Let’s say you’re a novice stock market trader, someone who so far has only watched from the sidelines, watching stock prices rise and fall, as entire sectors of the economy implode, and other sectors explode and make many people millionaires, and now finally…finally, you’ve decided to dip your feet in the water yourself and invest some of your own money in the stock market. You’ve setup an account with a brokerage firm, you’ve funded your account, processed all the necessary paperwork, and now you’re ready to invest.
It’s a big moment. It’s exciting. But how do you choose which stock to buy? When should you tell your broker to sell, sell, sell? And when should you do that most difficult of things: hold on to your stocks and watch as their value swings wildly from day to day, and sit and wait for the price to correct itself and hopefully stabilize at a price that could net you a good amount of money?
These are big decisions. Difficult ones, too. And as a novice, they can be quite daunting. Your first time investing, it’s easy to get spooked if your shares don’t raise in value immediately. A creeping sense of dread invades your stomach and you start telling yourself that you’ve made a horrible mistake. Maybe you recall tales of famous singers and athletes who’ve lost millions of dollars – millions! – through bad investments…and they (supposedly) had experienced accountants and financial advisers handling their investments, people whose very job is dependent on knowing the intricacies of the stock market. If those seasoned veterans were able to bungle their market strategies so badly, what chance do you, the novice investor, have of making any money at all?
This is the fear that you must conquer. This is your worst enemy. You could have the most analytical mind in the world, brilliant forecasting skills, and a keen finger on the pulse of the future of the market, but you could still be losing money because of fear. Fear will make you question yourself. Fear makes you doubt your trades and pull out of the chances you know in an analytical sense you should be making. Fear leads to pessimism.
To use the athlete analogy again, I recently listened to the an interview with chess grandmaster Magnus Carlsen where he said that in order for you to win a game of chess, you must not only possess a great analytical mind, you must also possess the optimism that you will win. Before you even sit down to the table, you must be convinced that you not only can win, but that you will win. Without optimism, the smartest chess player in the world will be paralyzed with doubt and fear and pessimism. And they will lose.
So it goes with investing. If you enter into all your trades fearing that your shares will tank and you’ll lose all your money overnight, the chances are slim that you’ll ever succeed in the market. It’s simple human nature. Fear clouds our judgment. It forces us to act irrationally.
The trick then, is to be confident in your trading. Easier said than done, right? Let me assure you, you can do it. How? Study the markets. Research investing. Open a brokerage account that lets you trade with virtual funds and buy and sell virtual stocks just to get a feel for trading and the market. Many online brokerage houses give you this option and you can trade with this virtual money on the real, current stock market. By doing this, you can see what works and what tanks. You can also follow various financial gurus online or on financial TV channels like CNBC and track how their trade picks pan out. If you find a particular expert that consistently recommends winning stocks, when you start to trade with real money, you may want to pay particular attention to that expert.
Of course, it’s easy to become too confident too quickly. If your first couple of trades make you a boatload of money, it’s easy to get it into your head that you can do no wrong. Just remember, there’s nothing sacred about the stock market. There is no “magic ticket” that will guarantee you wealthy gains on every trade. It brings to mind that old saying about gambling: “The worst thing that can happen to you when you go to a casino for the first time is to win big.” Because if you win big the first time, you’ll keep coming back again and again, chasing that elusive big score and in the end, you’ll lose everything you won. Maybe even more.
The stock market isn’t a casino, of course, but the same principle applies. Many are the novice traders who hit big on their first couple of trades and then go on to lose it all on wildly speculative trades, blinded by the optimism that they can do no wrong.
As in all things in life, a balance must be achieved. Be optimistic but also cautious. Learn as much as you can. And study the signs the market gives for those who know what to look for. And most of all, never let fear guide your market trades.
