Online Trading Hints – To be Truthful to Ourselves

April 13, 2010

We might tell ourselves or others we are ambitious rather than greedy. Or we might think of our desire to make a lot of money as fulfilling our security needs. We may feel excited as we’re making increasing amounts of money. Why ruin our excitement by labeling it greed? Can’t we just say we have a healthy interest in earning as much in income and investments as possible? Sure, we can label it anything we like.

But for our purposes of balancing fear and greed and understanding how these motives affect our trading behavior, we must be ruthlessly truthful with ourselves. We want to understand how greed, or the desire for more, can push us to make poor decisions when we’re investing online. We need to be able to identify our own thoughts and feelings of never enough, of yearning for more, and not call them something more innocent or flattering.

I gave of my own holding back from taking a profit with Pfizer, it certainly would have been easier for me to attribute my behavior to something more benign. I could have tried to convince myself that it really wasn’t greed operating but simply a lack of understanding of how dependent the stock price was on the expectations of Viagra.

Or, I could have tried to convince myself that Viagra is just one drug among many that Pfizer sells and that this company is far too large to rest its hopes on any one drug, no matter how popular it may have become. And there is truth to each of these assertions. But they aren’t why I didn’t sell when it hit 150.1 didn’t sell because I wanted to see it hit 160. And that is what greed is all about: Squeezing a little more juice out of the orange.

Is there anyone reading this who doesn’t know the feeling of well-being and exhilaration upon watching a stock go up very quickly? And how hard it can be to take profits when one hopes the stock will move even higher? This feeling of never enough or wanting more profit, that no matter how much we’ve made, we want just a little more this is the face of greed. And, as we said earlier, it has been a part of the human financial story in one form or another since the earliest exchange economies.

Even with all the fancy technology, real-time news, and everything else available, we never really have all the information that would be desirable about a company or what moves its stock price in helping us make our investing decisions. We are always being forced to use our best judgment to evaluate and make decisions, knowing we don’t have all the pieces, that we are operating on limited data. Of course, this is true not only with our investment decisions but in the rest of our lives as well. This is pretty self-evident, isn’t it?

Unless you are sitting on the board of directors of a company or have the CEO whispering in your ear, you really aren’t privy to all the details that are relevant to a company’s current condition and future prospects and how this information may affect its stock price. Even then, as we all know, a company’s actual condition may not be accurately reflected in its stock price, which is simply its perceived relative value at any given time.

A company may have stellar earnings, solid fundamentals, technical indicators looking good, great prospects, and a CEO who knows how to charm the pants off the analysts and the press. And yet still the company may be out of favor with traders and investors for no apparent reason.

This is where my dictum, mind moves the market helps make sense of what is at first glance tough to comprehend. If the way people interpret all the data about a company is not in line with the actual facts, you have a discrepancy that shows up in the stock price. Sometimes, all the good things about a stock are already priced into it. Then the least perception that the company is not outdoing itself each quarter leads to a sell-off.

Dell is perhaps the best example of this. The company was growing at such an astounding rate that when it began to cool off just a little, the stock got hit hard. Nothing had changed with the fundamentals of the company. In fact, it continued to gain more market share. The company’s prospects looked bright. But the expectations had become very high to justify the high premium attached to the stock. When it beat, but did not “blow out” its earnings number for a couple of quarters, the sell-off was severe.

So many variables related to the market are out of our control. Because of this, it is important for us to be truthful to ourselves, since our own emotions, thoughts, and motives are at least one domain of the investment game that we may know and within which we may exert a measure of self-control.