I wrote about the basic pair of opposites in my last blog (see Time for Equities, Oct 10,2015) on the aspect of whether one should invest or not and suggested that it should be in favour of investing rather than against it out of misjudged fears of losses. There is potential for loss in every endeavour that we may do and keeping ourselves away from potential high returns out of a judgement that possibility of loss exists in equity investing is certainly not reason enough not to be invested in equities. There are ways around it, which can be learnt and applied so as to diminish the impact of the losses, which are part of the deal.
Let’s deal with another pair of opposites that confronts the traders and investors almost all of the time. This one is should I take profits now or Defer it for later? The Warren Buffets of the world (and his India portage, Raamdeo Agrawal) would have us believe that it is not the buying and selling that makes money but the holding. Even Jesse Livermore, the legendary Wall Street trader, was quoted as saying that it is ‘sitting’ that made him most money on his trades. So there does seem to be some agreement between the investing and trading community that one has to sit on the winners. Problem is to find a way to do that. Like I wrote in an earlier blog (see Investing with TA, Oct 2, 2015), very few people are really able to do investing thru the top down approach. Hence to develop the long range vision that is necessary for holding on to an investment for 20 years becomes very difficult. In a startling revelation, one of the top mutual funds of the world stated the highest returns were in the portfolios of those who were either dead or those who forgot that they had invested in the fund!! Meaning, holding for a long time becomes an accident rather than a design.
However, if holding a winner is the surest way to make higher returns than we do have to bring a design into it. Here is where the opposites pop up and make our life difficult. As soon as profits begin to show on our investments or trades, the mind starts demanding that we take profits. The profit taps into various areas of our minds that stores information from the past experiences. To the extent that these experiences have been negative, the mind will scream at you to take profits, reeling out many reasons why you should. While one portion of your rational mind protests feebly that you should continue to hold because the reasons for taking profits don’t exist yet, the other portion of your mind is just too powerful in its influence. Many people around you are coming from the same kind of mind set and they are comments too are asking you to take the money off the table. You will find very, very few people asking you to stick with the investment or trade as they perceive more gains ahead. The only ones that will do this will be the ones that do not have the improper memory storages that impair poor judgement calls.
So this pair of opposites (i.e. take profits or shoot for more) can be addressed in the correct way only if we have a process to fall back on that helps us to deal with our minds better. That is a learnt skill, which is part of a technic that needs to be learnt from a good practitioner and something that has to be practiced over and over by the individual himself. Without this, it would be well high impossible for one to hold on to winners as the power of the mind for instant gratification is insatiable and impossible to resist. It requires great strength of mind and consistent effort to overcome this inherent makeup of the mind.
The next time you tell yourself wistfully, ‘If only I had held on to that stock some more……..life would have been so much different’ remember that it was your own mind that did you in. Only thru a process of educating your mind can you really overcome this problem.