Tuesday, October 25, 2011

Personal Investors Are Self-Confident

No Doubt
I went back and forth as to whether I should label this particular trait as self-confidence, or self-reliance.  In either case this trait has to do with one's ability to prevent self-doubt from inhibiting good decisions.

Why Sell?
I wish I had a nickel for every story I have heard regarding the person who sees their broker about taking a profit, or minimizing a loss, only to get talked out of it.  The person then sees the broker as responsible for the problems they are having.  Perhaps there are almost as many instances when the broker had talked us out of doing something foolish.  We minimize those situations, so they don't readily come to mind.  I don't have any research on the subject, but I would be willing to bet that for most of the times we get talked out of doing something by the broker, we end up regretting it.  The reason for this is simple.  Despite our misgivings, there are more reasons for the broker to have us hold the position then there are for them having us exit it.  Unfortunately, few of those reasons favour us, and our success.

Homework, Not Ratings
Which brings me to the subject of stock picks.  The best Personal Investors use the ideas from others to do their own research..  I never buy a stock based on ratings, recommendations, or rumours, yet people are inclined to do so too much of the time.  I only buy a stock when my homework tells me the stock, on a historical basis, is on sale, and the momentum favours doing so.  Also, any investment we make needs to be consistent with our risk tolerance.

How Much Is Too Much?
I never rely on those incredibly dumb surveys used to assess investor risk tolerance.  If anything, for our own protection, we want those surveys to show us as being on the very conservative side.  This limits the amount of risk any broker might exercise on our behalf.  Regardless, I decide how much money I am prepared to lose on an annual, monthly, weekly, and daily basis.  When any of those amounts are exceeded, I exit and wait for evidence of more favourable conditions.  I talked about the best method I know to reenter the markets in a previous post Stock Market Bottoms.

Confident Choices
We need to understand that we have nobody else to blame for the state of our investments when they are under performing, or just plain losing money.  We can blame greedy bankers, untrustworthy brokers, bad timing, and any number of other things.  Instead, we need to do a little bit of homework.  That will tell us how, when, and what to buy, not what others want us to.  Our picks need to be consistent with our tolerance for risk.  Any time our losses exceed our tolerance, I believe it is best to exit, and not wait for others to tell us to do so.

Knowing how, knowing when, knowing what, allows us to have confidence in the composition and performance of our own portfolio.

How confident are you in your portfolio?

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