When investing becomes a big giant gamble

avatar By: IS
Date posted: 02.23.2009 (4:00 am) | Write a Comment  (3 Comments)

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I wrote last week about how playing Bank of America was almost like going to the casino and indeed this week that is pretty much what it turned into with giant swings. Just today, Bank of America was down 30% at one point and finished the day about 2,5% down.

The current environment has been truly amazing to me. But the current environment has been tough psychologically for investors all around the world. Recently, investors have been gravitating towards two main feelings; fear and hope.  Which is worse? In my opinion, both can have tragic impacts on a portfolio.

And unfortunately, many investors are making critical mistakes because of both feelings. Fear will usually tend to get investors to sell their investments and often act with panic. As any financial advisor or specialist would tell you, panic is probably the worst feeling you could have while trading. The most important thing is to remain down to earth. While investors that got out probably will suffer less losses, they will most likely also miss the stock rebound as usually happens in such cases and so they end up losing more.

A more dangerous feeling however might be hope. Why? Because hope tends to get investors excited and into taking more risks than warranted. I’ve seen several cases of investors thinking they know when rock bottom has occured. How bad can it get? Imagine investors that a few months ago decided to get into the action big time. So if you have no money, how can you do it? You can open a margin account at your bank. Then, send money from that account to a trading margin account and invest. Basically, you can be trading 50-60K without having put a dime of capital. And then things turn bad. If you suffer a loss of 20% (very possible in this environment), then you have actually lost 12K… and at one point, the loss becomes more psychological than anything else. And instead of investing with your head, you are always looking for homeruns, for that one trade that will help you get back into profit territory, and that’s when things usually get even worse… Read any trading book and they will all tell you, the most difficult aspect of trading has never, and will never be the technical aspect. It’s always about sticking to your system when things go bad or when they go too bad…

Unfortunately, I think such mistakes can have very long term impacts. If you are a speculative investor, set aside money, an amount that you can lose, and separate that amount from any retirement fund or any other specific goal that you might have. And use discipline. If you have reached your “stop loss”, get out of the market. Don’t all of these also apply to visiting a casino? Told you.. these days, for most investos, the difference is minimal between the two…

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3 Comments

  1. Pingback by Linkstuff Feb 27 — February 27, 2009 @ 4:02 am
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