An interesting article caught my eye today on Bloomberg today titled "Americans Say They missed 73% rise in S&P 500". It can be found here http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTp.Sf7cvYvU
According to a survey conducted, only 1 in 3 Americans say the value of their portfolio has risen from a year ago! That is truly unbelievable given that the market is up 73% since....actually it's not so surprising when you think about it. I've been documenting here for months the ingrained bearishness of retail investors. These market gurus did what they always do near bear market bottoms.... panic sell out of equities and rush into the safety of cash and bonds and all throughout 2009 investors continued to pile into bond funds while shunning equity funds for the most part. Since mid and long term bonds have dropped quite a bit in value from a year ago while equities have soared, it's no wonder only 1 in 3 Americans have seen the value of their portfolio rise from a year ago. What's the motto of this blog again?
As a former advisor I know firsthand how mom and pop mutual fund investor behave during market cycles. You can preach long term all you want but in the end people will succumb to fear near market bottoms and greed near market tops. One thing I miss about my old job was being able to get firsthand knowledge of what joe six pack investor was thinking and how they were acting. Such firsthand knowledge made me alert to a peak in commodities in the summer of 2008 as I saw reckless buying of natural resource sector funds.
Fear and greed. It's all about fear and greed. If you can learn to control these primal instincts you will have taken a very big step to being successful in this game. When the market crashed in the fall of 2008 I was there on the front lines working as an advisor at the time to whiteness the sheer unadulterated panic selling that took place. Where I worked there was an inbound call center. The calling cue was so jammed up with panic sellers that advisors like me who don't normally take inbound calls had to help out. I took so many "get me the fuck out" type calls. I didn't even bother trying to convince them otherwise...they weren't my clients and they were so angry or scared to be convinced anyways. All of this happened when the TSX was crashing down to 10,000 in early October of 2008. I remember saying to myself "this type of off the charts panic selling from joe sixpack has to be the wrong decision and a year from now these people will regret it big time." Well, despite this panic selling I witnessed the TSX still ended up going down another 25% before hitting the final bottom in March of 2009! But I was right. By early October 2009 the TSX was back up to 11200 or thereabouts and now it’s back up to 12044.
Fear and greed. The typical investor will at some point give into these primal instincts. If you can learn to control them you will have taken a very large step at becoming successful in this game. And if you can learn to spot when other people are acting greedy and fearful you are yet another big step closer to success. There are different types of fear and greed. We all know the traditional forms of them but there are ones that aren't as obvious.
Forms of Greed
1)Overinvesting such as going "all in" or even worse using borrowed money. Typically done chasing a hot stock/market.
2)Letting a winning position ride well beyond your target price, what fundamentals dictate or despite danger signs in the hopes of making more money.
3)When it's time to sell a position you place a limit order just above the market in the hopes of squeezing out a few more dollars.
4) When it's time to buy a position you place a limit order just underneath the market in the hopes of saving a few dollars.
Forms of Fear
1)Panic selling during a severe pullback or a crash purely out of self preservation or disgust.
2)Fear of regret: Fear of the possibility that after you sell a losing position it's going to head higher afterwards. This usually causes you to ride losers even further down.
3)Fear of profits slipping away. Cutting a winner too short out of fear that the paper gains will be wiped out due to a pullback.
4) Fear of losing. Investing too little or pulling the plug on a position on just the smallest of red.
How many of you are guilty of committing at least one of the above sins in the recent past? I know I am but I must say I have improved substantially since I've decided to trade/invest full time.
I took profits too early on one of my position (UAUA). I got in around mid 7s, and sold it between 11 to 12.
ReplyDeleteYea the market makes you look like an idiot on the way up and way down.
it's true it's true. I've done the same...who hasn't? But before you beat yourself up too much...what was the time frame of this trade? Was it a trade or an investment? Why did you sell?
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