The Naive Young Trader

Sep 25, 2011
J. Webster
Comments Off on The Naive Young Trader

As a young trader you do a lot of stupid and naive things. One thing you might do is buy a stock thinking it CAN’T go any lower, it won’t. Which it does and will. Or, you might say, this is Bear Stearns or this is Lehman Brothers or this is Washington Mutual, they can’t let it go any lower. You might say to yourself, they just can’t let this company go under. Those are easy examples, as we known what happened, they all went much, much lower.

Better yet, there are those examples where you might say oh this is such a great brand that has been around for years and years and it’s surely going to recover. This too is wrong. Just take a look at a once powerful smart phone brand, Research in Motion, whose stock has been chopped down like a dead tree thanks in large part to Apple.

On the other end of the spectrum, it’s the idea that, “Oh, this stock just can’t go any HIGHER.” In this category you might mention Apple’s stock, where not only has it gone higher but it now has a market capitalization bigger than Exon Mobile. The naive young trader might have sold Apple at $200 or $250 a share, thinking there’s no way this stock can just keep going up and up in this poor economy. And perhaps the young trader might have sold the stock even a bit higher, say at $300 or even $350 a share, but we all know Apple is now trading at around $400 a share. It takes a lot of discipline to let winners run just as it takes discipline to let losers go. You see that green in your account and want to sell. You see the red in your account and you want to wait it out.

Just as the young trader might think stocks can’t go lower, at the same time, they might think stocks can’t keep hitting new 52 week highs in a recession. Both are wrong.

If you look at a lot of legendary traders and their greatest winning trades, whether short or long, those winners came by managing pain for months if not years or letting winners keep rising. They were confident in their research and maintained their position despite what others were saying and even if the company itself said they were wrong. Think David Einhorn’s short on Allied Capital. It’s that steadfastness that enabled them to make piles of money.

Related Posts Plugin for WordPress, Blogger...

Comments are closed.