Personal circumstances

Nothing much has changed in regards to market action since my last post. The market continues to frustrate both bulls and bears. Both camps have been expecting the market to have a sizable correction for some time now but it hasn't happened. This watched pot never boils syndrome is nothing new, we've seen this situation happen many times since the bull market began. As it turns out, the correction tends to happen a lot later than most expect and only after maximum frustration has been reached.

Switching gears now. I've often said that the greatest obstacle to success in this game can be yourself. Mental/emotional mistakes will significantly prevent you from reaching your potential and at worst can do you in completely. One of the biggest roadblocks to success is that people often make buy/sell decisions based upon their own personal experiences or circumstances instead of the fundamentals. Let me explain what I mean. Let's say you have a twin brother with the exact same skill and mindset as yourself who is on vacation at the moment. You discover a very undervalued stock with great risk/reward qualities that trades at $1. Instead of buying it right away, you decide to just watch the stock  for a while to see how it does, and it moves up immediately. A month later it's at $1.40. You still view the stock as undervalued but chances are, if you're like most people, you will have a hard time pulling the trigger at $1.40 because you discovered it at $1 and feel like a idiot chasing it at $1.40 when you could have bought it for $1, but like most people, you would be willing to buy it if it dipped back to $1.20-$1.25.  Your brother returns from his vacation and discovers the same stock. Like you, he thinks the stock is a great opportunity but unlike you, he's not anchored to that $1 price it was trading at because he was not around when it was trading there. Your brother has no problem pulling the trigger at $1.40 while you still hesitate because you are still anchored to that $1 price. No matter what the stock does from this point, your brother's action is correct, while yours is not. You are basing your decision upon your personal experience with the stock and mental hangups rather than the company's prospects/fundamentals. The market doesn't give a rat's ass that you discovered the stock at $1. Second of all, if you see a very undervalued stock that you believe is worth multiples of it's current price, you shouldn't wait for a dip in the hopes to buy it a bit cheaper because in doing so you risk missing out on the big upside that it's likely to have - the risk/reward scenario in waiting for a dip in this case is very poor.

It's this type of thinking that also makes us sell our winners far too early which is something I continue to be guilty of doing. Rather than selling based upon the fundamental factors of the company, most people will incorrectly sell largely based upon their own personal circumstances such as how much profit they have or how large a percentage of their portfolio the stock is (rebalancing). I'm 100% certain that anyone who's been playing the market for some time has make this mistake. It's probably the biggest detterant to making a killing in the market.The saying "you can't go broke taking a profit" is bullshit. If you want to travel the path of mediocracy then by all means follow that advice.

The right way to play the market is to make your decision based upon always looking at the stock with "fresh eyes". When the stock in question has make a good move up ask yourself this, if you had just discovered the stock that day, would you still consider it a buy? That answer should be the primary factor of your decision to buy or sell. Forget about the past or what your avg cost is. That means fuck all in terms of where to stock price is likely heading in the future. The only time you could justify selling a stock "prematurely" is if you uncover an equal or more compelling opportunity.

It is very difficult for even the great investors out there, to avoid the dreaded mistake of taking profits too early. As Livermore said

I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

I have made this mistake with hwo.to. The stock now trades at $4.50 and I sold out 92% of my position at an average price of about $3.20 leaving big gains on the table. Although I rationalized my decision to sell with some fundamental factors, a large part of the reason I sold was due to my personal circumstances. My avg cost was $1.45 and I collected nice dividends along the way and so I made out well, but I obviously could have done a lot better. I could be a little hard on myself here because although I believe it's a mistake to sell based on personal circumstances, my situation was unique in that I had made a large initial investment  in hwo and I did the same with gre.v and so I had 80% of my portfolio in just 2 stocks. I think I had bitten off more than I could chew and didn't feel comfortable being exposed this way. So I think in this case, making a trade based on personal circumstances may be at least partially justified because I made such large bets which I normally don't do, but in any case, I don't think I handled hwo.to properly. I sold too much of it even though I was exposed the way I was. I should have sold some shares, but I overdid it and I lost my nerve.

There's a lot of delicate balances to keep in order to have optimal success; I've said this before. Discipline vs conviction. But I will say this: If you want to make big money you gotta have the balls to bet big when there's a golden opportunity and you gotta have the balls and the patience to ride that mofo to the point where it's at least fairly valued. If you try to ride the whole thing from undervalued to overvalued then you're being greedy. Again, delicate balances.