In life we need to learn how to live on what I call “personal double standards” if we want to minimize disappointments, stress and dissatisfaction. Be flexible with ourselves. Theory of relativity says “it’s all relative.”
Same with our investments. As one trader put it, we have to “learn how to fool ourselves”and look at the brighter side of things again and again and again.
Caveat though, this does not mean we have to settle with mediocre results and returns.What it means is we have to be patient as we grow our savings and investments and from time to time fool ourselves as to what benchmark and method to use. Let’s get started.
Percent or Actual Amount Say you got a PHP1 dividend and you happen to hold just 100 shares at ex-date. So that’s just PHP100 less 10% tax = PHP90 worth of dividends. Peanuts? Small? Maybe for some it is small but what if the share price giving out the PHP1 dividend is just PHP45, then that’s actually 2% net of tax ROI per share already. Where can you get such ROI with no sweat? Think of it in percentages. Personally I’d be happy with it and strive to be able to increase my investment capacity.
Or if the stock you recently bought surged by 4% already but in actual amount it’s just PHP100 since you own a small lot. Should you be sad? Again, a 4% gain in a short span of time with a small investment is not easily available outside of stocks or businesses, so again it should be worth appreciating. For this case, think in percentages.
Some traders advice to have cut loss threshold of around 8%, wherein no questions asked, you sell if you lose 8% of your stock investment. If this 8% means losing PHP80 will it be a big deal to you? What if the same loss threshold is equivalent to PHP8,000 loss, will it mean differently? To each his own. I’m ok to lose more than 8% if it’s just PHP80 but if I’m losing by the thousands already, I might not have the tenacity (or foolishness) to wait until it reaches negative PHP8,000 before placing my sell order. This time, I would think of it in actual amounts.
Unsure What To Do
Sometimes we have a good gut feel on where our stock position is headed, in general, whether in the next few days or weeks so we stay put amidst the temporary downturn. But sometimes, we really don’t have an idea of the general short-term picture maybe because of a recent news, developments or disclosures and we are not sure what to do. We’re on a limbo. A friendly trader advise says “sell half, or sell some for your peace of mind”. If it goes south, you just suffer 50-degree burns and avoided total annihilation. If it goes north, at least you still get to ride the gains, albeit just half. Again, “fooling ourselves.”
From above, it just shows we have to establish our own rules, whether rules of engagement, trading rules or psychological rules. Some say strict rules are there to rule out fluctuating emotions, I say it’s my money on the line and I have to train my self to be disciplined in obeying whatever rules I have set.