Ditch Your Investor Pride to Avoid an Investing Fall

By MoneyMorning.com.au

Australia has a problem.

It’s called bravado. Australia is walking with a swagger.

That means trouble. Because you know the old saying: pride comes before a fall.

Pride is one of the biggest pitfalls for most investors.

That’s why you should try to avoid it. Because if you do, it will give you a clear view of the market… and help you save money and make money too.

Below we’ll give you our three top tips to avoid investor pride so you don’t have an investing fall.

But first…

A Social Experiment

“For a few souls at the employment margin who might make up that rise to a 5.5 per cent unemployment rate, one hopes they will be able to take compensatory pride in belonging to the nation that’s leading the developed world in returning to a budget surplus.” – Michael Pascoe, Sydney Morning Herald

Perhaps the publishers of the Sydney Morning Herald could help us with a two-step social experiment.

It was suggested by Slipstream Trader, Murray Dawes after we sent him a copy of the Pascoe article…

Step 1: Move Michael Pascoe to the “employment margin”.

Step 2: Ask him if he’s proud that Australia is “leading the developed world in returning to a budget surplus.”

We look forward to hearing the outcome of the experiment!

[Ed note: by the way, as we write, Murray has just finished recording his latest free weekly stock market update video on the Slipstream Trader YouTube channel. Click the market update link to view it.]

The Pascoe quote is a perfect example of Australian mainstream arrogance. Things are so wonderful even those who lose their jobs will stand back, suck on their pipe and say, “it’s great to be unemployed.”

Mainstream commentators are convinced Australia is a special case… immune from overseas debt problems. So they overlook what is obvious.

That’s pride and blinkered thinking. It’s the old head-in-the-sand treatment. And it’s also one of the biggest mistakes most investors make.

Fortunately, ditching your pride to become a disciplined investor isn’t hard. You just need to follow three easy tips…

Tip One: Don’t overpay for stocks

Sounds obvious right?

Wrong. Investors overpay for stocks all the time.

They see a stock price going up and figure it must be good.

By the same token, those same investors also see a falling stock and assume it must be cheap, “Why, it was a dollar last week, today it’s only 50 cents… apart from the price nothing has changed.”

That was the investor thinking behind the rush to buy BlueScope Steel [ASX: BSL] “on the dips” this past six months:

BlueScope Steel [ASX: BSL] chart

Source: CMC Markets Stockbroking

And why not? Three years ago BlueScope Steel was trading at $12 per share. Today it’s around 40 cents a share.

Bottom line, a falling share doesn’t mean it’s cheap… and a rising share doesn’t mean it’s good.

When it comes down to it, there’s no substitute for doing proper analysis (technical or fundamental), rather than jumping on a bandwagon… or thinking you’re a contrarian just by buying a falling stock. That’s not contrarian. In many cases it’s just plain dumb.

Tip Two: Admit When You’re Wrong

The great thing about buying shares is no-one else needs to know about it. If you pick a stock and it’s a dog, you don’t have to tell anyone… you don’t need to be embarrassed… you can just lick your wounds and sell it.

Of course, as the editor of a share tipping newsletter (Australian Small-Cap Investigator), when we tip a stock, people do know… all 20,000 of our subscribers.

But here’s the thing: whether you tip stocks for your own benefit or for others to invest in, admitting you’re wrong is just as important as picking a stock-doubler.

The thing is, when do you know you’re wrong?

Mostly, you know you’re wrong when the price is going against you. But many investors ignore the message. The easy way is to deny you’re wrong… to make excuses for why the stock is falling, “It’s a great company, I can’t believe the price is going down.”

Remember the aim of investing is to make money.

You can’t make money if the stock price is falling (unless you’re like Murray and you short sell stocks).

So, if the price goes against you, it’s important to swallow your pride. You sell. Now, doing that is hard… because pride is a powerful emotion. That’s why we use trailing-stop orders.

If a stock price falls to a set level, we tell our Australian Small-Cap Investigator subscribers to sell. Sometimes we get bad mail from subscribers who are annoyed… they’d prefer it if we stuck with it.

That’s pride too. But we prefer to tell subscribers to cut their losses and get out. After all, after reflecting on the stock, we can always get back in.

Tip Three: Use Common Sense

This is the first thing many investors lose when they enter the stock market.

Not only do they buy and hold on when they shouldn’t… but many investors start making up outcomes to fit their investments rather than thinking about what investments to make to meet expected outcomes.

The housing spruikers are a classic example. Because the Aussie housing market didn’t crash in 2008, the spruikers picked out everything that appeared to be different in Australia and claimed those were the reasons why Aussie prices would never crash:

Housing shortage… population growth… coastal cities… “marvellous water views”… and so on.

It didn’t matter that each of those reasons had nothing to do with Aussie house price growth – it was all about the credit bubble.

We see the same in the Aussie stock market. When investors have so much skin in the game they justify their position rather than stepping back to reconsider whether their position makes sense.

That’s all part of fear and greed… of missing out if stock prices rise after they’ve sold.

All up, investing is only as hard as you make it.

But if you apply these three simple tips to your investments it should reduce your investing mistakes, and help you get out of any unforeseen mistakes you do make… because believe us, you’ll still make mistakes. It’s how you manage them that counts.


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From the Archives…

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2011-11-23 – Kris Sayce

China’s Bubble Will Pop in 2012
2011-11-22 – Greg Canavan

ASX Stock Market Winners, Losers and the Newly Dumped
2011-11-21 – Aaron Tyrrell

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Ditch Your Investor Pride to Avoid an Investing Fall