4. Not Expecting To Make Mistakes – And Not Fixing Them Quickly

Even the best investors make mistakes in the market. Maybe you buy a stock that doesn’t really have the kind of fundamental and technical strength that normally precedes a big uptrend. Maybe you bought a stock without noticing that it was due to report earnings the next day. Then bam!

The report is disappointing, and the stock slumps 15% in one fell swoop. Or maybe industry events or economic events unfold that neither you nor anyone else could have anticipated, and that sends the stock lower. No investor is that amazing superhuman who’s never wrong in the market! Read “Reminiscences of a Stock Operator,” the semi-fictionalized biographer of Jesse Livermore, a phenomenal investor who lived in the early part of the 20th century. In that book, and in Livermore’s own how-to guide, “How to Trade in Stocks,” he recounts examples of money-losing trades.

But what made Livermore different from most, and what makes the best investors different today, is willingness to learn from mistakes. Livermore didn’t blame the market, or the guy who have him a bad tip, or the company itself for being bad. Instead, he accepted responsibility when he broke his own rule and bought a stock based on a tip, something he had vowed never to do. It’s not about beating yourself up – it’s about acknowledging the mistakes, understanding how you made them, and taking steps so you don’t repeat them. Livermore, like Gerald Loeb, Nicolas Darvas and many other top investors of the past century, realized that some errors are inevitable, and always took quick action to minimize those errors. They all had a system for quickly cutting losses if a stock’s price fell a certain percentage below what you paid for it. Some investors say 10%, other systems are adamant about 7%-8%, still others recommend keeping it much smaller. Keeping it below 10% is a good idea – and in shaky market conditions, a smaller percentage is usually better.

Looking at it one way, that’s a very mechanical discipline that is a simple way of saving yourself a lot of money and heartache, and lets you sleep at night. One of the trickiest part about many growth investing systems is that they expect you to monitor stock charts all day long, so you’re ready to hit the “sell” button the moment a stock dips a certain percentage below the buy point.

 

But that process can be more simple and manageable.

It’s entirely possible to buy at the right time and sell when necessary to protect your money – without being chained to your computer 24/7, and without making the stock market the focus of your entire life! And beyond the mechanical process of selling at the right time, there’s a true psychological freedom that comes when you just expect that you will occasionally buy a stock that doesn’t work out. And of course, you will miss some names that jump higher! That’s life, and accepting it makes the activity of investing that much easier. Why get angry at the stock market? Why flagellate yourself over the big one that got away, or the “sure thing” that didn’t pan out? There is always another opportunity, another company with something innovative that’s driving customer demand. Sometimes geopolitical changes spur growth – witness the boom in Chinese stocks in recent years. Sometimes industry changes result in higher stock prices – that’s been true in commodities stocks lately, as the underlying assets have been bid up.

There’s always something – whether it’s a new technology or a service or something as simple as a retail concept that catches on with the public. And yes – that’s true even in a weak economy. Did you know that in the depths of the recession in 2009, clothing retailers were among topper forming stocks? That’s right – some of the better names, like Aerospatiale, were managing inventory and keeping prices low. Those techniques kept earnings growth solid, which in turn attracted big investors.

The point is: There’s always something new coming along that’s a ripe candidate for investment. Not just one new thing, but many, every year. Think about it: A few years ago, had you heard of Green Mountain Coffee Roasters? Baidu? NetEase? Vistaprint? Ctrip? All of those made huge price gains in 2009. But prior to their huge rallies, none of those were big household names like Microsoft, Wal- Mart or Procter & Gamble, Johnson & Johnson or even Apple.

So go easy on yourself if you let a big winner get away. There will be another one coming down the pike, right behind it! Give yourself permission to make mistakes with your investing. Mistakes are inevitable. The real point is to understand how to cut your losses early, and to offset the duds with huge winners. Don’t obsess about a stock where you lost some money, or one that you missed.

Opportunity is constantly knocking – and don’t let anyone tell you differently. New, entrepreneurial companies with fresh ideas are always coming along, offering golden opportunities. That’s true no matter who’s in the White House or Congress, whether the economy’s been poor, or whether your favorite investment category seems out of fashion this year. Be open to new opportunity, and you will find it. Stock investing can be very financially rewarding – if you stick to the right names, invest at the right times, and keep the right mindset.

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