Happy St Patrick's Day! Now let's hope you didn't go too crazy this weekend. You never know, you could be having a good time and all of a sudden you think those women in black protesting the war on the street corner are actually green for the dayâ¦ But seriously folks, if you want to think green, then please check out this weekend's radio show. Jeff O'Neal was with us with his stocks of gold and I also have a 4-leaf clover for you: the second half of my two- part series on the common mistakes investor's make.
I hope you all enjoyed last week's session on Part 1 of Mistakes of Investing. This is the second part of a 2 part series, which deals with worrying about the past, and the number one mistake most investors make, not being properly educated. I hope you find this as useful as I did in my early undertakings as a trader.
Mistake #4: Worrying About the Past, Not the Future.
There are three main reasons that traders lose money. First, they simply have a wrong opinion of the market in a game where money is made and lost based on opinions. Second, traders lose their discipline and the patience in the trade, and lose money for their lack of discipline. A third reason can be explained by an insufficient understanding of the nature of a position's risk and where opportunities present themselves to optimize the position as the underlying fluctuates over time. Out of these three reasons, following rules will help to eliminate a large majority of losses in the markets. Luckily, there are a few quick rules to followâ¦
Keeping your attention on the cost of a trade makes you emotionally attached to the stock. Constantly thinking about the original cost of the position impedes your ability to focus on where the position is now. Try to look at the present and future, not the past of a stock. Many times, on the last day of a seminar, I will show charts of a stock, but not the stock's name. By then, most students can look at a chart, and quickly ascertain a bullish or bearish pattern. But it's funny; when I reveal the stock's ticker symbol, someone in the room will blurt out, "Wait a minute. That's not going down; it's going up!" More than likely, this person actually owns that stock and is married to it. I found that looking at my positions without looking at what I initially paid for them actually improved my profits as I looked at the position as of today, not what I paid for it yesterday. Bottom line, worrying about the past clouds your judgment for the future.
Also, forget about a stock's price; concentrate on its growth opportunity. For example, choosing a stock is means assessing whether it is more like a Volkswagen or a Mercedes. The P/E and PEG ratios will help you determine if the stock is a Volkswagen or a Mercedes [i.e., is it a cheap stock or a great stock?]. It's like betting on sport's team; since they're rarely equally weighted, one team often carries a point spread with it. Stocks are like that too, but the point spread is the ratios. I highly recommend that you take some time to learn more about P/E and PEG ratios and the best way to use them. We teach how to employ these tools at our Active Investor Methods (AIM) classes, as well as how to mix them with chart reading to find the best bullish stocks of the day.
Mistake #5: Educating Yourself through the School of Hard Knocks.
It absolutely shocks me how many people try to learn this business simply by reading a few books and then opening a brokerage account to get in the game. Although I laugh about this, my laughter is short lived as I remember that's exactly how I got into this business. I sent away for a book by mail, read it, and only retained the "profit" parts, and not the "risk" parts. I was already spending my profits before I even made them! In less than a year, I went broke to the point where I owed the brokerage firm money. It took me close to a year to pay back the broker from my hard-earned paychecks. Let me tell you, if you're looking for a broker to give you personal service, get a margin call; they won't leave you alone. I had to rebuild myself from the inside out, and I needed help, not books. I remember my school days on the cross country team, and how I went from an average runner to one of the top distance runners in the state of Georgia in 1982. I had a coach (who gave me private time as well as time with the team) and a mentor (my best friend and the only person I personally knew that ran under a 4-minute mile while still in high school). After losing my account early on in my trading career, I thought about my track days and did the smart thing: I got some trading education and a coach. What a difference! People get coaches for everythingâbusiness coaches, personnel fitness coaches, etc.â but when it comes to their own finances, most people seem to forget. Unfortunately, without pursuing an education in trading or getting a trading coach, most people will lose money out of the gate.
So what exactly can a coach and mentor do for you?
Remember, when it comes to finances, the cost of education pales in comparison to the cost of ignorance. At Profit Strategies, we focus on all of these factors: innovative education, market basics, learning to trade without emotion, finding the right strategy regardless of whether the market is going up or down, and managing your money in the marketplace.
Tune in next week when I'll be talking to a few new traders on the block. I'll be asking them some tough questionsânot how nice they are or how great life is as a traderâincluding what systems work for them, and how they have matured as traders through their failures as well as successes.
Profit Strategies Group, Inc.