Many years ago, when I was just putting my foot on the first rung of the success ladder, I had the good fortune to sit next to a wise, old and very wealthy businessman. I have always been a keen listener to older people, who have proven what they say is true, by the results they get. Sadly, the old man died shortly after our meeting, before I could get to know him better, but what he told me has stayed with me and always held true.
He explained that I should enjoy my bad deals as much as I enjoy my good deals.
It took quite a while before his lesson sank in to my business philosophy, but when it did kick in, there was no looking back and being upset at flawed deals. So how can we use this advice in the context of investing/trading in the erratic stock market?
Oftentimes, when we buy a stock it will go down. If we just buy and hold, we will feel uncomfortable every time it hits a new low. However, if we buy the stock at regular intervals with limit orders (say, every one dollar drop) then we will feel we have made a good deal and focus on the price of the latest acquisition.
The main criteria before investing this way is to research our stocks before taking the first plunge and only make the first purchase on a big down day. A rule of thumb is to try and buy the stock below the middle of its yearly trading range. Look for stocks with no debt, low price earnings multiple, super management, reasonable dividends and good forward looking statements. Never buy on margin and only use money that will not be needed for five to ten years.
If we have a hard time picking great companies then we can invest/trade in the market ETF index funds i.e.; DIA DOW 30, SPY SP 500, QQQQ NASDAQ 100.
Sometimes, we may experience the enjoyment of watching our portfolio go down for many months or even a few years. However, once we have a core position, we can trade round it and make small profits on the days it goes up. By trading around the initial position we may find, that in time, our original position stands us in at zero
When stocks or even whole sectors are out of favor, it is a good idea to find the companies with the most stable businesses (ones that will be around and thriving in ten years) and then begin our enjoyable trading experiences.
By trading/investing this way, we can remove the words bull and bear from our vocabulary. It makes no difference to our emotional state of mind, for if the stock goes up, we are happy to sell and if it goes down, we are happy to buy more bargains. We can now feel happy when experts deliver their negative propaganda that herds of sheep follow.
We may hear the same propaganda repeated time and time again by a variety of copy-cat sheep, who do not understand there was very little veracity to the experts statement in the first place. For instance, this type of negative propaganda was particularly rampant when all the expert parrots kept repeating; oil will go to $200 a barrel because supply is outstripping demand and China and India cannot get enough oil. The propaganda did take oil to $147 a barrel before the realization that most Chinese and Indians ride bicycles or walk and there is not shortage…this realization help to turn the price around.
There may come a day when oil is in short supply, but that is not about to happen any day soon. That said, we still need to have a keen awareness of present and possible future world events, economic news and investment bubbles, as we can scale back holdings before any financial meltdown (as in the housing market)
All things being equal and calm, in normal days trading/investing, negative propaganda may send our stock lower, however, we want it to go lower so we can buy it cheaper…We are delighted the negative expert analysis is giving us the opportunity to get in at a lower price than the folks who listened to the same propaganda expert express (six months ago) what a great buy the stock was, trading at $15 dollars higher, than it is today.
Even if we occasionally get it wrong (which we no doubt will) and we have to sell at a loss because circumstances changed in the company, the loss will give us the strength and fortitude to do better next time.
Therefore let’s raise our glass of fruit juice and drink a toast to the wise old man who, a long time ago, advised me to enjoy the losses as much as the gains…Cheers Albert!
Disclosure: No position in DIA, SPY, QQQQ