The Anatomy of a Trader, Part 1 of 5: Brain Basics

Andrew Nyquist

By Andrew Nyquist
Okay, investor nation, this is part one of a five part series focusing on how to elevate your investment game to the next level.  The idea is to illuminate traits and skills that will assist you in becoming a more confident, successful investor.  But before we sweat the details, I want you to ask yourself an honest question:  How do you rate in terms of your investment literacy and skill set?  The answer to this question will assist you in understanding which concepts require more focus than others over the duration of the article series.  Moreover, it will be up to you to take these concepts and bring them to life.  Let’s get started with Brain Basics.

Whether you define yourself as a trader, an active investor, or a buy and hold investor, you are required to make important decisions that impact your household pocketbook.  At the end of the day, it doesn’t matter whether you are buying a stock or a mutual fund:  It matters what price you buy it at and what price you sell it at.  Simple as that.  Straight up performance, my friends.  And in a stock market that has more winding roads than Napa Valley, maintaining focus can be tough.

When to buy?  When to sell?  Feeling frozen just reading this?  It’s okay, hitting the buy and sell buttons are a difficult task for investors.  But, understand this:  Each and every one of us has the ability to monitor our financial situation more closely and make appropriate decisions that are derived from a mental game plan, as opposed to “frozen hope.”  It’s just a matter of becoming more comfortable and confident in taking that action.  And using common sense to develop an action plan from the get-go helps.  Furthermore, having an action plan is probably the best way an amateur investor can learn how to be successful.

That said, here are some common sense ideas that all of our brains are capable of processing when building an action plan:

1)   Pick a stock that you know and like.  This is the old Buffett rule – Warren Buffett only invests in things he understands well.

2)   Realize that this is not a lottery ticket.  If you are at home hoping to get rich quick, then your mentality is probably indicative of your financial balance sheet.  Desperation can lead to bad investment decisions.

3)   Map out a plan for buying and selling.  If you are an active investor, decide where to buy initially and where to add more.  You must also decide where to exit (for gain or loss).  If you are a buy and hold investor, you must decide where to enter and when to add to your position – probably good to decide what-if levels to sell as well.  Don’t be greedy!

4)   Keep your head in the game.  Read and learn more about the markets and your specific investments.

This all sounds easy enough, but over the years, I’ve seen and heard it all.  From investors that were up 25 percent in a month and didn’t want to take any gains to investors that were down 25 percent because they forgot to place a stop (or a mental stop).  Yes, investing can trip you out.  Try this example on for size:  Investor Z is thinking about selling ABC stock for 10 dollars.  ABC stock falls to 9 dollars over the next week.  Investor Z decides to wait for ABC stock to come back near 10 dollars to sell.  ABC stock then falls to 8 dollars.  Investor Z decides to target 9 dollars for a sell, but ABC stock only hits 8.75, before falling to 7 dollars.

You get it.  Mind over matter.  Mastering your psychology is an important variable in developing and sticking to an action plan.  “Hope” isn’t an investment strategy, and it certainly isn’t going to help you beat the damned Joneses.  Ha!

Tune in later this week for Part 2 of Anatomy of a Trader.  Happy investing.  Have a good week.

***Find the entire The Anatomy of a Trader series here. 

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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.

 

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