Discipline
(c) 2000 TLC, may not be reproduced without permission
I’m not talking about mistressmaxine.com, here, bubby.
I’m talking about following the rules. We all have rules. If you think you don’t, look again.
If you have a rule about shaving every morning, and one Saturday you break it, we both know the Stubble Police won’t be knocking on the door with a warrant for your arrest. But you do have rules in the stock market, and you have to follow them, or Mistress Market will spank you. You can trust me on this - I am still at large.
The touts and gurus never mention this fact. The ads for the new revolutionary trading software never mention it, nor do the smiling actors on the television ads. But the fact remains - when it comes to investing in the stock market by choosing your own stocks, you are playing against some people that are very smart, and that have specific disciplines - and if you don’t have discipline, you will probably lose your money, no matter how smart you think you are.
That’s not all. Everyone is different, and my discipline, (or Mistress Maxine’s for that matter), may not work for you. The "Get Rich in the Stock Market" books and tapes don’t mention this interesting fact either, mainly because the market whizzers that are selling their books can’t tell people that they are different and unique and then expect them to fork over cash for a cookie cutter solution to their Individual Stock Market Jitters.
I’m not saying that you must make your own calls in the market. Many of us don’t have the time or the inclination to do it. If you want someone else to make your calls in the market, I personally believe you should go straight to the Mutual Fund Page of the paper, and have a nice day.
Ask me how I know this. Go ahead, ask me.
OK, I’ll tell you. I’ve met people that had things come easy to them. That’s a good thing, and I wish them well. But that’s not me. I learned The Hard Way. I haven’t had too many things come easy to me. In the stock market, I haven’t anything come easy that I can recall. Maybe my IQ is lower than average - I don’t know. All I know is that when somebody takes my money away from me, I sit up straight and pay attention. It’s personal - know what I mean, Vern?
I’m a short-term trader. I need My Plan. I need My Rules. I am not suggesting that everyone else be a short-term trader. It’s not the easiest way in the world to make money. It’s actually one of the hardest things I’ve ever done. But I can do it successfully, and the main reason I can do it is discipline. I’m also not suggesting that if you have discipline you will succeed and if you don’t you will fail. I’m only suggesting that if you don’t you will fail.
Here is the good part: it does not matter a whole bunch what your rules are when you start out. I am not advocating that one of your rules should be to knock over the fast food restaurant down the street and make a getaway on your skateboard. I’m simply saying that any rules are better than no rules. Make some rules. Change the rules later if they don’t work.
Further, it’s not hard to come up with some good rules. It appears that it’s directly correlated to what I call the Unpleasant Loss of Capital, or PT (Pain Threshold).
Let me give you an example.
Say you have $200,000.00 in your trading account. You are waiting for an IPO you like. It comes out, and you buy it. You are intending on holding it for a couple of days, maybe a week, getting out for a quick profit if it runs up, and bailing out fast if it doesn’t work out. You buy 500 shares. The stock immediately goes down.
I’m psychic.
Fast forward to three days later - it is down 8 points. You’re down four large. Not A Good Thing. You decide to hold on, because you liked the stock and you think it will work. Two days later and you are down 14 points, seven grand. You think, "No way am I taking a seven thousand dollar loss on 500 shares. I will hold this stock till my granddaughter graduates cum laude from Yale before I sell it for a seven thousand dollar loss."
Somebody asks you if you had it to do over would you just take a grand hit and be done with it, and you say, "Absolutely!"
Been there, done that.
Where did you go wrong? You broke your rules, my friend. Your mental photograph of the future did not quite match up with Channel 7 and you couldn’t face The Cold Hard Truth. You intended to hold the stock for a couple of days and get out fast if it went the wrong way. You didn’t do that. Then you changed your rule to fit the bad move.
Suicide.
The rule was: get out if it doesn’t go right. You made the rule, I saw it up there, get out fast if it doesn’t go right. The truth is that you would probably end up selling that stock for a loss, and it would probably be a loss greater than what you would have taken on Day Two had you gotten out fast.
Let’s look at what happened. You were wearing brown shoes that day, you had Italian food for lunch, and you didn’t set a stop limit at two points on the downside.
It’s not the mental hi -jinx you went through while your money drifted off into the atmosphere. Warm and Happy Positive Thoughts is not what I am talking about here.
You can make new rules - start wearing black shoes on "Buy IPOs Day", eat at the Casa Grande Mexican Restaurant, but if you don’t set your limit at two points when things go wrong, no amount of salsa and chips is going to help you, amigo. The heat you feel will not be the jalapeno peppers.
Rules. Rules that make sense. Rules that you can apply. You must have rules.
The fund managers have rules. They have no choice - they have to follow their rules. Football players, eye surgeons, you name it, they all have rules.
You must look at what you did wrong, and then formulate a rule to make sure it does not happen in the future. There is no other way. Here is why: we are all learning. We are all in Stock Picking School. This game is not really about "making money" while we are learning. Here is the big secret: what this is really all about is avoiding the loss of capital until you get good enough to make money consistently.
The only way to avoid loss of capital is to have rules in place that will not allow loss of capital to happen, and the only way to make those rules stick is discipline.
Discipline is the key. No plan will work without it.
Make your rules and stick to them. Sit down and write them down on a piece of paper, and follow your rules. If one doesn’t work, change it. Don’t break more than one rule at a time.
You’ll do better if you make some rules and stick to them. |
