THANKSGIVING 2022: Setbacks make better investors
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Thanksgiving 2022 event: Setbacks make a better investors
Hello everyone, I am pretty sure this year, is a year that is "memorable" as bear is hitting the market. We have been a long bull market previously, or a fast and furious V-shape recovery of Covid-19 crash (bear), thus, this longer term bear market definately has upset many investors.
However, instead of getting upset, we should use this as an oppurtinity to review ourselves, both strategies and mindset in investings, to be a better us. In addition, it is also very important to equip and prepare ourselves for the next bull run!
Setbacks are fine, but never quit the market. The moment we quit, we lose.
Setback 1: Controlled by the emotion, not rational.
Look on the biggest market of the world, US. Do you notice that all three indices are always going up in a long term prospective? Indices is always going up because of three main factors: Population growth, inflation and index changes. Population growth creates more demand on the stock; inflation causes the money value decreases, which then increases the asset price like stock; index changes always replace a weaker company to a stronger one.
Then, why most people still losing money in the stock market? It is generally believe that 90% people lose money in stocks. How can it be?
Yes, macro-analysis, fundamental analysis and technical analysis are important in stock market analysis. However, I would say that emotional or physiological control on the stock market, plays a much bigger weightage to be profitable in the stock market.
For example, do you have this experience: You have done the research, wait for the entry price to be triggered. Ding! Then, you will find that after you buy the shares, it starts to tank. The red color makes you uncomfortable. After a weeks or even months, you are tired to see this stock never perform, or in a deep red color. You decide to sell it. The moment you sell it, it shoots to the moon.
If you experienced this before, you are not alone. I experienced this a lot and paid a lot of tuition fee to the market. After being cooked and prata by the stock markets, I summarized three important points to control and protect my emotion in stock market:
1. Never buy with FOMO (fear of missing out), and sell with PANIC
Using Adobe as an example. I have done the analysis and identify Adobe is a good stock. While I am waiting for it to dip deeper, it suddenly gap up. On the next day, it went higher again. I was feeling “Oh shit, I missed it, I need to buy it now!”, and I FOMO to buy it. Then, as you can see, Adobe consolidated for quite long time and most of the time I was in red, as I bought at resistance level. Until one day, I am impatience and closed it at a small loss. However, after I sold it, Adobe is hitting new high and new high again.
Lesson learn: Follow the plan, and trust what we have researched. The moment we are affected by the chart movement, most of the time, we make mistakes. Now, I am using stage analysis to help me sharpen the buying point and selling point.
2. Buy a stock after listen to a tip or read a news
The tip can be from media, analyst, financial report or even the Youtuber. It is fine to listen to those tips, but it is still very important to do our own research, and wait for the correct entry. If we do not do enough research on the stock, any correction would induce fear on us and will cut the loss. It is very different if we have done a proper research on a stock, that we believe in it. Only the investor who has done a very extensive research on a particular stock, know its potential and value, its future driver, will be able to hold the stock up and down during the volatile period. And these are the people who can profit from these stocks eventually.
3. Follow the trading plan! When we buy a stock, we need to have a plan on it. Why you buy this stock? Is it based on fundamental or technical entry? What is your target price? What is your time-target? How much can we afford to lose for this trade? To be honest, I am still practising myself to follow my trading plan properly. Used NVTA as an example, on 7 December, I made an entry after it breaks the previous high, as a momentum play. My target was to take a quick profit after riding the momentum. A few days later, indeed it hits to another all-time high. Did I run? Nope. I was greedy and hope to ride more profit. I removed my profit target (1stred flag). I even removed my trailing stop loss (second red flag). Then, it plunged. My profit all gone and I suffered a loss. Did I get out of this position? No. I told myself this is a good stock to invest in long term (3rdred flag). Does this sound familiar to you? Now my trading plan changed from momentum play to investment play! Yes, it bounced back again but do you think I took the profit? You should be guessing right, I did not. As my mindset is shifting to investment, and I want to just ride on it. However, in fact, this stock does not meet my criteria to invest in. The market then taught me a lesson again, it keep plunging. Then I have decided to cut the loss and learnt the lesson.
After these lessons, I know that I can be right for the direction and the right stock, but, if I could not control my emotion, greed or fear, I will still lose money. Discipline and follow the trading rule is uttermost important to protect us. Market maker and big players will always gyrase the market to milk from our retail investors. Many people lose in market because they lose confident and become impatience, and quit and never return again.
Use a quite from warren buffet: The stock market is a device for transferring money from the impatient to the patient.
My next mistake drew down my account for almost 70%: Act smart on Option
Option is a leveraged derivative. Many guru may tell you, you just need to pay a little, to own 100 shares of a stock! When it goes up, your profit will be also shooting to the sky.
While it is true that option trading or even option investing can generate lot of $$$, but it takes a lot of effort to understand how this works, because, you may also lose a fortune if do it wrongly.
A few years ago, I thought this is such a great method to use, as only required little money to earn so much money. I have done my technical analysis, I completed my fundamental analysis, crossed check with each other, and I thought I was ready to earn a fortune using the option strategy! Index is always going up in the long-term, good company is always going up in long term, right?
So, why buy stock? Just invest the stock with option!
Then I found that, the most difficult part is NOT the analysis, it is the emotional control. That time I was not good enough in managing emotion thus let the greed and fear dominated me. I failed to consistently take the profit earlier, or let the profit eaten and became a lost.
Let's see what had happened:
Because of the time decay, I literally still lost money if the stock dipped and rebounded. I even put a stop loss for my "investing strategy with option", that is strongly manipulated by the money maker. My stop was collected just in a few days.
What happened eventually? I lost money when the market trend was up, and I lost even more money when the market trend was down.
Funny right? No matter market up or down, I lost money. If the market consolidated, I still lost money because of the time-decay. Consequently, all options expired worthless. Not even single cents remained. Well, that time I did not know how to do option rolling, but I was pretty sure that I would lose more if I rolled it.
Consequently, my account was down almost 70% because of this. Once the option expired worthless, nothing left.
Lesson? Do not simply play option (or any instrument) that we do not know how it works. Option is one of the most complicated tools, as we need to understand the Greeks, premium, volatility and others.
Okie, these are the past stories. How to apply on today's market?
Never give up. Stock is in a cycle. If you have done proper reseach, follow it. If you see your stocks are tanking, follow the plan to cut lose or add more stocks.
After the bear market, a bull period will be coming. Do not miss it. Early bull is the easiest period to earn money. In addition, the return will be very very high. Not sure what to buy? Just get ETF.
In fact, there are some stocks already running.
In addition, at least I still have some extra money to invest, and manage to feed our family. I am very grateful and thankful for all of this.
All the best!
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