Investors can’t accept too many consecutive losses before they begin to doubt themselves as well as their investment methods.
The logic and experience of system testing tells us that some of the best investment methods are subject to considerable draw- downs as well as strings of losing investments. From my experi- ence, I’d have to say that taking as many as seven losses (even up to ten losses) in a row is not unusual. Yet, this is precisely what causes investors to abandon their method or to change mid- stream. In order to make a method work for you, you have to give it time and plenty of room. Most investors know this intu- itively rather than discursively.
Here is how you may embark or stay firmly on the road to consistent profits. First, examine your results by looking at your monthly brokerage statements. Attempt to determine why you made the investments you did. This will let you know at once whether your investments were systematic or whether they were based on a whim, emotion, tips, rumors, fear, or greed. If you’re like most investors, you’ll find that a relatively small percentage of your investments were the result of a system, and that most of your investments were prompted by other factors, most of which were totally unrelated to any definitive system, method, or indicator.
This will alert you to a problem area in your investing. It will let you know, without a doubt, that you are not basing your de- cisions on a consistent approach. The second step, then, is to fix this problem by looking for a method that has simple, unam- biguous rules of application.
MASTERING THE PSYCHOLOGICAL
techniques to overcome the problems. Purists would argue that the latter approach is shallow and not conducive to long-term change. I disagree.
Numerous mechanical techniques can be used to overcome problems of investor discipline. Whether the application of these mechanical methods results in permanent changes is irrelevant.
If mechanical methods work, then I suggest you use them.
What do I mean by “mechanical methods”? Some of these are discussed in later chapters. Here are some examples:
There are many investors who cannot follow their own rules. To overcome this limitation, simply turn your rules over to someone who will implement them for you.
How about a method for helping investors who are too actively involved in (perhaps even addicted to) the mar- kets? The answer is simple: Most overtrading comes from either too much contact with the market or attempting to follow too many markets or methods at the same time. A mechanical way of dealing with this problem is to elimi- nate the source or sources of information that stimulate you to make too many investments.
Making a verbal contract with your broker can solve some of the problems.
Factors Underlying Successful Investing
Although there are many things an investor can do wrong in the markets, there are only a few things he or she can do right.
We are all well aware of how important risk management, disci- pline, and a good investment method can be. Yet without a doubt, they are all useless in the hands of a trader who is psychologically
S E L F - K N O W L E D G E Your Practical and Emotional Selves 51
inept or self-destructive. It is unfortunate that investors still believe in the myth that a better system will make them better investors.
The factors for achieving investment success are primarily psychological or behavioral. My experiences have taught me that three factors make up perhaps 90 percent of the formula for achieving and maintaining success:
1. Detachment. Many years ago, I learned that in order to in- vest successfully, I had to “not care,” to be detached from my work as a trader. At times, being human gets in the way of success by throwing emotional roadblocks in your path. Emotional roadblocks cloud judgment and inhibit success. Just as a surgeon must not become emotionally involved with a patient, an investor must not become emotionally involved with his or her trades, or for that matter, with the idea of success. Keep yourself from car- ing too much, and you’ll facilitate success.
2. Persistence. Clearly, the investor who is a quitter will never succeed, because he or she will not be in the markets when the big moves occur. A truly successful investor is willing to come back fighting after a loss or after a string of losses.
3. Realistic attitude.Investors must maintain a realistic attitude in order to succeed in the game of high expectations. All too often, investors have grossly unrealistic expectations about what they can achieve in the markets. Dreams of striking it rich or of being in on that one stock or prop- erty that makes you fabulously wealthy are self-destructive and divert your attention from the reality of your goal.
The fact of the matter is that you are far better off catching smaller profits that have a higher degree of accuracy than expect- ing large profits that are not likely to occur or will take so long to develop that you’ll have at least 100 opportunities to make mistakes.