Seven New Year's Resolutions For Active Investors
Don't try to predict what will happen, take more smart risks, and other tips for traders.
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The main reason that the stock market can be so financially rewarding is that it offers an endless flow of opportunities to make money. Every day, there is a chance to make money. If you aren't having success, then anytime you want, you can wipe the slate clean and try again.
Your primary job as an active investor is to constantly improve your methodology. You will never be perfect, and you will be visited by bad luck quite often, but you can also find ways to improve.
The start of a new year is a particularly good time to look back and contemplate the many things you can do to improve your investment returns in the year ahead. Most of the issues are things that you already know, but active investors have to constantly remind themselves of what is important.
Here are seven New Year's resolutions that are sure to improve your investment results.
1. Avoid Predictions. Brokers and the business media love to pretend that they can predict what the market will do in the future. It attracts attention and drives engagement, which is what they really want. It doesn't really matter if it is helpful or not, and in the majority of cases, predictions are dead wrong and lead to inflexibility and poor decision-making. Once you start making predictions, you sacrifice your flexibility and are prone to data mining to try to prove you are right. Predictions are more likely to mislead you than help you.
2. Focus on Price Action and Be Reactive Rather Than Anticipatory. Rather than hope that a prediction may come true, the better approach is to watch the price action and react aggressively as it shifts. Rather than sit and hope that the market will eventually appreciate the great stock you have found, look for signs in the price action that there is increased interest. Price action is often very random in the short term, but nothing provides more insight into the future of a stock than trending action and strong price movement.
3. Focus on Stock Picking and Not the Indexes. The business media talks about the action in the indexes quite a bit. It is a convenient way to summarize what is going on in the market and makes reporting much easier. The problem is that it is often wildly misleading, because it only reflects a few mega-cap names. The indexes are at historical levels of concentration, with just a dozen names driving most of the movement. The best opportunities in the market don't come from analyzing misleading indexes; they come from finding stocks that aren't highly correlated with them. The biggest market gainers have little to do with the indices. Mega-caps like Nvidia NVDA drive the indices, but the bigger movers are stocks like Palantir PLTR and Rocket Lab RKLB. They far outperformed the indexes and traded counter to them quite often. That is where the big returns are. Indices don't help you make money.
4. Be More Aggressive in Both Directions. The only way to improve your returns is to take on my risk. However, if you take on more risk, then you also have to be much more aggressive in cutting stocks that don't perform well. This is a resolution that I make every year. I know that my trade selection tends to be generally good, but I should be making bigger profits from those trades. I need to take bigger size and be aggressive when the trade is working. That means I will also have bigger losses when I end up with a dud, but overall, it should produce better returns.
5. Don't be Afraid of Making Mistakes. As long as you have a set of rules and follow them, there are no mistakes. The only mistake is not following your rules or not having any rules in the first place. Losses are just part of the process of trading. If you don't have losses, then you aren't taking enough risk and are unlikely to find the really big winners. A losing trade is only a mistake if you fail to be disciplined in the way you handle it.
6. Be More Disciplined. There is a story about famed investor Stanley Druckenmiller suffering a loss of more than a billion dollars. When asked what he learned from the experience, he said, "I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself." Even the greatest investors in the world lose their discipline at times. They have to constantly battle their emotions and remind themselves of what they need to do. Recognize those emotions and work harder to control them.
7. Improve Your Stock Selection. Picking good stocks makes the investing process much easier, but it requires time and effort to find the best names. Read TheStreet Pro and other publicans for ideas and then research them yourself. The best results come when a stock with good fundamentals develops a strong chart. Have a shopping list and never stop refining it.
The stock market can provide you with a source of income for the rest of your life, and if you employ these resolutions, the gains will keep you very comfortable.
At the time of publication, DePorre was long NVDA.
