The truth of the matter is that the following resolutions about investing aren't just for the year ahead, but for every year. That's because human nature and emotions, and thus responses to the stock market's movements throughout history, have largely remained intact. They're timeless. That's why the same types of chart patterns that manifest themselves today (and will occur moving forward) also existed years ago. The following observations are based on my personal investing experiences since the 1970s. Yours may differ. Keeping in mind that investors use a variety of methodologies to invest and address the investing and risk management sides of the investment equation, and that each case is different, please consult with your investment advisor, accountant and/or other investment professional(s) for a personalized review and assessment. That said, here are my fifteen investment resolutions heading into 2020, some culled from my book Relationship Investing – Stock Market Therapy For Your Money. May you and your families enjoy your happiest, healthiest and most laughter-filled holiday season yet!
- An academic education and a stock market education are two different things. Stock market intelligence is more important than academic excellence when wading into the market's choppy and volatile investment waters. Analyzing the stock market by observing its movements is the key premise of technical analysis, and the one I've adhered to my entire career. The stock market has a language all its own, and a potential investing aid lies in studying its movements and not trying to apply academic strategies to real-life trading situations.
- Don't have a prewritten script you expect the stock market to follow, because it will often pursue a different path.
- Be flexible and discipled at all times. At all times.
- There are two guarantees in the business of investing; hard work and losses. Accept it. You're going to lose money when investing. An effective job at controlling financial cuts (manageable losses) before they become financial infections (larger losses) or financial hemorrhages (big losses) will have a major impact on your investment results. You can be correct in eight out of ten trades and still lose lots of capital. Conversely, being correct in your stock picks well below 50% of the time can net a handsome net gain if your risk management skills are effective.
- Potential should precede price when investing. Technically speaking, I may find less risk in a name selling at, let's say, $50 per share than in a name trading below $15 per share. It all depends on my observations of each security from multiple chart angles.
- Don't place a lid on how much you can make, but always have a floor on how much you can lose. This is a big flaw in the "breakeven" approach, when one is trying to sell a security when it returns to its original purchase price without having any risk management plan on the downside should that price fail to be achieved. You may get that break-even result nine out of ten times, but the one time you don't can overwhelm the multiple times that you do. To me, selling a position within a few or several percent of where I purchased it is as good as a breakeven result - even if I take a loss. On the northerly end, there are cases where it can be wise to lighten up, such as when a key trend line is being approached. In this regard, just because a security is making new highs does not mean that it doesn't have any potential resistance.
- Don't let personal considerations interfere with investing considerations. When I'm investing, preserving my capital is my number one thought – not tax considerations, not dividends, not whether or not I need the money if I decide to sell a position, not what the consensus view is.
- I heard former Federal Reserve chairman Alan Greenspan on the radio on September 14th, 2008 commenting to the effect that the (then) current financial crisis was a once-in-fifty-year occurrence and the worst he had ever seen. As I remarked in my book, "no matter how rare an event is – whether it's a once in fifty year, once in a hundred year, or once dating back to the Paleozoic period – you always need to prepare for it. You don't get a pass. There are no exceptions, despite whatever highly unusual circumstances may exist." In my lifetime so far, I've witnessed the big bear market of 1973-1974 (among the worst since the Great Depression), the 1987 stock market crash (which claimed approximately 41% from the DJIA in under two months), the technology stock bubble of 2000 (and the NASDAQ's 78 percent plunge from March 2000 to October of 2002), the subprime mortgage crises starting in 2007 (with the S&P 500 Index plunging approximately 57%) and the flash crashes in 2010 and 2015. I can list more, but you get the point. The bottom line is that since there will be once-in-a-lifetime-events, you have to assume that they will occur in your lifetime.
- Know yourself and how you'll react to a wide variety of market movements - some sudden and violent. What are your limits for financial risk and monetary pain? Do you set boundaries? What's your plan to not let something totally unexpected, even a once in a century adverse investment event, negatively impact your standard of living? Should you even be investing in the stock market? Also, remember that financial losses can take a human toll, not just a monetary one. In addition to seeking advice from your financial professional and accountant, also consider consulting a highly regarded professional to assist you with your market emotions. If you're not willing to take losses and admit mistakes, then the business of investing or trading in the stock market isn't for you.
- Just because your child is planning to attend college years hence is no guarantee that the stocks, mutual funds or other investments you purchased for them will rise accordingly. You can't assume anything when it comes to investing, and you can't expect the market to appreciate by enough of an amount by a set time to fulfill your educational needs. It may even decline. The market is the boss, and it doesn't take orders. Consider a backup plan or additional avenue to pursue, just in case.
- Don't allow a rushed, spur-of-the-moment change-of-mind to outweigh your original, well-contemplated and researched decision to sell, which I do "at this market" in the vast majority of cases. That's because it's my money – and I want it back. Several cents either way makes no difference. Besides, the market doesn't always offer second chances. While the same general (reverse) thinking applies when buying a stock, I rate selling as the more important of the two because it's my capital that's at stake.
- On Wall Street, what goes up goes down, but what goes down does not necessarily go back up. Also, note that when a stock falls 20%, it needs to rise 25% to recoup that loss, while a 30% decline requires a 42.9% gain to break even and a 45% plunge would necessitate a nearly 82% rise for a breakeven result. The stock market falls faster than it rises. That's why risk management is key.
- My analysis of charts and technical indicators takes precedence over all other analytical market methods, including seasonality and sentiment measures. If I want to purchase a stock, I analyze the stock, not the company. The two are not the same, especially in a bear market.
- Preserve what you have before trying to have more. Risk management is always key in that regard.
- "The stock market teaches you humility," as one of my market teachers liked to say.
Jeff Weiss, CMT
Jeff Weiss, CMT, formerly served as Chief Technical Analyst at Lehman Brothers, PaineWebber and UBS after getting his big break as a technical analyst at E.F. Hutton and Company, working for the legendary Newton Zinder. He has been a featured guest on multiple financial networks and in the financial press, and is a motivational and inspirational speaker on the stock market and a host of investment topics. His book Relationship Investing – Stock Market Therapy For Your Money was named 2018's "Best Investment Book of the Year" by The Stock Trader's Almanac. He has two CE-approved courses, as well as grade school through graduate school course offerings. His website is https://weissspeaks.com.