Everyone has a plan ’till they get punched in the mouth. – Mike Tyson
Most people think winning in the markets is all about picking the right stocks.
Winning in the markets is all about having a plan…and sticking to that plan even when things appear to go wrong.
No one…and I mean no one…can pick stocks that go up in price 100% of the time.
Anyone who thinks they can get every call right is delusional. And anyone who says they can is a B.S. artist.
Avoid these people at all costs.
If you want to be a successful investor over the long term – and by that I mean one who ends up with more money in their account than they started out with – you’ve got to face reality.
Even the Smartest Investors Screw Up
And reality is that even the wealthiest, smartest and best-known investors around make the wrong calls. Sometimes spectacularly wrong calls.
It’s part of the game. And it’s play or be played. That simple.
Fail to grasp this simple truth, and you’re going to have a miserable time as an investor. Understand it, and you stand to make a lot of money over time.
So the question you need to focus on isn’t how to get things right all the time. The question you need to focus on…unrelentingly…is how to minimize your losses.
If you can minimize your losses…and maximize your gains…you’re set to beat just about every other investor in the market.
3 Things to Do Before You Think about Picking Stocks
To do this you must have a plan in place before you invest a single dime.
This may seem easy. But it can be a big challenge.
As Mike Tyson put it so eloquently, sticking to a plan is tough. Especially when things go wrong.
What follows are three things you should make sure you do before you start thinking about which stocks to pick. Make these a routine part of what you do as an investor.
1) Drop the ego – Ego is your enemy. Ego tells you that you can’t be wrong when you are. It tells you that you are better than everyone else when you are not. More important, it prevents you from learning from you mistakes. Because it prevents you from admitting you make them in the first place.
So, when you take an investment decision, first make sure you accept your investment thesis may be flawed…that your thinking may be skewed…and that luck may go against you.
This way you won’t get attached to your decisions. And you can let go of your flawed thinking when it becomes apparent that you’ve screwed up.
2) Have an exit strategy – Most people spend most of their time thinking about what stocks to buy. But they forget to think about what to do with them after that. Given that you’ll often make the wrong decisions as an investor, this is a recipe for disaster. So, at the outset decide when you’re going to sell.
One of the easiest ways to do this is to use stop-losses. When you set a stop loss on an investment you pre-determine the exact moment when you get out.
You can set a stop loss at a certain price above or below your buy price. Or at a certain percentage above or below your buy price. Or you can use trailing stops.
There are lots of different ways to set stop losses. But unless you have a good reason not to (such as a value approach to investing) make sure you use them.
3) Stick to your plan – I know. I’m repeating myself. But sticking to your plan is the most important part of your plan.
Say you’ve set a stop loss on your favorite stock at 25% below your buy price. Your stock hits its stop on bad earnings news. But you’re convinced earnings will pick up next quarter. What do you do?
The temptation is to override your system. And make an exception. Don’t. Systems are there for a reason. They stop you making stupid mistakes. They help you minimize your losses and live to fight another day.
Never, under any circumstances, override your system.
Even if you get punched in the mouth.