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Today I intend to go into some of the behaviors displayed by investors I have talked to find out why some investors win while others lose.
I personally invest because I enjoy learning new things and find that researching companies, doing analytical work on key events, researching the markets in which they operate and the technical details of the work they do fulfills some of my thirst for learning. But not many people invest for this reason.
The main concerning behavior of some investors (and it seems all to common) is the idea that big gains can be easily achieved and that these gains should come fast and every time. This is unfortunately linked to the “cut your loss before you miss the next big riser” attitude.
It seems that a lot of investors either see others make big gains or make big gains to start with themselves and expect this as the norm.
Those who attempt to hit these big gains will chase the next “big riser” and if it doesn’t happen within a small time scale they will experience the feeling of failure that they are not producing the level of return they expected to make.
If they lose money they will start to panic that they need to make back the loss and extra to compensate for the experience, this will result in them cutting their losses and moving the funds with little or no research into a new “hyped up” company.
The next stage is panic as they buy and sell for small losses realizing these losses are building faster each trade.
The end result is that the person usually becomes desperate and constantly anxious meaning his/her judgment is even more impaired and the feeling of letting down their family or losing their home or just the thought of the heavy losses and hours of work needed to build back said funds becomes overbearing. Some of these individuals resort to shorting or “going long” to scrape back gains only to lose even more.
The fact is that these people are the ones that are, in a most basic sense, addicted to trading. If your behavior has developed past the first stage I advise you seek help, I will be writing a book on how to avoid these behaviors and mechanisms to help reverse the way you trade.
Unfortunately these people have no help available and this is a real problem. The stock market is a cruel beast and the FCA and LSE should put measures in place to help people deal with the addiction trading can bring.
The hard fact is that trading in and out of these sentiment stocks will and chasing the huge gains will always eventually end in losses. You might think I am teaching you to suck eggs but that’s not my intention. My intention is to give you the tools to avoid the trap of addiction, it might or might not work, if it doesn’t you should seek help as soon as you can.
So here is a list of tips to avoid these behaviors
Firstly
Taking a long term outlook on investments and only investing what you can afford to happily live without for a prolonged period of time is essential.
Second up
Picking a realistic target sell price and not being misled by the bulletin boards and other media outlets is equally important , it always helps to pick strong growth companies and put the time into researching a range of companies before investing. Once you have picked a few companies that (from your research) show good growth prospects and a stable fundamental base, pick a buy price for each of the companies and once one reaches your target buy into it. Decide in advance how many companies you want to invest in and stick to it. I never invest into more than three companies at once as I like to avoid spreading my funds to thinly. I also find that concentrating on multiple investments and the price movements increases stress and excitement and subsequently the risk of emotional trading/addiction among some investors.
Thirdly
Do your research and be so thorough in doing so that you are 100% confident in the long term outcome and that no matter what anyone says to discredit the company you have the answer to the attack. You must except that no company is perfect and every company that is growing will suffer financial strain along the way. This is not necessarily a reason to sell up and you should consider the company growth and whether it is still on target to achieve the results you envisaged.
Forth
The AIM market is not driven by fundamentals only. The AIM market and in fact most of the markets are driven by investor sentiment. This is something you must ignore until your sell target is achieved otherwise you will find yourself panicking about the losses or loss of profits as you wait for your exit price. If you know what event you are waiting for or what growth stage you are looking to be invested during and you have a set target exit price which your research suggests is conservative then there should be no reason to be agitated during the ups and downs.
Fifth and almost lastly
Always re-asses your investment after each RNS as even news that seems small and irrelevant can have a large and disproportionate effect on the company, an analogy would be the straw that broke the camels back. Never underestimate the strain or upside small news can have on a company.
Lastly
Always have a target in mind and only change that target if things change beyond your expectations. Once your target is met you should sell as you planned and never get greedy and chase more than you firstly deemed fair value. Its easy to get carried away when you see 50% + rises and people say about bull runs and 2000% rises are coming but it is important to keep a level head and stick to your plan.
You might miss out on the extra 20%+ but that is a lot better than being on the wrong side of a spike.
The market is made to take your money and help companies raise funds at your expense.
I will be putting all my analytical techniques into my #SIBseries book which should help you all decide your targets and structure your research. I will also be putting together a few books on different industries and what results and figures in each industry actually mean.
I hope this has helped and I hope people spread this piece to help every investor avoid this behavior.
As always:
All in my opinion and not to be taken as fact nor advice.
Always seek professional advice before investing in any company.
