Trading and Emotion, page-3

Morning,


there are hints in your post and nodferatu's reply that point to one of the massive issues.


"after doing some reading of a few basic trading/investing books."

and, nodferatu "There are some good trading psychology books outs there....."



the heart of the issue - is the difference between 'trading' and 'investing' and for either - the assessment of one's personality - including tolerance for 'risk'.



Now - I will go out on a limb here and say that I would bet that you have not even defined what 'risk' means -- for yourself - or perhaps - even looked up the definitive meaning of the word.

These are absolutely basic things one needs to do - unless one wishes to be in the 90% plus area of traders who go broke - most in very quick time.

Here is some interesting reading - there is a lot of work on it available - just google and read.


http://www.tradeciety.com/24-statistics-why-most-traders-lose-money/


"

1. 80% of all day traders quit within the first two years. ¹
2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. ^1"

Why --------- in the name of god, would anyone want to be a stock trader with statistics like that?


Now - imagine a pub that has poker machines where - instead of going and putting in a dollar at at time - that you put in say 100 bucks in one hit - and then came back in 4 weeks to see what the result was.

Lets say that they even paid double what other machines pay out.


Would they get business? Or, at least - would they get anywhere near the business that the current one's get?

Why not?

You can answer all of these - it's important to work things out oneself.


Now - for the average asx punter ---------- look at the difference between 3 types of people ----

a. DT or ST traders

b. 708 investors who put larger amounts down well before listing - up to say a year before a stock lists

c. Warren Buffet - who buys, with no intention to ever sell.


Now - can you imagine a. doing what either b. or c. do?

Why not?


I won't go any further with that lot - you should come up with some pretty good thinking if you ask 'yourself' the questions.


Now - on the OP -

"I researched, bought, and sat on stocks until I thought they were at fair value and then sold them."


What answer would one expect if one asked Warren Buffet a question of - "if you owned a stock that was fair value - would you sell it?"



Now - think of a young fruit orchard.

An investor - plants an orchard - lets say - they buy (invest) in small trees - and plant them. Then they tend them.

Fairly close to a stock owner really in some ways - they buy a stock - and, they monitor the progress --

now - for the first year ------------- does the orchadist - look at the progress of growth - or does he continually count the fruit?

Now, look at the mentality of most of our stock owners - they buy the stock - then - pretty much - they keep and eye on the business - but, mainly - they judge almost all matters by the price ----- (the fruit).

And, - they love the young growth stocks ------------ the young trees.

But, how is it possible for young trees to bear fruit in their first year?

It's not - what one needs to be watching - is not how much fruit - or the market price of fruit - but, one needs to be watching - how the orchadist is caring for the trees ---------- is he maintaining the fences that keep the possums out - which can devastate a lot of trees in one single night - is he keeping on top of pests with a proper maintanince program which is well designed and executed.
Does he have a good transport system set up for the first harvests. Does he have a sales plan for the fruit.


Now - if you saw an orchadist - ripping up the fruit trees after planting them for 6 months -because they didn't have any fruit ------------- what would you think of him?


Obvious.

But, that's what most investors do --------------- they set things like - stop losses - which automatically without any controls - just rip out entire orchards.

Or even without stop losses - investors see a storm over the ridge - and go and pull all the trees out - hoping they won't be destroyed by hail - or some other calamity --------------- sounds very stupid - but, that's exactly what people do.

Most people on the market ------- don't think about the actual benefits that come from when the trees bear fruit - they just hope that someone will come along and offer them a high price for the orchard - before it bears anything.

And, if the price of orchards goes down for a bit - because an orchard across the valley sold for less -because the owner died and it was badly kept because of ill health - then, they sell their own orchard in panic - because it looks like orchards aren't worth much.

And - they just jump from orchard to orchard to orchard. -

Who benefits?

The orchard real estate man - and, if they do happen to make a profit - the tax man.


Not us traders.

Pinto