Friday, September 12, 2008

A Trading Anecdote

As you read this, I am sitting on a lanai in Kauai overlooking magnificent Hanalei Bay. I'm not trying to make anyone envious, I only want to point out the great surroundings I am enjoying because I probably couldn't be doing what I am doing now unless I was in the trading business. Last weekend I wrote about what I consider to be the advisability of treating trading as a business and how I believe it can increase the likelihood of success as compared to those who treat trading as a hobby or as a gambling venture. Nothing guarantees success in trading or, for that matter, any business, but the investor's approach can make a real difference.

One of my early coaching students came to me after having lost a huge sum of money when the tech bubble burst and the markets turned down. Tears literally ran down his cheeks when he described his losses and his hands shook when he spoke about trading. In spite of this, the student claimed he wanted to be a full time trader. We spoke about the necessity of getting his obvious emotions out of the way and substituting discipline in their place. I suggested that the first step would be the creation of a trading business and he was all for the idea. We then began to go through the business plan elements I discuss in "Trade Your Way to Wealth" in order to help this fellow develop a plan that might fit his personality, risk tolerance, and needs. Our discussions began well and he started to develop his plan. We then came to the question of what his business hours would be. I believe it is important for traders to set out time that they will specifically devote to their trading business just as it was important for me when I was in the law business to devote hours to the practice. I also believe it is important to have time for oneself that is not devoted to the business. Time to shake out cobwebs, time to enjoy other things in life can be very important as well. My student absolutely refused to set hours for himself. I explained that the hours he set originally always could be changed because his business plan was never to be set in stone; it was always a work in progress. Nevertheless he flatly refused. He came up with a myriad of excuses even though he had no other fixed time obligations since he had quit his job several years before when he began trading (and before he lost the bundle). It was only after more discussions with him that I began to realize that refusing to set business hours was an excuse for his unwillingness to continue to trade. I addressed that situation with him and suggested that trading might not be for him. He disagreed vehemently so I asked him when he had last made a trade. He had not made a trade in more than 2 years. I suggested we find a stock that looked bullish in a bullish sector (the market at the time was going up) and buy a single share. He began to shake and to cry. He was unable to buy a single share of a $15 stock. He told me he had to wait until the system he was working on was perfected. Though he didn't use these words, he was working to create the holy grail. I suggested he might be better off marketing his system, but now, several years later, he is still working on the system and he still has not made a single trade as far as I know. This poor fellow is an example of the need to know ourselves. Some people are not cut out to be traders and if he ever was he isn't now.

While a plan is very important to trading, my old student taught me that something needs to come before the plan. Honest self evaluation is critical. Anyone can be a happy trader when they are making money, but first we need to know whether we can face the prospect of loss and whether we can handle actual loss since there will be losses. In the business sense, can we look at a loss and understand that it is a cost of doing business or is it going to be devastating? If the prospect of a loss is daunting, trading probably isn't for you. If you understand that losses will occur and that risk is ever present but can be managed with discipline, and if the idea of trading interests you, then maybe you can start working on your plan.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

15 comments:

cathyalien said...

Dear Mr. Kraft,

I enjoyed your anectdote. I can readily see why that happened, I think, Too much risk, beyond his risk tolerance??

I have traded off and on a little for about three years, small amounts, and am still learning many things about the ins and outs of the market. I feel that I am finally ready to do more and take on a little more risk. I have learned a lot and look forward to learning more as I go.

Thank you so much for your articles. i always learn something, usually several things from your articles.An Ardent Admirer

Cathy Alien

Nick Lang said...

Hi Bill---- I enjoyed the article as always and it reminded me of a great book I read by Jay Abraham, who is a master marketeer, by the name of "Getting Everything You Can Out of All You've Got". One of the many lessons I gleaned from this wonderful text was that if you are serious about success, you have to take your business seriously and planning is such a key part of that. If you are not planning for success, you are basically planning to fail, that's just the way it works.
Thanks for the books, your courses, and your interesting insights into the world of stocks and options. Best regards as always-----Nick

Srick said...

Great advice as usual. A traumatic event will either make you stronger or weaker, but it always changes us.

Anonymous said...

Hi Bill,

Glad you're taking a break from this insane market! Another great article from you.....I look forward to your advice ...it's always "fresh" and pragmatic.....Your words have propped me up when I question my own trading....I have invested for a long tiem, been trading for 3 years (a very different animal!)...As an investor I know that fundamentals will matter again but navigating this market has been a challenge.....some of my best lessons in life have come from failure...I believe trading enhances the discipline that enables us to look at our mistakes and grow from there....patience doesn't hurt either! Enjoy your vacation Bill and know that your words do make a difference.

With gratitude,
Linda

Linda said...

P.S......I would like to reference an earlier article you wrote Bill, using Citigroup and GE as "great" companies, but not good holds. As an investor I always believed in buy and hold until I saw opportunities that were short term....I also started to see the insanity of holding a "great" company because it was called just that.....my entree into the trading world started with the sale of C and GE.....3 years ago...I also said "goodbye" to the broker who loves his managed funds. As you so aptly pointed out, we must take ownership of our investments!...Thanks for letting me take up sapce here.

Linda

JDG-Rec said...

hey bill i just read your article about
your student that fell apart after losing a good grip of cash. i just started trading a month ago. i am going in to the pool with both feet bare and a blow drier in my hand. so far ive bought 7 stocks 5 im gonna sit on. and 2 that i wanted to turn over for quick money. i had the oppertunity to sell when they were up 70 percent -->Lack of dicepline) and i decided to see if it would go up little
more then they dropped 50% or more than what i started with.so im sitting on them now lol. trading is somethin i want to do badly. loss of money does'nt bother
me because im makeing more.lol my lack of knoledge is a prob. ive been spending 3 hours a day on the research part looking for stock that i maybe able to make some fast money at.
i relize fast money could be a week waite or 2. faster would be better but i dont know what to look for. i would like to find a faster less costly way of learning.
is there anyplace on the net that can
give me some guidance? on how to find
money makers or atleast give me the sight to see them. im not intrested in
paying hundreds or thousands for subscriptions to news letters. ive had
a couple and ya pay for alot of mail
i was spending most of my time reading emails getting no where. is there a chat
room or forum were people talk stocks.
see the way i look at the stock market right now is like, the universe is the stock market and the planet earth is the brain sell that has to store all that info, so i would like it to be put in organized, or your gonna have a real mess to deal with.

Thanks JDG-Rec
feel free anyone to email me a reply
JDG-Rec@theoriginaljudge.com

Alexander said...

Well written newsletter as always, very informative and intriguing.

Bill Kraft, MarketFN.com said...

Thank you, Cathy. Successful trading does require ongoing study of the markets, strategies, and, probably most importantly of ourselves and our reactions when dealing with our money.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Nick. I haven't read Mr. Abraham's book, but I'll take your advice and check it out. Those of us who are interested in trading should never stop trying to learn about trading and about ourselves.
Bill Kraft

Bill Kraft, MarketFN.com said...

Good point Srick. Thanks for writing.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Linda. Congratulations to you.
Bill Kraft

Bill Kraft, MarketFN.com said...

RDG, thanks for writing. I know of no easy way to success in the markets and I believe the best way to go is to learn through reading, DVDs, seminars, and/or private coaching. You might find my book, "Trade Your Way to Wealth", helpful as a basic starting point. You can order it on amazon.com. Many brokerage firms include some training on their websites. Best to study first then trade rather than the other way around.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Alexander.
Bill Kraft

JDG-Rec said...

Im sorry bill maybe i didnt write my post in an understandable way.
its JDG-Rec. im not looking for a easy
way to riches. didnt say that. what i said was that im not interested in paying hundreds or thousands for someones opion on how to get rich tradeing. when theres hundreds of people selling ideas that tells how to get rich easy using my program just follow my dvd or cd and check out my book and if your not making money your first trade ill refund ya.now thats to easy to me anyone else. just because your new at something doesnt mean you should go out and pay everyone money to learn. two how many diff people do you have to pay till u finaly find what your looking for.three if im gonna lose money on everyone elses theories,it would be cheaper to lose it learning my way,i thought wich wasnt much of thinking that someone in cyber space besides me maybe just maybe wouldnt mind talking about trading stocks. but i see that if you dont own a course your pretty much clueless and will never learn. hmmm guess ill just have to go that way. sorry im not interested in your book cd dvd movie video clips brocurse cards tv show billboards signs emails phone calls or textmessages.
thanks i see more things now.

Bill Kraft, MarketFN.com said...

Well, JDG, I apologize. I was just trying to tell you the work and study I went through to learn the ropes. I don't care whether you read my book or not, but you better read someone's before you try to reinvent the wheel. It can be a very expensive process and it sounds like you are determined to do it the hard way. Good luck and good trading.
Bill Kraft