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small piece of the company. As we said in Chapter 9, they tend to identify with the company. And the longer they hold the stock, the stronger becomes their identification with it. |
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The discipline they can borrow from trader's-mind is to have a specific goal in mind as to what amount of money or percentage gain they would like to see with each stock purchase. Day traders and other short-term traders are very clear when they go into a position what they want out of it. For the day trader, it might be 1/4 of a point and then out. For the swing day trader, it might be a full point and then out. For the position trader holding for a few days, it might be three or more points. All of these short-term traders have to be clear on the goal of their trade. What makes them effective as short-term traders is exercising the discipline to get out once they have reached their price. |
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At the same time, short-term traders are also much quicker to exit their positions when the stock falls to a certain preset level. They are aware of the need to set stop limits, so that they are automatically "stopped out" of a position when it drops to that point. |
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What intermediate speculators and long-term investors need to adopt from trader's-mind is this clarity regarding exiting their positions and setting downside limits in the way of stop losses. |
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Why is this important if you think you want to hold the stock for months or even years? Because without any idea where you want to sell, it is easy to "fall in love and marry" the stock and become complacent. The relationship is left open-ended, rather than seen as an investment where the object is to sell the position and end up with a tangiblenot just paperprofit. Even when you say you want to let profits run, it still is good discipline to have a set point to take your profits and be satisfied. |
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When the relationship is left open-ended and there is no clear exit strategy in place, it is easy to overlook information that may signal that it is time to reevaluate your position. Sometimes this is because of a change in the fundamentals of the company. At other times, there is a change in the story of the company or the sector the company falls within. |
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When a whole sector that has been in favor with the Wall Street community and investors suddenly or gradually falls out of favor, those who are married to a company may misinterpret the new information. If they interpret it correctly, they may refuse to act on it. Other times, it is not just one sector but the trend of the market as a whole that shifts, and long-term investors simply are not mentally |
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