How to be a conservative online investor

December 29, 2009

Conservative online investors tend to be rather conservative in their investment style. They began thinking and saving for retirement long before their friends, who are not so concerned about the future. But they aren’t afraid to take thought-out, reasonable risks and will routinely perform the due diligence required to feel fully informed before putting their money on the line.

They are comfortable with mutual funds that are balanced, not too heavily oriented toward aggressive-growth stocks. They tend to pay attention to asset allocation models that tell them not to place too much weight on any one risk category.

For example, they appreciate the concept of including “boring” bonds in their portfolios and are not past considering CDs that pay little interest but let them sleep at night. They think of their home as a secure, appreciating investment that diversifies their portfolio of stock holdings.

Anything too volatile, like high-flying Internet stocks, sends chills down their spines. They think people who go after them will ultimately get skinned. But that doesn’t stop them from reading about the companies and wanting some of the fast money that comes with the big moves when they are hot.

If they designate a small portion of their investment capital for high-risk plays, they may even take a chance and buy some of the latest “dot com” that has hit the market. But then they watch it like a hawk and may very well exit it prematurely when they can’t handle the volatility. Options trading is too risky for them, unless they research them thoroughly and then dabble very sparingly. They believe it is best to leave options to the professionals.

Because they tend to be conservative and methodical in their investing style, they will not be tempted to overtrade online. Nor are they comfortable trading on margin (money loaned by the brokerage that allows you to gain leverage, buying more stock than you otherwise could).

Margin is secured by stock and cash positions, and the stock may be sold by the brokerage if you get too far in debt and are unable to come up with added cash to secure your positions. If this type uses margin at all, it is only for short periods of time. They are most comfortable using margin to give themselves a short-term loan.

This trading type will value a discount broker who offers service as much as speed of execution or the lowest cost, since they are not likely to be attracted to active trading. They will also like a discount broker who offers research reports and tools to analyze their portfolio, as this kind of stuff is enjoyable to them. For a respected web site that offers objective, in-depth comparison reports between discount brokers for the whole spectrum of online investors, visit www.sonic.net/donaldj.

When it comes to individual stock selection, they often feel most comfortable picking well-known, large-cap companies that are solid performers. They like to think of themselves investing in companies, not just stocks. In fact, they are among those who may become married to a stock, never wanting to give it up.

Some of those with this investment style become what are called chartists. These people like to analyze the technical aspects of stocks. When the market is closed, they plot the daily price movement of stocks and pore over the charts to determine entry and exit points, based on the stock’s history. Of course, what used to be done painstakingly by hand may now be found at numerous online discount brokerage and stock analysis web sites.

Much like looking at constellations of stars in the sky, chartists find all kinds of patterns in the charts that are deemed to be meaningful. The whole market of custom charting software has them in mind. Online, when the market is open, technicians like to monitor intraday price movement graphs, volume, ratio of new highs to new lows, and various other technical data.

The obsessive-disciplined investor who spends a lot of time online loves to stay up to the minute on all breaking news and how it may affect his or her stocks. Some like to know the quarterly earnings results of a stock just as they are released and then stick around to listen in on the company’s conference call.

Obsessive-disciplined investors also enjoy participating in some of the many online stock message boards, closely following the conversation “thread” related to one of their favorite stocks. In fact, they often become part of the core of regulars who are valued contributors to these boards.

Obsessives tend not to be lurkers who sit back, read others’ posts, but never “come out of the closet” and actively participate. This is because they have opinions and like to get involved with other posters. Their enthusiasm for the stock and their obsessive nature makes them tend toward attachment when they find the right mix of contributors.

Just as can happen with anything else in cyberspace, some even become overly attached to these boards, spending large amounts of time in dialogue. When forced to stay off the boards, they may experience withdrawal symptoms in the forms of agitation, mild anxiety, and feelings of loss. The stock bulletin boards may serve the same function for them as do social chat rooms for others. Yes, it’s easy to want to say to the most dedicated, “Get a life.” But they would tell you how well they get to know other posters, how friendly they become, and how sometimes they even end up getting together in the “real” world for face-to-face interaction.

Because they are thorough and attentive to detail, if they have a strong interest in the market, they might make good active traders, perhaps position or speculative traders. Short term for them is a few days, weeks, or even months.

But to become a position trader, they would have to overcome some anxiety that is common for obsessives to feel when taking short-term positions. By their nature, obsessives are prone to worry too much about the risks they take.

The power of the daydream in online investing

December 22, 2009

One aspect of all-or-nothing thinking that we use to scare ourselves with is taking what is a process and turning it into a final and irrevocable outcome.

This is most often done by a combination of conscious and unconscious thought. The conscious aspect is simply freezing a moment in time and taking it to be an end state. The more powerful unconscious aspect is the role of fantasy intruding upon conscious, intentional thought. Our minds are very skillful at weaving elaborate fantasies out of the barest of mental threads.

What is the single most powerful and unappreciated fact of mental life? No contest: It is the considerable amount of time spent totally lost in waking fantasy. And most often, not even knowing it!

By fantasy, I mean a daydream, a fictional story made up of fleeting pictures along with a story line and associated feelings that we may take to be temporarily or enduringly real. Or fleeting images that we can barely even notice as we close our eyes for a moment. The reason we are unaware of much of the fantasy in our waking life is because it pops up quickly and we are not trained to be conscious enough to catch the images as they float by.

We tend to create fantasies to accompany many of the actual events of our lives. One small thought, one slight incident¡ªthat’s all it takes for us to spin off into fantasyland. And these daydreams can be very intense¡ªboth in the clarity of their images and strength of feelings¡ªand seem very real. They may be quick fantasies that last a few seconds to more complicated ones that last for minutes. In some ways, they are much like dreams we have while sleeping. The main difference would be that dreams while asleep do not have the partly conscious aspect that makes up daydreams.

Fantasy and the Market
Much of how we interpret the world in general, and scare ourselves in particular, is based on inner fantasy¡ªnot the actual events of our lives. From the wonderfully positive, hopeful, and uplifting to the dismal, catastrophic, and perverted¡ªall concoctions of our own active imagination.

The outcome of a fantasy may be viewed as a real and final state. We forget that we have created this inner story. And we don’t realize that we have made something concrete that is a actually a process.

These fantasies may be especially painful and frustrating when we focus on our investments because our artificially constructed and irrevocable end states do not acknowledge the obvious dynamic, fluid nature of the market.

So, the process of the stock price going down is immediately viewed as a final end state. We think it will fall and stay down rather than go down temporarily and climb back up again.

It is interesting to watch this process of thought and emotion in oneself when there is a sudden and violent drop in a stock. Or a protracted correction in the market for days or weeks at a time.

It is equally interesting (and much more enjoyable) to witness the fantasies which arise as our stocks are making money. All kinds of fantasies of how we might spend our profits may fleetingly pass through our minds as we calculate how much money we are making. Clearly, one of the psychological payoffs to online trading is the time spent lost in this delicious reverie. But here is an example of a fantasy which goes the other way.

A Roller Coaster Ride Through Hell
One morning in the summer of 19991 sat in front of my monitor and watched in near shock as one of my holdings, CMGI, a very volatile Internet stock, dropped nine points in an hour and a half in early trading.

I was getting pretty squirmy in my chair, wondering how far down it would go. I had decided when I bought this stock that, because of its volatility, it was best to view it as a trading stock, not a long-term hold. It was moving down too fast.

To add to my torture, I opened my portfolio evaluator window which showed me, down tick by down tick, exactly how much money I was losing as it plummeted. The loss was mounting up. Shock was replaced by anger. I knew this stock moved sharply but this was disturbing.

In the course of this ride down, I began to berate myself for getting involved with such a wild stock. I had traded this stock a few times over the months and had done pretty well, holding it for a few days or weeks at a time. Each time I had made a healthy profit. But right now I couldn’t think about how much I had made taking advantage of this very same volatility.

It felt like I was going through a miniversion of financial hell. This fantasy hell is an easy state to get into when you are watching a plunging stock very closely like this. I had negative fleeting images, negative thoughts, imagined catastrophic losses, along with and an industrial strength measure of fear.

After an hour and a half, lo and behold, the stock reaches some kind of bottom, and slowly begins climbing back up. And keeps climbing. Even faster than it had been brought down, it was now bouncing back up. I couldn’t believe what I was seeing. There was no explanation for the quick bounce.

Within a half hour of reaching its bottom, the stock was up six points. From its bottom, the stock had gone up 15 points in a half hour. And it finished up for the day.

At the time, I had never seen any stock recover this far and this fast. The following months would provide many occasions to see other fast-moving Internet-related stocks make similar reversal moves. But this one was striking to me. From inner hell, suddenly the sun came out and everything looked good again. A roller coaster ride past the shadow of death and now back out to roses and lollipops. And all just by watching a stock graph!

The moral of the story is twofold: (1) don’t take the process for the outcome and (2) be aware of and learn to control the influence of fantasy on your disciplined decision making.

Discipline and the Mind’s Productions
Crucial for the disciplined online investor is the ability to control the fantasies produced by the mind. It’s not that we can normally con?trol what passes through out minds. For the most part, we can’t.

Unless we have had a lot of meditation experience, stopping this flow of thought just can’t be done. Thoughts, fleeting images, as?sociated feelings¡ªall will jump forward into awareness on their own. This is simply what the mind produces.

If you don’t believe this, it is simple enough to test it for yourself. Sit for 15 minutes quietly in a chair and close your eyes. Simply pay at?tention to the thoughts and images that come up. One of the astound?ing discoveries that anyone makes who tries this exercise in good faith is how truly out of control our normal thought process really is.

Thoughts, images, and feelings may rush forward, begging to be taken seriously and to be acted upon. It is our job not to be taken in by this deluge of material. We must realize that it is in our power to refuse to take a fantasy seriously. Or to stop the emotion of fear from dictating our behavior.

Since weighing the various factors that go into decision making is hard enough, for online investors, making rational decisions with?out the interference of confounding emotion will normally be to their advantage.