Until we get to the end of Dick Davis‘s 35 tips, I don’t have to declare an Andy Day – I can declare a Dick Day:
Item 23: Predisposition Toward Failure
Human nature makes us ill-equipped to achieve success in the market. Fear and greed are powerful, deep-seated emotions and work against us. They can be harnessed but only with great discipline. I’m not saying we are predestined to fail. Only that by temperament most of us are predisposed toward making the wrong moves. Contrarians make a living from this human fallibility. Some investors, by a complete lack of discipline, are born losers in the stock market. Every time they buy something, it goes down and every time they sell something, it goes up. If you know someone who is consistently wrong, you can do the exact opposite of what he does and be consistently right.
Item 24: Avoid Big Losses
Taking losses in the stock market isn’t a probability, it’s a certainty; it’s an integral part of the investment process. Yet, there is a strong reluctance on the part of the investor to take a loss. It is much easier to hold on in hopes that a stock will come back than it is to close the door on that possibility and deal with the pain and embarrassment of having made a bad investment. Psychologists dealing with stock market behavior tell us that investors consider the loss of $1 twice as painful as the pleasure received from a $1 gain. However, you can keep losses moderate by using stop loss protection. In fact, you can be wrong more often than right and still come out a winner. (The baseball player who fails to get a hit 7 out of 10 times, in other words a 300 hitter, is considered a star and is paid millions.) What’s not acceptable is taking a big loss. When buying, enter a stop-loss order or make one mentally, giving yourself plenty of room on the downside. If you’re stopped out, at least you won’t be wiped out. Sometimes the stock will go back up, but more times than not, you’ll be right. Right or wrong, the key point is you protected yourself against a risk you could ill afford. It comes down to preservation of capital. A big loss is a crippler. You can’t play the game if you lose your chips. Unless of course, you’re super wealthy. Last year, Paul Allen, who founded Microsoft with Bill Gates, lost $1 1/2 billion in RCN, a telecommunications company. Bear markets make smart money a lot less smart. Of course, Allen’s nest egg includes some $9 billion worth of Microsoft stock.
Quote of the Day
Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man.~Fred Schwed, Where Are the Customers' Yachts?
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