Kumar,
Emotions are by far the number one reason that investors fail. However, you see that emotions are a problem for you. As they say, the first step in solving a problem is recognizing that you have one. Most self-directed investors simply give up because their emotions sabotage their decisions and they incur significant losses. It’s good that you are trying to improve and are seeking advice on how to avoid the emotional decisions that are hurting your returns.
Steve recommended that you stick with a quantitative system (P123) and avoid making personal decisions. I would add an additional layer of protection from yourself: As an inexperienced investor, you may want to avoid the small-cap stocks with which you seem to be enamored. While it is proven that small-cap stocks will provide better returns, they also have inherently higher volatility, and that volatility is detrimentally affecting your behavior.
You admit to “getting some success thru p123, but my mind-set remain as gambling crowd.” It’s good you recognize this tendency in yourself. You also say that you want to get to the “10% of winning investors” and away from the "90% of gambling crowd.” There can be no better goal if you want to be a successful investor.
However, in this same thread you also rebut George’s (geov) admonishment to avoid companies like CTP by saying, “Peter Lynch, suggest to buy small and unknown company to become rich. He prefers 10 baggers.”
Kumar, it’s obvious that you are ‘swinging for the fences,’ i.e., trying to ‘get rich’ from investing. That is a mind-set that will be sure to have the opposite result, i.e., make you poor. The number of people who ‘get rich’ is truly a microscopic portion of those who take up self-directed investing.
Investing is an activity in which you buy partial ownership in publicly traded companies with the objective of making a reasonable, small profit on your capital over long periods of time (decades). Consistently repeating years of reasonable profits, aided by the magic of compounding, can grow a portfolio into real wealth. You can’t ‘swing for the fences’ with micro-cap stocks and expect to make a reasonable, steady profit. Your approach is speculation; gambling.
I believe that for a new investor like yourself, trying to achieve a steady, reasonable return is the key to investing success – not trying to ‘get rich’ via volatile small-cap stocks. Even Warren Buffett, arguably the greatest investor who ever lived, only achieves an average annual return of about 20%. The way Buffett attained a net worth of $60 billion, starting out of college with $500, was to maintain that 20% annual return year-after-year over many decades. He systematically avoided losses – the kind of losses you get when your emotions can’t handle volatility and you pull the plug when things get scary.
Buffett’s 20% avg. annual return is about 17% more than what the typical individual (or even professional) investor attains. 98% of all investors aren’t really investors. They are traders, speculators, and gamblers.
Here’s a little tough-love, Kumar: Based on the things you’ve said and the type of stocks you are attracted to, you are not investing; you are speculating (gambling). The micro-cap companies (CTP, ABTL, MFLX) upon which you are taking chances will likely bring nothing but trouble for you. You invariably sell when you start to see a slightly negative result. I know this because you cancelled your subscription to my newsletter when I only had a 6% drawdown one quarter. That’s all it took for you to pull the plug on a proven system with an 11-year track record of profits.
Here’s some suggestions for a successful approach to investing that can help you avoid the shooting yourself in the foot from emotional decisions:
1) Reduce your expectations. Shoot for conservative 20% returns, not 80% or 100%. At least initially, those high returns aren’t available to you if you are not able to stick with your own program. Start slow and work your way into being a successful investor. Several years of good performance with conservative stocks will give you the confidence you need to get more aggressive.
2) Limit your investments to more stable mid- and large-cap companies. Typically, they are less volatile. Try adding a buy rule of MktCap>1000 and use a custom universe made from a combination of the S&P 400 and S&P 500 (not ‘All Fundamentals’).
3) Consider adding low Beta and high Sortino to your Ranking Systems and Buy rules to help reduce the volatility. It’ll probably reduce your returns over a sim/port without them, but at least you’ll be better able stick with the program for the long haul. A reasonable-return, low volatility portfolio will beat the pants off high-return portfolio with stocks with volatility you can’t handle emotionally.
4) Consider adding a personalized stop-loss rule. While our research shows that stop-loss strategies actually reduce returns, if you can’t emotionally handle a loss greater than, say 15%, then by all means, put in that rule. It’s better to have a rule that anticipates your personal pain threshold (even if it reduces overall returns in a sim) than not have one and give up because you got some big drawdowns on a few stocks and sold them at their lows.
5) Stick with a proven, quantitative system with the above characteristics. If you’ve designed a system with stocks you, personally, can live with day-in and day-out, it shouldn’t be hard to stick with them. You need to make sure that you are honest with yourself, anticipate your personal emotional weaknesses, and create a sim/port that takes those weaknesses into consideration.
You also asked for a book recommendation that will help you deal with emotions. Have a look at The Little Book of Behavioral Investing by James Montier. Books like this will help you understand how emotions sabotage your results, but it still won’t help you avoid them. It’s probably futile to even try.
Montier says, “Even once we are aware of our biases, we must recognize that knowledge does not equal behavior. The solution lies in designing and adopting an investment process that is at least partially robust to behavioral decision-making errors.”
Look in the mirror and be honest with yourself. Then design a system that takes your personal emotional nature into consideration. If you do that, you’ll still be investing – successfully – 30 years from now, and you may even be ‘rich.’