There is a parasite invading the minds of investors in this age of abundant information. This parasite creates a desire for a constant stream of news and data to pacify the mind into a comfort zone that is always restless, never satisfied. Never mind that a majority of the information digested by investors is of the useless variety. Nonetheless, it is those pieces of useless information that are combined within the subconscious to make often times irrational, nonsensical investment decisions that serve to either cut profits short or allow losses to run.
Micro-managing portfolio positions has become the preferred modus operandi for investors in the current market environment. It isn’t, however, just the current environment that has created this negative trait. It has been an apparent flaw among investors since shares of Dutch East India Company traded in the 1600s. The current environment has made it that much easier to micro-manage positions, however. There is an abundant and endless supply of information to fool yourself into making the incorrect decision with. Don’t allow yourself to think you are in an exclusive class. You WILL 100%, without a doubt, make the incorrect decision as a result of micro-managing your portfolio.
The constant monitoring and obsessive reasoning behind moves in a portfolio will never allow you as an investor to allow your profits to run. Allowing profits to run is one of the biggest faults I see among the investor class. The scope of punishment has been so great over the past several years that profits seized at a moments notice.
I see it myself with the questions I receive whenever a company I have issued a research report on begins to run. The most obvious observation is that investors start beginning to look for excuses to take a profit as soon as any profits are achieved. This is a fatal flaw. You will never make the mark you desire in the markets by taking small profits. It won’t happen. There will come anomalous periods of time that take back your small profits faster than you can react. The desire to take profits quickly must be deleted from the deepest levels of your cerebral cortex if there is to be any longevity in your game.
How do you go about deleting this fatal flaw? Start by becoming detached from your portfolio positions. You can’t be intimately involved with every tick and expect to be successful. Stay away from the need to deeply dissect the reason behind every move a stock in your portfolio makes. There are forces of supply and demand in the marketplace that aren’t meant to be figured out. There are allocation decisions that will cause 5%+ moves in a stock you own that shouldn’t be thought about twice. Instead, you get traders and investors talking about how there is a conspiracy afoot with a market maker that wants the stock to move up. Wild conspiracy theories develop about partnership developments that don’t exist. Rumors of institutional buyers come into the marketplace.
All of these campaigns of misinformation weaken your mental resolve to stay with the position. Let me tell you why: When you mentally digest a completely false piece of information, it creates a spark within your mind that wants validation. When the necessary validation doesn’t come, while the stock you are emotionally involved with begins to pullback, it amplifies your level of anxiety. Not only are you dealing with a loss of capital, but your hunger for validation goes unsatisfied. It becomes a cycle of amplification of emotions. The amplification of emotions leads to irrational decision making once the investment behaves violently, as investments often times do. You sell early. Profit cut short. Investment continues to run for months on end.
The sooner you can sit patiently on a position, allowing the market to work for you instead of you trying to work the market, the more profitable you will be. Stop judging every tick. Stop utilizing false reasoning. Stop micro-managing your portfolio like its a 2 year old walking through a glass factory.
I’ll end with a cliche and somewhat tired quote from Jesse Livermore. Doesn’t make it any less relevant, however:
After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.