The Psychology of when to “Cave”

I bet I hate to lose just as much as you do. Psychologists say that we tend to focus on small failure rather than the investing successes we have. It’s true, and I made a few mistakes last year. They were not catastrophic, and I seem to have been able to roll with it… but I still go back and look at those stocks and want to kick my self.

I’m a fairly optimistic person, so I have to be careful not to become over confident in my stock picks. Remember, the Price of a stock does not care how we feel on any particular day. We may feel supper confident it will go up, and it still goes down. Why? Because we did not know enough about the stock, and went with our gut rather than information. Sometimes even with good information that indicates a specific stock will go up, other market forces cause it to go down. Case in point, last Wed. Xilinx (XLNX) announced it’s best quarter ever. Thursday is went up about a $1.30, and then Friday the market took it all back because it was freaking out about if Timothy Geithner will get reconfirmed or not… some times all your good “feelings” get wiped out for some seemingly unrelated reason.

I tend to sell a winner too quickly and hang on to a loser too long. One of my goals this year is to use a better trading tool. I’m currently just using the standard Schwab account. I can put in Stops, or limits, but not both. I have downloaded StreeSmart, which will let me set trailing stops. On paper I always figure out what my upside exit is as well as my down side exit is. This way, I can take the emotion out of the equation. Lately I have been following the advice to always sell if I’m down 10%. If I don’t know enough about why a stock is going down, assuming I had done my home work to buy in the first place, then I tend to sell before it’s down 10%. If the stock drops 10%, I’m out… Some times I don’t, but if I don’t, it’s because I’m continuing to buy some more… but I’m working on getting the emotion out of any trades I do.

For every trade you do, make sure you know why you are doing it. Before you trade, write down every thing you know about an investment. Then write down what you think you don’t know. Then, and only then are you ready to make a trade. Then if it goes down, you can look at the reasons you bought in the first place. If all the reasons are still valid, then it may still be Ok to keep it… Otherwise it’s time to cut it loose.

If an investment does not perform, and just goes sideways, then you should also think about letting it go as well. You need to realize there is an opportunity cost for any investment. If you come across a better investment, you should take a look at what you have that has not appreciated, or is down. Many times by selling and re-investing in something better will in the long run be more profitable.

Best Time Zone to Invest From?

Why the Pacific, hands down. I live in California, and while I did not mean to stay, I have been here for 20 years. I have a theory, and I’m tossing a challenge out to any statisticians out there to prove me right or wrong. The Pacific Time zone is the best place to invest from. Why do I say this? Well, the alarm goes off in my house at 6:15am. Not too early… and 15 min before the markets on the east cost open. So if I’ve done my home work, I can check a few things and watch the markets open for 30 min or so… get ready for work, check again right before I leave at 7:30am or so… and then later, during my lunch, I can check the last hour as well. As I said before, I do have a day job… so I can’t spend all day checking the market. I just make some picks, set some limits and stops, and then go on with my day. I do set up some email alerts… but otherwise I don’t stress and check the market every minute.

It would be interesting to see if there was any real effect or trend from Pacific coast traders (with day jobs) in that first hour and then the last hour of the trading day. It could make a cool Masters Thesis for someone.

All right, here are some topics (not in any particular order) I’ll cover over the next few weeks. Let me know if there are any others you would like me to talk about as well.
1) Thoughts from Investing Books I’m reading
2) What kind of Investor I think I am
3) How do I find my picks and watch lists
4) How do I keep track of my trades?
5) What I do each morning and evening to get ready for a trading day

Later… Happy Trading.

What's Your Investment Risk Tolerance?

I had a goal of writing an entry every day… but life is getting in the way. Now my modified goal is to write a minimum of once a week, and try for every other day.

But I have not been idle. I did stop by my local used book store www.recyclebookstore.com and looked through their selection of investment books. I picked up 2 books that looked interesting, and still relevant. Remember, my goal this year is to learn charting methods and using option spreads better. One book was an “Idiots guide to Options and Futures”. I have not started it, but it looked like a standard guide of the language, definitions, and strategies for options and futures trading. I’ll report on it another time.

The book I did start reading is called “Riding the Bull, Beating the Bear” by Edward M.Yanis. I have not got to far in, and it looks like it’s really a presentation of the Y-Process strategy (I have not got to that chapter yet, nor have I looked it up on the web, so no spoiler comments please)

What I have got to is a chapter review of Risk Tolerance. It had a short quiz to score my risk tolerance. I also got on line for see if there were any better ones. They all seem a bit contrived, and the questions are a bit goofy, but it was an interesting exercise. I recommend it to every one. I’ll post some links at the end of the blog today.

I took the quiz twice… because I think I have a split personality when it comes to financial issues and decisions. Both Cindy and I are financially conservative. We put savings away every paycheck, I have been boosting my 401K contributions 1% each year. I think it’s at about 11% now… At some point Cindy will say it’s too much, but that is the strategy for now. We tend to save and pay cash for big purchases, and typically will try to even not have a car payment… as a consequence; I do drive a beater 1999 Dodge Caravan. But, Hey, a car just gets you from point A to point B, right?

Right… Back to the subject of Risk Tolerance. I first took the quiz excluding the crazy trading I’m doing in my Schwab account, and reverted to my conservative nature… As expected I go a score on one test of 25 and a statement that “You have an average/moderate tolerance for risk”. I don’t just stick my money in CDs, but I also don’t take risks with money that I need to pay the mortgage or have for the kids collage funds either.

I then took the quiz again, based on how I think with my “chunk” of money that I play with in the Schwab account, and I got a score: 37, and a statement that “You have a high tolerance for risk.” I would agree with that. I tend to take more risk with this money… but only this money. I remember when I got started a few years ago, with less value in the account; I clicked all the “I Agree” buttons to turn on margining. Suddenly I had about twice as much money to play with, albeit at a cost of between 6.5% and 8%. Well it did not take long for me to feel the pain of a margin call. After getting a voice mail from Schwab, and having to put extra cash in the account… and then having a few more close calls (pun intended) I think I have learned my lesson. I still use my margin privileges, but keep it much lower. More on that in a later post. Anyway… The point I was I’m making is that I’m much more risk tolerant with this account.

Here are the 2 Quizzes I took. Like I said, I like the first one better… the second one is a bit lame, but the exercise is still valuable.

http://njaes.rutgers.edu/money/riskquiz/

http://moneycentral.msn.com/investor/calcs/n_riskq/main.asp

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I’m really worn out. Christmas holidays were fun, and I spent it mostly eating, sleeping, eating, watching movies, and reading some SciFi books…and eating some more. My Mother in Law is a great cook! But now it’s back to work. The problem is that while I want to spend more time doing some investing study… I still have a day job and it’s wiping me out. Each night I’m lucky to get an hour of study and investment planning done for the next day..

Just before the holidays, I signed up for an investment newsletter on line. The problem was that after I signed up, I was presented with a list of about 30 other newsletters, training, software and other services. I can’t even remember what the first one was. Well I read through the list and selected about 18 more… Yes, I do have a alternate gmail address that I use for this stuff… and you better too… but needless to say, after a few days into the new year I have about 210 emails… some are interesting, and others are total junk… I’ll report later on the ones I like and the ones I don’t. If you have any online newsletters you like, let me know. Make a comment.

Squeaky Hinge's Investing Adventures

This year I plan to work on improving my investing skills. I have found that my current strategies are not very technical. Some times very "gut" feel. Mostly I have been following the folks over at "The Motley Fool" and building up a big list of stocks I watch on my Yahoo Finance page. My strategy has been a mix of short term trades, not really day trading, but typically most trades are bought and sold in less than a week. The goal had been to try to make an average of $100 a day. Every day, day in day out... for the most part I have been able to do this. Some days much better. I have also been picking up some long positions with dividends.

What I lack is an understanding of how to read charts, and other technical strategies. So this year, and through this blog I'm going to work on, and document my " Investing Adventures". I plan to take some classes, read some books, read a lot of web sites, and if all goes as planed, make a little money. One thing I have also found is that while there are lots of web sites and tools on line, I have not been able to find many good "free" tools out there. I'm not opposed to paying for tools and advice, and I am going to look into that this year as well, but I'm also planning to see if I can find more accessible tools. I plan on working on creating some tools that will help me and others... stay tuned.