Each year around this time we start to think about our New Year’s resolutions. Perhaps this will be the year you will finally lose those extra pounds, or maybe the year you will finally stop smoking… we all have ideas on how to improve ourselves, but we can’t forget to consider resolutions that could also improve our portfolios.
Mine is to completely remove emotion from my trading.
When it comes to differentiating a successful trader from an unsuccessful trader, more times than not the main difference is the amount of emotion they bring with them to their trades. Earlier this year I wrote an article on how important it is to remove emotions from investing, but if I am honest with myself, I must admit that I do not always follow what I preach.
There have been plenty of times over the last year when I convinced myself that I should ignore what the market was telling me, and more often than not I paid the price. Did I notice Apple (AAPL) broke down technically in October and failed to hit previous highs… sure I did. Did I know that the stock had little support and most likely would see a huge selloff once momentum turned against it? Sure I did. Did I sell my shares and lock in a 100+% return? Of course I did not, why would I have? I was a genius to own the stock, why admit I was wrong?
This is a big leak in my portfolio. One that I am resolving to correct in 2012. Will it be easy? No… but then again nothing worthwhile ever is. There will always be the voice in the back of my head telling me not to worry, things will turn around. There will always be that voice telling me that no matter what the technical indicators are telling me, there is no reason the stock I have with a 30% gain will not continue to move higher. How horrible it would be to “only” book a 30% gain on a stock.
If only every trade could book a 30% profit, but far too many times my emotions have taken over and I watched my profits slowly erode before admitting the obvious and getting out. It is easy to rationalize, even in hindsight, by saying that a 15% gain was nice… but how much nicer would it have been at 30%?
Do you find yourself falling into this same trap? Holding winners too long, or not dumping losing stocks because your pride tells you that it has to come back? If so, don’t worry… you are not alone. Emotion, more than anything except for a lack of homework, is the most dangerous thing for an investor. What makes it worse, is that it is in our human nature, and can be very tough to deal with.