. The gyrations create Opportunity and Risk. It is very frustrating when they go down (like recently !!) but on a longer term perspective, we all know they will go up again. On a 20 year price chart, this will seem like a small dip before resuming the Uptrend.
On the flipside, downs create Opportunity to buy cheaper - Warren Buffett looks at it like there is a ‘Sale’ on down at the local stockmarket. When markets power relentlessly up, the opportunity is to sell out of some stocks maybe or topslice.
Never Rush - making snap decisions is nearly always a mistake and something I actively avoid.
I am sure many readers will know the scenario where you have just read about the latest exciting tech stock and you rush to your Laptop to nab some stock before the inevitable leap up in the share price (because it is so obviously a steal) - only to see it tank in a few days and leave you very unhappy.
Or you hear on Bloomberg that the FTSE100 has dropped 100 points in the last 5 minutes and you sell every stock you hold - only to find it rallies in the afternoon and leaves you out of the best rally this year……..
I have a very simple rule that I apply almost totally - with the odd exception. I will not make any buy or sell decisions during the Trading Day when markets are open. All my trades are determined the night before or at the weekend in the cold light of day and without the gyrations of the market on a particular day influencing my emotions and ability to make carefully thought through, rational, objective decisions. This also applies to topups and topslicing.
Quite often I will make a decision over several days or even weeks - I might get the thought that a particular stock does not have much more upside and I will analyse it and finally make a decision to sell it or topslice perhaps.
Once the decision has been made to buy or sell a stock, I write on a piece of paper what stock I have to trade in, in what account, and any price constraints etc. I put this on my Sofa so that next day I see it there and think “oh, I better do that trade” and the only decision I have to make is when during the day to actually execute the trade. In practice, I tend to trade early in the morning probably around 9am ish - this gets the action done and I can do other things during the day without constantly thinking, “is this a good time to trade?”
This keeps things robotic - a good way to be.
If you see a share you like and it has jumped up 20% in the last 3 or 4 days, then sit back and wait. 90% of the time the stock will fall back as the initial excitement of the Bulls will subside and a wave of selling will take hold. This is your chance to buy - wait for the selling to weaken and the stock to start turning up, and then buy it. Candlestick charts, MACD(Moving Average Convergence Divergence), RSI (Relative Strength Index) technical indicators can help with timing.
This particularly applies if you are buying something that has been Tipped in a magazine or newspaper whatever. Some people say “never buy tips” - I disagree, analyse them just like any other share you have unearthed and be particularly careful on the timing of the purchase.
Never get Overexcited - if you find yourself getting all hyped up and raving about a share then you probably are letting your greed emotion hold sway. There is nothing wrong with being passionate about a share with regard to its attractions as long as you also consider and can extol the risks as well. Overexcitement can lead you to buy a bad company without properly researching it which will obviously lead to expensive mistakes.
Another impact of heightened excitement is buying way too much of a risky stock - I remember a few years ago buying £14k of Fiberweb (FWEB, now taken over) when I should really have only bought about £5k maximum - I got over excited and it hurt a lot. I bought at 60p and they dropped to 30p and then got taken over at 90p - so I was right, but went through immense pain to get there and several years……….
Never Get Depressed - Yes, as we have discovered this week, markets can be very, very unpleasant at times. Again, if you find yourself being affected this way, try to do something else and get away from the markets. I was talking to a trading buddy today, and he has just got back from a Greek hotel holiday - he had some issues over IT connections but I actually envy him because he was away from it all and did not suffer the emotional pain and anguish that I experienced.
The big danger of such depression is that many people (I know someone who did exactly this) totally sell up all their stocks and never buy a share again in their lives. This is a colossal mistake as no other Asset class can make you money over time like the stockmarket.
Welcome to my Educational Blog Page - I have another 'Stocks & Markets' Blog Page which you can access via a Button on the top of the Homepage.
Please see the Full Range of Book Ideas in Wheelie's Bookshop.