Getting in Touch with Your Emotions
When you buy a security at the right time and ride it to new highs, letting go when it suddenly falls on hard times can be difficult—but if you want to protect your money, you must be prepared to hit the eject button. I have compiled stories in this book from investors who struggle with this very thing; attachment can be a very large hurdle to overcome.
It can be frustrating to sell a position, only to see it turn around and hit new highs just when you sell. I won’t lie: You have no guarantee that after you sell a position, it won’t turn around and rise higher than it was when you sold it.
That’s why it’s important to ask yourself why you hold each position in your portfolio, as well as what it would take for you to ultimately sell that position. For example, would you be comfortable if it doubled or if it were a ten-bagger? If you lost 50% in a position, is that the point at which you’d sell? Or if you read news that the company had a fundamental change in its growth strategy—would you sell then?
Stocks and mutual fund components are always fluctuating in value. Management in the underlying companies involved must constantly adjust their strategy based on market and economic conditions. How does this affect the way you view each holding in your portfolio?
Studies have shown that we go through a cycle of investor psychology, as shown in Figure 1.4, which typically ranges between two basic emotions: greed and fear.
Source: RMB Unit Trusts
Figure 1.4 The Investor Psychology Cycle
My trend following discipline eliminates those emotions. Oh, who am I kidding? Let’s admit that we’re all human. We have powerful feelings and opinions. But when it comes to investing, it’s important to quiet them as much as possible. By following a mathematical formula and a disciplined buy-and-sell strategy (and with plenty of practice), you will no longer let these emotions dictate your investment decisions. I’m not saying that you won’t experience one or all of them, but they won’t prevent you from having the confidence to buy or from pulling the sell trigger.
This brings me to the point of this book. I give you several examples of market uptrends and downtrends, and I show you how to identify them using the 200-day moving average. I also show you how to apply this strategy to industry-specific markets and sectors in the United States and abroad. I give you an easy-to-understand, nonemotional investment strategy that works in any market climate.