On the surface, successful investing is pretty straightforward. You identify a good company whose stock is trading at a reasonable price and then sit back and wait for them to increase in value. And while not every buy will produce results, if you “cut your losers and let your winners run”, then producing solid returns shouldn’t be that difficult.
Of course, investing isn’t that simple, but as is the case with everything in life, nothing that is truly worthwhile is ever easy. Indeed, the fact that trading is so challenging is the very reason it can be so potentially lucrative. Finding good companies with attractive valuations and/or strong charts is the fun and easy part, but what comes next (i.e., navigating the ups and downs and landmines on the path towards finally – hopefully – booking profits) is hard. Overcoming the obstacles in your way is what will make you a good and capable investor. Or, as Marcus Aurelius put it centuries ago: “What stands in the way becomes the way.”
Accordingly, here are the three most common issues that will often derail traders as they navigate that space between the buy and the sell.
Luck
Most market players fail to recognize the fact that luck plays a very big role in trading and investing. No matter how insightful you may be or how deep you dig to find that one stock that has the potential to be the next big winner, pure luck can often be the sole determinant of whether or not any given trade is successful. Sometimes a pandemic will shut down the entire world. Other times, a mad dictator will invade a neighboring country and, while committing war crimes, create a global energy crisis. Still other times, a well-timed social media campaign will drive hoards of inexperienced folks who have plenty of time on their hands and fresh stimulus money in their pockets to suddenly buy stocks in companies on the verge of bankruptcy. In other words, stuff’s gonna happen, and there’s nothing you can do to predict it.
The good news is that we all share that same problem, and as such, we can mitigate that problem to a certain degree through diversification and making sure we aren’t too concentrated in any particular stock. One great certainty in trading is that something’s going to blow up at some point, and while it’s going to hurt, we need to make sure that it doesn’t cause a fatal injury to our portfolio.
On the other hand, there will be times when we get lucky and buy something that immediately jumps higher. We can increase the odds of that happening by looking for charts with favorable set-ups, and when we do find that the market gods have smiled upon us, we need to make sure that we try to enhance our returns by increasing size on dips and locking in gains on rips. This doesn’t happen as nearly often as we might like, but when it does, you have to be ready to attack.
Randomness
Another market certainty is that stocks will often experience inexplicable moves. Traders will frequently become flustered by sudden volatility in a stock and will often underestimate how random the daily movement in a stock can be. It’s my contention that most of the movement in any given stock on any given day just isn’t meaningful, and I see folks who are too sensitive to that will frequently get shaken out of good trades. Oftentimes, there’s simply no explanation for why a stock may be moving the way it is outside of the fact that some more people may be buying than selling (or vice versa) on any particular day, and sometimes, that discrepancy can create volatility… especially in the smaller names that active investors tend to gravitate towards.
The problem is in deciding if the action is truly random and meaningless or if someone knows something the rest of the market doesn’t. Even if there isn’t some tiger lurking in the bushes, investors are averse to large drawdowns and need to cut an otherwise solid name in order to manage risk. On the flip side, market players can get into trouble by talking themselves out of taking stops because nothing material has changed, and keep buying more to lower their cost average, only to watch their losses grow.
The key point is that random movement is part of the game and can present active investors with some great opportunities. Effective traders define their trading plans and then don’t get too bent out of shape when their positions bounce around within the parameters they’ve set for themselves.
Patience
A third obstacle that traders often have an issue with is a lack of patience. I always try to keep the Pareto Principle (e.g. 80% of my results occur during only 20% of my working hours) in mind, but I’ve watched too many times as traders grow impatient with a stock that hasn’t moved the way (or in the time) they want it to. Of course, hitting the sell button ironically turns out to be the catalyst that gets it moving!
There’s also a high correlation between the amount of patience and the amount of capital a trader has. When you have limited funds, it’s hard to watch your account sitting still. However, it often takes some time for trades to work, and not being comfortable with random action in the interim (see above) can cause some serious issues.
Some active investors, meanwhile, try to force things by chasing big moves and heavy volume. Sometimes, they’ll get lucky and the stock will streak higher for several days, but there’s really no edge there. It’s far better to track those big movers as they digest gains, establish support, and then build cause for further upside before moving in aggressively. Go into trades with the expectation that they won’t move immediately.
Ultimately, the key point is that investors will face many obstacles after they buy and before they sell a stock. We all have to learn to deal with good and bad luck, random action, and issues with impatience, but it’s those very obstacles that create the opportunities for you to produce exceptional results. So, in that sense, what stands in the way truly is the way.
