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Mental Posture

28 August 2018 By PDSNET

effective private investor from one who loses money continuously? The difference is what we call “mental posture”. To be a successful private investor you need to have a good mental posture. But what is mental posture? It is your emotional response to the share market in general – and to your shares in particular. What are you feeling? Because how you are feeling will determine what decisions you make. You may think that you are well in control of your emotions. You may consider yourself to be rational and objective in your investment decision-making. You may think that your emotions have no influence over your decisions – but they do. Consider this example. Suppose that you have bought a share three months ago for 1000c per share and that it has now fallen to 800c – what are you feeling inside? You are feeling anguish - pain. And you are saying to yourself, “I cannot sell the share because then I will lose money”. That is total nonsense, of course. You have already lost the money – you just don’t want to admit it to yourself! You make the price which you paid for the share – three months ago – the single most important factor in your decision as to whether you should hold it now or sell it. But the price you paid three months ago is completely and absolutely irrelevant! The only thing that matters now is, “Will it go up from here or down?” If you make an irrelevant factor the most important factor in your decision you cannot hope to succeed. To succeed you have to:

1. Acknowledge the importance of your emotions in your decision-making process – especially your emotions of fear and greed.
2. Acknowledge your emotional responses, as they cannot be avoided - you should take them into account and aim off for them.

Probably the most important technique in your armoury is your stop-loss strategy. Without a strong stop-loss strategy, you will end up watching helplessly as your shares lose value. You will be the rabbit in the headlights – you know you are going to die but you don’t move. One of the secrets of stop-loss is to value your shares in your head at their stop-loss value. To give a simple example, if you have bought a share for 1000c and set your stop 10% lower at 900c, then re-value the share in your head to 900c. Think about it as being worth only 900c - because then you will experience no pain if you have to sell it at that stop level. That implies that the very act of buying a share is the act of taking a 10% loss – immediately. But that is good because it will make you much more careful about what you buy. Most novices value their shares at their market price which means that when and if it comes time to sell out on their stop – they experience pain. And that pain very often prevents them from selling. Then once they have ignored their stop they simply watch their share fall. They become a “long-term” investor. Very often a long-term investment is just a short-term or medium-term investment that went wrong!