Are you a “normal” trader/investor?

Let’s be brief, shall we?  Are you normal?

As much as I would like to tell you to just think long term.  Or at some point, business fundamentals matter with valuations matching cash flow prospects.  It just isn’t true.  The market has been “broken” for a long time.  We go from crisis to crisis and then to recovery.  The 1990’s we had the savings and loan crisis where real estate got absolutely pummeled.  The Y2K boom and bust were epic and a precursor to today’s Meme trading.  The GFC was led by insane bank leverage, loose lending standards (being polite) and esoteric structured products finding their way onto balance sheets.  Ok, fine, the pandemic crisis was not a human nature, man made situation and has now finally recovered.  But the world has permanently changed as a result. In short, the overarching message is human psychology creates massive distortions regularly in the markets.

We listened to a terrific podcast last week by a fellow named Trader Tom.  He asked the question of traders, “do you consider yourself normal?”  The resounding answer was of course, yes!  He then proclaimed that 95% of traders are not profitable.  And those 95% consider themselves “normal”.  So why in the world would you want to be normal!?  He makes a very valid point.  Now, if you are an “investor” and just playing long term ideas and large cap market weighted holdings, you can breathe easy and just figure you will earn the market return (up and down) give or take each year.  If you consider yourself a trader as well, you need to look in the mirror and reflect on your performance the past few years and ask yourself, “Am I being successful or am I part of the 95% (normal)?” 

Being normal has some basic problems when trading.  First, you tend to hang onto your losers, hoping they come back and even adding when they go against you.  We all do this.  At first, we tell ourselves that we have conviction in this idea and the market is wrong, at the moment.  With each passing day (or hour depending on your time frame) of being wrong, we stare at the losing position and wonder why the market doesn’t agree with us.  Second, the winners we also tend to let run without a plan on exit other than “higher than here”.  Ok, so that is normal behavior in a basic sense.  Most investors also get FOMO when the market is going higher, regardless of the reason and we wish to participate which causes us to lean over our skis at the wrong time.  Again, human nature.  That is why price exhaustion systems exist like Demark or RSI.  It tells us when the herd is done buying (FOMO) or selling (anger from losses peak). 

This isn’t to say you need to become crazy to make in the markets.  We could spend hours and days discussing what makes a great trader.  For now, let’s keep it very simple.  HAVE A PLAN.  Most normal people do not have a plan when they trade or invest.  They just keep filling their closet (account) with more and more positions until there is no more room left.  Sound familiar?  So let’s just say having a plan on each individual stock you trade is a great discipline.  We sent out to subs our one page set up analyzer (upon request) which should make you more disciplined in your ideas whether they are short or long term.  Define your risk, your reward, is it an A, B or C idea and when you might exit and why.  With all that said, re-read from top of this writeup a second time and decide if you are normal.  And now, let’s review the week and the weeks ahead.