This single sentence could save you a lot of heartache

published 22 August 2012

If there's one thing I've learned about investing (and life in general), it's that it's incredibly hard to learn from other people's mistakes.

I've been writing about finance and investment, and investing my own money, for well over a decade now. And I'd read plenty of books before I started putting my own cash into the stock market.

So I knew' what you were meant to do when you invest. But I still made lots of basic mistakes.

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Like buying companies because they had sexy stories, rather than because they were good investments. Or panicking and hitting sell, when I should have held my nerve. Or doing the opposite staying with a losing stock for far too long.

So one thing I want to try to do in this series is to pass on some very simple tricks' that might just help you to bypass part of the painful learning curve of investing.

I've already told you to use a notebook. But chances are you'll ignore that, particularly in the heat of the moment.

So today I want to pass on a simple mantra that might just stop you from making some of my stupid mistakes.

If you only take one thing away from these articles, this is the one to remember:

There will always be other opportunities to make money.

So what do I mean?

I mean that you don't have to pounce on the latest investment opportunity you've just heard about. You don't have to rush into anything.

The financial industry spends lots of its time poking you with a stick or dangling a carrot in front of you, encouraging you to pile in to the next opportunity.

That's because they make money every time you make a trade. Doesn't matter if you win or lose. Either way, they get their cut. And either way, they know you'll be back for more.

And the horrible truth is, they know you don't take much convincing.

Because you are hardwired to make stupid mistakes when you invest. Overcoming this hardwiring is probably the single most important thing you can do to increase your chances of making a decent return.

Don't forget: you are an irrational investor

You think you're a rational human being. Chances are, if you're reading this, you're smart, you're numerate, you understand the importance of setting goals, and you also feel quite in control of your emotions.

Forget all that.

The first time you put money into a stock, all notions of emotional detachment are going to vanish. If it falls, you'll feel anxious. If it rises, you'll feel elated. But you'll also start worrying about when you should be taking profits.

And it doesn't matter that I'm warning you about this beforehand. You'll still feel like this. So knowing' about investor psychology doesn't in any way help you to resist it.

So what can you do? The best way to avoid being hijacked by your emotions is to have a plan. There's no single plan that works for every investor.

Strategies range from find a solid, high-yielding stock, then buy and hold' to find dirt-cheap stocks then sell them when they get expensive or the story changes'.

That doesn't matter. Different styles suit different investors, and they can all make money.

The point is, if you have a plan, then you can start to automate' your investment process. You know why you are buying. You know what conditions will make you sell. It's harder for fear and greed to short-circuit that process.

But of course, having a plan requires patience and a bit of forward thinking. And the trouble is, while you're planning, the market is always moving.

At some point I can guarantee you you are going to set your sights on a stock. Maybe you've seen it mentioned in MoneyWeek and you want to do a bit more research on it.

And while you are considering whether or not to buy, it's going to start taking off.

You're going to feel panic rising. Your instinct is going to be "buy now, before it goes any higher!" Your finger will be hovering over the buy' button, watching the price, hoping it will fall back just that little bit, kicking yourself as it goes ever higher.

Don't buy it.

Take a step back, and remind yourself: "There will always be other opportunities to make money."

How a nice profit can seem like a loss

Here's something else that's going to happen to you. You're going to buy a stock that does rather well.

Like a good investor, you're going to ride the profit, but you'll also be smart enough to get out when it hits your target price. You're going to sell for a nice juicy profit.

And then it's going to keep rising, and rising, and rising.

Every extra percentage point on the share price is going to feel like a kick in the gut. Every extra pound of profit you missed out on, is going to feel like a pound you lost.

And your immediate instinct is going to be to make that money back right now, even although you didn't lose any money in the first place!

What makes it even worse is that you'll start to see that big profit you just took as a gambling fund' that you will cheerfully sacrifice on making big bets to compensate for the profits you missed.

You'll hunt around for a similar stock that hasn't moved as much, or you'll try to find a decent entry point to get back into the one you just sold. And you'll want to do it RIGHT NOW...

Stop.

Take a step back. Remind yourself: "There will always be other opportunities to make money."

There's always a bull market somewhere. And if you can't find one, there's always a bear market, where, if you're more adventurous, you can profit by going short (we'll discuss this in the future). So don't fret about the profits you miss' there are plenty more where they came from.

It seems so simple. But believe me, that one little mantra could save you from making any number of expensive mistakes.

What to do now

Take a piece of paper. Write: "there will always be other opportunities to make money" on it. Stick it on the computer terminal where you make your trades, within your eyeline. And don't forget it.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.