Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Students, It’s Time to Prepare Your Finances for the Years Ahead - 25th Jul 17
Stock Market and Gold Stocks Trend Forecast Update - 25th Jul 17
Saving Illinois: Getting More Bang for Its Bucks - 24th Jul 17
3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind - 24th Jul 17
Activist Investors Are Taking Over Wall Street, Procter and Gamble Might Never Remain the Same - 24th Jul 17
Stock Market Still on Track - 24th Jul 17
Last Chance For US Dollar To Rally - 24th Jul 17
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

How To Use Emotions To Make Better Investment Decisions

InvestorEducation / Learning to Invest Jun 13, 2017 - 07:52 AM GMT

By: John_Mauldin

InvestorEducation

BY JARED DILLIAN : There are a lot of times in my life where I wish I was just a computer and didn’t have feelings. I’d probably be a much better trader.

And that’s what this piece is about. We’re all human beings, trading and investing, trying to make money, but these things called emotions get in the way.

Most trading experts will tell you to get rid of your emotions altogether, to get as close to being a computer as possible.


Let’s be realistic—you can’t get rid of your emotions. The best you can do is to try to use them for your advantage.

Learn to Control Your Response to Loss and Profit

I am probably more emotional than most people. I have a tendency to get really happy or really angry or really sad. I got a stomach flu a few months ago and spent a day at home on the couch, watching 6 hours of My Cat from Hell reruns (and crying).

I have spent most of the last ten years trying to be as dispassionate as possible—but emotions still sneak out sometimes.

So if I can control my emotions investing, you can, too.

One of the first things to work on is your response to making or losing money.

If you get happy when you make money… that is unproductive.

If you get distressed when you lose money… that is also unproductive.

You should instead view that bottom line in the P&L as an input to a math problem. If it is negative, you work on solving a problem: how to make it positive. If it is small, you work on solving a problem: how to make it bigger.

And if it is big, try not to get carried away. It will one day be small.

This Too Shall Pass Should Be Your Motto

The feelings you are experiencing are only temporary. It may not seem that way when you are down 20 days in a row, which is why you can’t be passive about losses. You have to take action.

It is human nature to avoid dealing with something that is bothering you: “I’m sure this will go away if I just wait long enough.”

So, people don’t log onto the brokerage account or even open the statements that get mailed home. They sit in a pile.

There are all sorts of feelings associated with this, and the biggest one is shame—you’ve made one or more bad trades, and it’s embarrassing.

To sell the position is to acknowledge that you screwed up.

Most people can’t even admit that to themselves.

You know how it is with stocks that go down… they keep going down. So when you ignore a problem, it inevitably gets worse.

The converse is true when someone has a trade that is making money. They get excited, and they find themselves refreshing the P&L every two seconds, and eventually, they get really eager to close out the position and realize the gains. I’m sure lots of people bought AMZN in 1997 and sold it in 1998 under the same circumstances.

Oops.

So all of this is a really fancy way of saying:

  • Ride your winners
  • Cut your losers short

There are a lot of trading philosophers running around on Twitter telling you to do exactly that. But it is easier said than done—because we are emotional human beings.

It is human nature to experience asymmetry with gains and losses—the whole field of behavioral finance is built around this concept.

But not much is written about the actual emotional experience you go through.

I remember distinctly calling one of my old colleagues from Lehman in January 2016, telling him that I just had my biggest day ever. I would go on to have my worst four months ever—starting the very next day.

Not a coincidence.

People Are Crazy

I think most people (and the legal system, especially) completely underestimate how emotional and irrational most people are.

Trading is about being smart, yes, but it is also an exercise in emotional fitness.

Neurotic, sad people generally don’t make money. Happy, confident people are the ones who make money.

There’s a reason why guys like Paul Tudor Jones hire guys like Tony Robbins as a coach. I think Tony Robbins should stick to his knitting and stay away from real estate conferences, but he has probably helped people be competitive in a very competitive industry. All that hooey about being a winner really is true.

I have seen a lot of people succeed and a lot of people fail at investing, and let me tell you, it is not usually a function of intelligence. These dour, bad-stuff-happens-to-me-all-the-time guys really struggle. They struggle mightily. And not coincidentally, bad stuff does happen to them all the time.

People who act like winners usually win. They aren’t always nice guys, but they are winners. Like I said, it is rarely a function of intelligence.

I’m still working on the secret sauce. I’m profitable, but I’m a bit of a grinder. It’s never easy.

Grab the Exclusive Special Report, The Return of Inflation: How to Play the Bond Bear Market, from a Former Lehman Brothers Trader

Don’t miss out on this opportunity to cash in on the coming inflation.

Jared Dillian, the former head of Lehman Brothers’ ETF trading desk, reveals why inflationary price increases could be much higher than 1% or 2% and how you can position yourself for big profits as the bond market falls.

Download the special report now. 

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife