How To Let Homerun Trades Come To You

The biggest question bouncing around Americans’ heads right now is where are their portfolios headed given the current market environment. The norm has been 10%-12% a year in the S&P 500 over the past 30+ years and that has been what people have come to expect for their equity investments.

Expectations for a portfolio are commonplace, and they are necessary when each investor is establishing goals and then creating the portfolio to achieve those goals. Here is where the discussion begins…

Historical returns and setting goals is fine, but I believe those should be done on a conservative basis and should be checked on from time to time. But if you are managing your own money through careful stock selection via intermediate-term investing or daytrading your portfolio, then it is important to go into each day and each move without an opinion. I began by running my money with the latter in mind, and I was my broker’s best friend. Now, I have evolved to the intermediate term. The point is, whichever time frame, if you are practicing a sound strategy, the profits will take care of themselves by implementing all of the rules. It is extremely important not to get caught saying or thinking: "This stock’s not capable of making me much money, I’m going to pass and wait for something else." Have NO expectations when you are making your move. If the scenario fits the rules of your strategy, then follow it. Do not back down because of your own belief that the investment may not perform for some unknown reason.

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Quarterly chart of the S&P 500

Successful traders/investors are always moving into things when 98% of the public is saying: "Are you crazy?! You must be trying to lose all of your money by taking that trade." When it comes time to close the position, Joe Public is usually in disbelief, stating: "Why are you getting out when you’re just beginning to make money? That thing has a long way to go." My point is that our expectations are very often contrary to what will actually work, just like 98% of the people out there. Solid, proven rules get us through that moment of doubt, where our expectations are trying to take control and stop us from making money. When Home Depot set up in its base in early 1991, few people, including investors, expected this no-name company to power to a several hundred percent gain over the next couple of years. Biotech stocks were where the action was, and a building products retailer wasn’t exactly an investment to drool over next to an Amgen.

Let’s bring these examples much closer to the present. Following the 1990s, it was hard to believe, even for me, that you could actually make solid chunks of money on stocks outside the technology arena. Additionally, many of the non-technology names are unknown small- and mid-cap stocks. Mix these two factors together and you end up with a big name that 1 or 2 people buy into at the correct time; a few people notice the stock at the correct time, but pass on it; and the majority of people learn about the stock and jump on as the move comes to an end. Case in point: NVR.

The beauty of the stock market is that we can all search for and analyze stocks. By this I mean we can keep it simple and look at three or four letters to define our investment. A stock symbol keeps track of the investment just as well as knowing the name of the company. This is the first step to eliminating expectations. The second step is to fall back on your rules. I would never recommend buying something on whim or rumor, but only on proven, sound rules that you are comfortable with and that make sense to you. Naturally, as we all gain experience, those rules are modified to accommodate our improved knowledge…but that’s another lesson in itself.

Let the rules do the work for you. Do not gravitate toward XYZ simply because it has done well in the past. By applying your rules, ABC will show itself and allow you to make money by following an unbiased action, free of expectations on that particular investment.

Why shouldn’t we set goals for a specific investment? Very simple: our mind will have us setting a goal that is limited to the capacity that has been established. When I told my dad that I was leaving my career at a major pension consulting firm to start trading my own money with about as much money as I needed to make each year, he thought I was crazy and taking on way too much risk. After all, he had seen as many people lose all of their money as those who made more than 12% a year in the stock market. Obviously, the rest is history, since I am writing this article as part of the business that I began over five years ago and still working for myself.

It is equally important not to expect too much out of an investment. You may find yourself "milking" it for much more than it is capable of, and you may be putting undue pressure on yourself by setting expectations that are too high.

Greed is one of the driving emotions behind investing. When a stock becomes highly profitable for investors, greed takes over as the sky becomes the limit. Logically, we all know that is not true, but when emotions are involved, this can cause enough of a hesitation in selling correctly to give back significant profits on the position.

If you find yourself looking at an investment with little or no expectations, check that opinion against the rules you have established for your analysis and see if they agree with you. Additionally, when you find yourself in a successful investment where your expectations are high, continuously check that opinion against the sell rules you have established for yourself.

Good Trading!

Timt@tradingmarkets.com

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