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Much has been written about trading plans. So what I want to chat about here today is psyche. This is the most complex aspects of trading or investing. I am not sure any amount of reading can totally prepare you, but maybe some pointers might help those who still struggle with this aspect.
Much of what I have to say comes from the ‘school of hard knocks’. So it is real.
My basic premise is to buy low sell high. This is a truism I accept but I am not convinced even a minor proportion of retail investors do this. My anecdotal experience over many years is that investors are swayed by hype. We all are and this does not mean by just the markets – we cannot totally immune ourselves from marketing, media headlines etc, We are all but human. But we can manage how we respond. And if we are not able to do this currently, we can certainly learn to do so. Managing emotions is a ‘learnt’ behaviour. Now we may be born with a certain underlying ‘trait’ but the balance of ‘nature and nurture’ is not for this column but we can all get better at managing our emotions.
So where is the low? Now there are lows and lows. We can see lows intra day, intra week, plus seasonal lows, and minor to super cycle lows. We can identify some of these in the simple monthly line chart below:
click to enlarge
When I look for a low it is just not any old low but rather one that has some confirmation that it is the low and what we are seeing is the beginning of a new trend that has some life span to it. I have made no secret of the fact that I did not buy in March 2009 and so I am still out of the market – now for almost three years! And that is because we saw a major spike without any consolidation.
Most investors feel a compulsion to be ‘in’ the market – as if money will burn a hole in their pocket! I can tell you when you see a decent run it is not a great feeling on the sidelines. But in my view there is no point in chasing a runaway market and that is what we saw for the most of 2009. Pullbacks need to be orderly and so far we have not seen this.
Even if you don’t pick the low you must avoid at all costs buying up the risk curve and that is where we are at the moment. If you have been bought at the top of the market and experienced a savage fall then you will know what I mean by the ‘cold sweat’ experience.
You have to work out for yourselves how your psyche might blend with market volatility but the key question is ‘can I sleep at night with what I am doing?’ Now I am not saying we should await the time when it is a ‘dead cert’.
For some, the plan could be too progressively buy in. That is, to buy on dips along the way. For me that is a little tedious as I need to be all in or all out and to be all in I need the right market conditions.
We are all different so we need to decide what approach we will take this year and how that will fit with our psyche.
Next week we will look at a couple of scenarios for 2011 and how that my will influence how we ‘psyche’ ourselves for the years ahead.
Enjoy the ride
Tom Scollon
Chief Analyst |