Follow the Trend Line to Better Investing
Purchase a stock and from that moment forward it gently angles upward never deviating off of its path towards your target annual return: would that be nice or what?
Sure, sign me up.
It seldom happens like that, but when I look back on my buys and sells though I have picked many stocks that have, if you were to follow a longer term trend line, rather than the stock price line, risen pretty steadily over a long period of time.
Unfortunately I sold out somewhere along the way.
Why did that happen? Emotion. The reason for making an investment decision based on a stock’s price line, rather than its trend line is that the price is measure in a little thing we call money.
Money of course has all sorts of fabulous uses in this world; like buying food and paying for housing and other basic needs. We equate it to survival.
Trends are just statistics. They are objective from our day to day concerns; therefore we don’t really have an emotional attachment to them.
To become a great investor we need to do one simple thing: stop basing our decisions on the price line and start basing them on the trend line.
As I see it there is no more basic formula for making money from stocks, because 99% of investors are following the price line, which is the one that is rooted in their emotions.
How to let go of the emotions?
There is only one way to get over the costly influence of emotions in investing.
Systematic experience can be had in two ways: earned or bought.
I buy the systematic experience of a professional investor for one of my portfolios. I give him my money and get a report of value of my investments quarterly. I don’t meddle [he would fire me as a client if I did] and I don’t get any details of what I am holding. Only a valuation and a general sector outline.
At the time I am writing this, I am heavily in to resources including: oil and gas, uranium and precious metals. The portfolio has returned 30% in the last year, which is about average for the last 4 years for this manager’s clients.
His formula is to follow long term trends and not price lines. To a professional investor a downward fluctuation in price is link when your favorite t-shirts go on sale. You know the real value, and he knows the demand, so it is a time to stock up.
The other way to obtain systematic experience is to earn it through your own trial and error. The was is much more expensive [in dollars and inner turmoil] but will probably be more valuable in the long run as you should be able to consistently make money in any market conditions.
The key is the system. Experience is easy, every losing investor is getting experience, but only a system has a method for continual improvement.
- To make money you need to be able to base decisions on trends and not on prices.
- The reason that it is difficult to base decision on trends is that we are emotionally attached to money.
- Systematic experience is the best way to transcend emotion based decision making
- Systematic decision making can be acquired by hiring a professional or careful and honest participation in the market through trial and error.
Update: this article has been included in the Carnival of Personal Finance, which is hosted at City Girl’s Financial Blog.