When it comes to investing, most people are their own worst enemy.
Passionate emotions can inspire you to great heights in your career. They draw friends closer in your personal life. But in the stock market, they’re lethal.
‘Twas ever thus. From Biblical times to the present day, emotional investing has turned fortunes to dust. When you manage money from your heart, not your head, the universe punishes you.
Does that sound familiar? When emotions are swirling, buying low and selling high is a lot harder than it sounds. If you’ve been investing for longer than five minutes, you’ve probably made a trade that haunts you — the kind that, in hindsight, seems plain dumb.
When you lose money, it’s human nature to beat yourself up about it. If you can’t even figure out why a stock has gone down, that beat-up can lead to self-hatred. It pushes you into your shell.
Free Reports:
That’s the worst place to be as an investor. But a solution is at hand…
Overcoming your human biases is one of the hardest things you can do as an investor.
That challenge is what separates the greats from the amateurs. Despite their fierce reputations, men like James Packer and Kerry Stokes don’t get hot-headed or sentimental about securities.
James and Kerry will fight their foes tooth and nail across a boardroom or a courtroom — but if they see a trend moving against them, they won’t fight the stock market.
A stock doesn’t know you own it. It doesn’t care if you make or lose money — and it sure as heck won’t reward your loyalty. So why should you swear blind allegiance to the shares in your account?
James and Kerry understand this. For them, the cost of owning a dropping stock far outweighs any warm, fuzzy feeling they might get from owning shares in the company.
Great investors are not robots. They have emotions just like the rest of us. But the likes of James and Kerry employ vast teams of advisors to weed their emotions out of the investment process.
You probably can’t afford your own crack team of full-time financial advisers. But here’s the good news: you don’t need a team. You can take care of your emotion-driven investing with one simple strategy…
Here’s the first step to beating the hidden biases that can wreck your portfolio: recognise them.
You should know that each of us is our own worst enemy when it comes to making money in the markets. We’re either too greedy and we hang on too long, sometimes watching a big winner turn into a big loser…or we’re too fearful and we sell once we see a tiny profit, completely missing out on a big winner.
Even worse, sometimes we hold onto toxic stocks for stupid reasons. We warned you against that recently.
Whatever their reason for buying and holding, most investors lack an exit plan. But if you don’t have a plan for when you’ll sell a stock, chance are you’ll make an emotional decision…and sell at exactly the wrong time.
Don’t make that mistake. As we mentioned earlier, great investors are not robots — but that doesn’t mean machines don’t drive their decisions…
The best way to remove emotion from your investing is to take advice from cold, hard data.
That’s the premise of algorithmic trading. ‘Algo traders’ build complex computer programs that can model and predict where the markets might move.
These programs signal when to buy and when to sell based on movements in the market. Much like the stocks themselves, these programs ignore news headlines, pundits’ opinions and investors’ mood swings.
When the program gets things right, it can make huge profits for its operators. This is a big reason why top-tier investment banks and hedge funds have made so much money in the past 15 years.
The model acknowledges that when sentiment changes, so too do stock prices. Sentiment swings poleaxe your average punter — but with a well-tuned model, algo traders can do the poleaxing.
Algo traders go by another name — quantitative, or ‘quant’ traders. The best quants are curious, clinical and consistent.
That’s a perfect description for our newest colleague at Port Phillip Publishing, Jason McIntosh. Jason is a long-time quant trader, and a highly successful one.
In tomorrow’s Money Morning, Jason will take the reins. He’ll draw back the curtain and reveal his brand-new quant trading service. If you’re sick of seeing your portfolio suffer from emotional buying and selling, you won’t want to miss this…
Cheers,
Tim Dohrmann,
Editor, Money Morning
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