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The successful investor's mindset

Investors are always keen to avoid large losses - but they often don't achieve this.
Being successful in the markets can depend on our mindset.
The mindset of a successful investor is described below.

Introduction

How can we avoid large losses in the markets? How can we protect our investment capital? What simple steps can we take to stay on top and be in control of our sharemarket success?

Since the onset of the now infamous bear market of 2008+, many investors lost a lot of money. Some of those investors managed to recoup their losses fairly quickly (amongst the lucky ones), with many others facing losses that lasted for years. And some of these losses impacted adversely on retirement plans, causing many to change their plans and return to the workforce.

Many active participants in the markets didn't lose much at all, or perhaps lost nothing, because they could see the likely bear market coming (just like many did in 1987). Despite the views of some of the respected finance industry professionals, this bear market was foreseeable. 

The underlying opinions and emotions of all market participants
are summarised in the price charts.
Every price chart tells a story.
It pays to understand the stories in the price charts.

Read more about technical analysis

In order to foresee an oncoming bear market, and respond to it appropriately, an investor (or trader) needs to have a mindset with some key characteristics. These are described as follows.

The basic approach

  1. Blue chips can disappoint - There is no strict definition for the term blue chip. Many so-called blue chip stocks are not what they are cracked up to be. Too many blue chip stocks fell significantly during the GFC. Some took a very long time for their share price to recover, causing a serious opportunity cost for many investors. See the ASX definition of the term blue chip, and read more on the real truth about blue chip stocks, they can be disappointing.
     
  2. A bear market or correction comes around too often - Bear markets and market corrections come around at least once every four years. And some of the falls of the market index, and many of the underlying stocks, can be a lot more than 10 percent, and even a lot more than 20 percent. And they can take many months for the share price to recover to new highs. It is very important to realise this. Not convinced? See information about the crash of 1987 that took almost 10 years before new highs were achived, and about the 2008 GFC bear market. If only we could avoid some of this capital destruction (see the next two points).
     
  3. Capital preservation is paramount - During a bear market it is possible to lose 50 percent of our investment capital, and more, and to not see a recovery for years. Given that these events do happen, it can be very useful and prudent to utilise strategies to protect our hard-earned investment capital. Many successful investors consider that capital preservation is paramount.
     
  4. It can be very useful to be able to spot an approaching bear market - There are ways to spot an approaching market correction, or bear market. Some of these approaches are actually rather simple and straight forward, but they rely on the ability to understand the stories in the price charts. See details about Weinstein's approach, and chart indicator divergence.
     
  5. Fundamental analysis is not essential - It has to be said that many investors (and traders) in the markets are successful without any fundamental analysis. At the extreme, many of them would declare it a total waste of time - they are entitled to their own opinions. Many of the people who utilise fundamental analysis enjoy the process of researching and analysing the material - like a hobby or other pleasant pastime. So we should not detract from that. But let it be said that many successful market participants use very little or no fundamental analysis at all - and they can be very successful.
     
  6. You CAN time the market - Many finance industry professionals declare that it is not possible to "time the market". They state that it is "time in the market" that is more important. Well, many thousands of market participants can successfully time the market, so are they lying to you? or are they ignorant of the techniques? There is no other explanation for their incorrect statements. A basic understanding of how to read the price charts is all that is needed (more details below).
     
  7. The Stop Loss is a precious and invaluable tool - If we want to preserve our capital and protect it from the ravaging of a potential bear market, then it is imperative to have some strategies at hand. Some investors like to hedge their portfolio utilising options, or other derivatives. However, a much simpler approach that requires less time to achieve, is to be comfortable in liquidating some of the portfolio at the appropriate time. If a share price is falling too far, then we could liquidate a portion of the position to capture and lock-in some profits, or we could totally liquidate the position. The simplest and most effective approach is the Stop Loss method. See more details here.
     
  8. Allocate time - We don't get anything for free - and so it is with our investment activities. Our investment positions do require at least a little monitoring and processing to keep them healthy. And this boils down to allocating some time to do this, and having a regular routine to monitor them and take relevant action. Allocating appropriate time is very important. It is very dangerous to simply set and forget. But we should also be mindful about wasting time on unproductive activities. See more information about balancing the time on research and investing.
     
  9. Sensible money and risk management - There are a number of basic money management and risk management strategies employed by successful market participants. See details about risk management.

More information

More details on the topics mentioned here can be found in Brainy's eBook (PDF) articles, and in other web pages in the Toolbox (some of which are reserved for Toolbox members). See the Toolbox Master Index for details.

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CBA - The stories in the price charts
The opinions of market participants
are captured and available in the price charts.
It pays to be able to read the
stories in the price charts.
(weekly price chart of CBA from October 2013
to May 2014 - see more details)

The charts are very useful

As much as many investors might feel uncomfortable with this, the price chart is a very useful tool because it summarises the opinions and emotions of all market participants. And this understanding can enable us to take advantage of the situation.
  1. The price chart is very useful - As we have said above, the underlying opinions and emotions of all market participants are summarised in the price charts. Every price chart tells a story. So it is very useful to be able to understand the stories in the charts. This ability and competency is known as Technical Analysis. The sample chart at right contains just one example.
     
  2. A confirmed price trend is likely to continue - The share price on the price chart can be in any one of three different states - either an uptrend, a downtrend, or in no trend. A price trend is simply defined as a series of higher peaks and higher troughs on the price chart. An uptrend on a chart can often have a rising straight line drawn under the price action - which looks like a rising floor for the share price. This is due to broad general agremements amongst the market participants as to the increasing fair value for the stock. It has been researched and concluded that once a price trend is under way, it is statistically likely to continue. See more information about trends.
     
  3. Trend-spotting is an invaluable ability - Because of the previous item about price trends, the simple art of trend-spotting is very useful.
     
  4. The Moving Average can help - The Moving Average curve on a price chart can tell us a lot about what is happening to the share price, and it's general tendency to change. See a simple implementation of the Moving Average with Weinstein's approach.
      
  5. Look for price support and resistance levels - This is one of the most basic principles that tells us a lot about the views of the majority of market participants. When they tend to agree that a stock has an upper or lower limit to it's fair value, this is reflected in the horizontal levels of price support and resistance on the price chart. The price approaches one of these levels, and often tends to bounce away from it due to the general opinion about fair value. See a sample of price support and resistance levels in the sample chart above, and read more details about support and resistance.
      
  6. Look for a chart pattern - As time goes by, the opinions of market participants regarding fair value for a stock can progressively change. When this happens, the extremes of price tend to lie within a price range. And this price range can vary over time. If we draw a straight line above the price action and another below it, these two lines can often form a chart pattern on the price chart. See more details.
     
  7. One or two chart indicators can assist - The field of technical analysis includes an arsenal of tools to assist the analyst. This includes a large number of chart indicators to help understand more detail about the price action, including the influence of volume. See more details about chart indicators.

More information

For more information on these topics, refer to the web links above.

This is one of the many tools in Brainy's Share Market Toolbox.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.


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Last revised: 30 September,  2014.