This has been a very challenging year for investors, as a small group of big-cap names pushed up the indexes, while the vast majority of individual stocks never escaped the clutches of a bear market.
Many investors are hoping that positive seasonality will provide some good opportunities to end the year, but there are plenty of financial concerns to spoil the party.
No one can predict what will happen in the coming months, but what you can do is prepare yourself mentally and emotionally for success.
One of the best things about the stock market is that you can get a fresh start anytime you want. As long as you have capital, you can start over. Just sell your positions, wipe the slate clean and start day one with 100% cash. It’s a good thing to do periodically as it changes your perspective on the market. Our judgment is always impaired to some degree by the positions we hold, especially when we cling to poorly performing positions and hope they will eventually work out. You can always buy back anything you sell, but removing them from your portfolio will help you be more objective in your evaluations.
Treat everything you have as if you bought it that day and use that cost basis to formulate a new trading plan.
Another way to do this is to mark your positions to the market. Treat everything you have as if you bought it that day and use that cost basis to formulate a new trading plan. Where do you stop? Where do you take earnings? Are you increasing or decreasing the position?
Ridding yourself of the baggage of bad or mediocre stocks is an extremely important step because it will help you develop a more optimistic mindset.
The factor that will determine your market success more than anything else is optimism. Not optimism that the market will go straight up and all your stock picks will be winners, but optimism that there will always be another good trading opportunity no matter what the market does.
Instead of wallowing in misery when the market misbehaves and your account suffers losses, the optimistic trader focuses on ways to deal with the challenges and immediately starts thinking about the next set of opportunities that will develop because the action is so bad The great beauty of the market is that bear markets are always followed by bull markets, and there is a new opportunity every day if we look hard enough.
Optimistic traders are always confident that they will be able to find ways to eventually profit. The worst bear markets also tend to have the biggest countertrend moves, and even if you don’t focus on shorting, there are great opportunities in downtrends.
Opportunities are not a function of the market; they are a function of mindset. When the Dow Jones is down 1,000 points, are you focused on how bad it is, or are you thinking about how you will ultimately take advantage of the opportunities created by extreme emotions?
With the fourth quarter upon us, I am very optimistic that earnings reports, seasonality, tax loss selling and other factors will create some great deals. We just have to work to find them, which brings us to the next emotional factor that will determine success: persistence.
Most big traders are sloggers. They work on it day in and day out. They are driven in part by their optimism that there is another great deal out there, but many of them have developed a routine and that work ethic is part of their daily process. Through thick and thin, they look for new ideas, lead positions and develop strategies. It’s not something they do once in a while. This is something they do consistently.
One of the biggest benefits of persistence is that it leads to compounding returns. Steadily building an account over a long period of time is how you build great wealth. You don’t need to be a buy-and-hold investor to compound your gains, you just need to keep pushing your account to new record highs, which is the basis of compounding.
Great traders are always looking for ways to improve. No matter how long you’ve been trading, you continue to learn. I am sometimes surprised how I continue to develop as a trader, even though I have been doing it for a very long time.
Unfortunately, optimism and persistence do not always lead to immediate success. It is important to recognize that the reason we can make so much money in the stock market is because it is difficult.
Keeping it real
One of the main reasons traders fail is because they have unrealistic expectations. Trading and investing is hard, and no one can escape a steady diet of painful mistakes.
If trading was easy and everyone could do it, then you wouldn’t be able to make much money from it. It is because there are so many others who fail that we can take advantage of it. It’s somewhat of a zero-sum game, meaning you have to win, someone else has to lose.
Once you acknowledge and embrace the fact that trading is extremely difficult, you will appreciate that you will have many losing trades along the way. There is no way to make significant money in the stock market without also having a whole lot of mistakes.
Bad trades are not shameful or a reflection of your ability. They are inherent in the trading process. If you don’t have losing trades, then it is very unlikely that you will have many big winners because you will never take the necessary risk.
Once you understand that mistakes and losses are just the nature of trading, they will begin to lose their sting. So what if you made a bad trade? Perhaps you have learned something and will benefit from it in the future.
Traders need to understand that luck is their constant companion and something you cannot control. Sometimes you have good luck and sometimes you have bad luck. It is inevitable and has nothing to do with your ability as a stock picker. It’s just part of the process, and once you accept that reality, you’ll have the mindset to optimistically carry on.
If you want to be very successful in the market, clear your mind and use a combination of optimism, persistence and acceptance of reality.
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