I gained 15% in 98, lost 60% in 99, and gained 35% in 2000. Obviously I am still down quite a bit, and I've spent a lot of time thinking about what I did wrong in 99.
I have a different strategy than most of the posters here. I buy undervalued stocks and wait for them to go up, or sometimes short overvalued stocks and wait for them to go down. Sometimes this takes 2 months, sometimes it takes 2 years. I use TA to pick my entry and exit points. (BTW when I say undervalued I don't mean traditional "value" stocks, I mean companies with good prospects that are not fully appreciated by the market yet.)
One of my mistakes has been to sell winners too soon. If I had held the stocks I bought for twice as long I would have made a lot more money. Not that I am advocating a blind buy-and-hold policy. If there's bad news, sell, but don't get scared out of a winner by a short-term pullback. Same thing applies to going short. I went short in 99, too early, but then I made it worse by giving up before it paid off. Nothing worse than being right and still losing money.
Another mistake was to hold losers too long. I averaged down on a stock that went bankrupt. There's a difference between being contrarian and being pig-headed. Contrarian means buying stocks with a low price and an improving situation. Pig-headed means buying stocks with a low price and a deteriorating situation. Sounds obvious but IMO this is a distinction people often fail to draw in practise.
Finally, my biggest mistake of all was to get caught up in the game like a gambler, forgetting that it was real money, just playing the game, not changing my strategy, assuming I could make back the money as easily as I had just lost it, until finally I realized I had lost 60%! Then I finally came to my senses with a shock and realized I could NOT AFFORD TO LOSE ANY MORE! I took a short break from trading and then came back with a new attitude of refusing to lose money. I still went after stocks with a big potential payoff, but I did everything I could to limit the downside risk, and I was much more careful and serious. Since then I have been making money again.
The best book I know dealing with these issues and trading in general is The Psychology of Finance, by Lars Tvede. It's an expensive book, but worth it.
Fun-da-Mental |
