Can You Keep Your Cool?

| May 12, 2010 | 0 Comments

The past week has been a challenging one for traders and investors.  The markets have been going up and down like a yo-yo on steroids.  No doubt about it, it’s been a heckuva wild ride.

The frantic behavior reminds me of the best piece of advice I ever got.  It came from a good family friend who passed away a few years back.

Bill was a great friend and a quality guy.  He told me one day, “No matter what happens… always keep your cool.”

Now he wasn’t talking about trading and investing.  He was just talking about life in general.

He gave me this advice many years ago and it’s stuck with me through thick and thin.  It has a simple truth that resonates with me.  No matter what the situation, always keep a level head.  Letting your emotions get the best of you can cause you to make poor decisions.

This advice is also very timely for investors right now…

Why?  The recent swings in the markets can turn investing into a highly emotional activity.  If you don’t keep your cool, you can make decisions you’ll regret.

Here’s a great example of what not to do…

There’s a guy (we’ll call him George) who bought a large chunk of Apple (AAPL) a few weeks ago.  George got in at $260 a share.  He believed AAPL would top $300 by the end of the year.

Now I’m not going to say it was a bad idea to buy AAPL at $260.  I haven’t been tracking the stock.  I don’t know the fundamentals and I don’t watch the technicals.

But what he did next teaches a great lesson…

The market started acting weak last Tuesday.  George was already starting to get a little nervous.  By the time Thursday morning rolled around, he was sweating bullets.  AAPL was trading at $250 and falling.  We all know what happened next…

Pure chaos hit the markets.  The major indexes plunged.  Just about every stock was in free fall.

And AAPL was no exception…

George panicked… in an emotional frenzy, he convinced himself he had to get out.  He put in an order to sell all his AAPL shares at $235.  George just lost $25 per share in AAPL.

Did George make the “right” decision?  Well, AAPL went all the way down to $200 before reversing.

But as of today, AAPL is trading around $262.  Yep, it’s back above George’s original buy price.

And this brings me to my point…

It’s nearly impossible to make the “right” decision during a meltdown like last Thursday.  What separates the winners from the losers is what they did before the meltdown.

The winner accounts for all possibilities before they enter a trade.  The loser doesn’t.

What I mean is this…

You have to take into account all the possibilities of what could happen before you put your money on the line.

In the case of George, he thought AAPL was going straight to $300 without a hiccup.  It never crossed his mind AAPL could pull back to $235.  When it did, he panicked along with everybody else.  He didn’t know what to do.  His emotions told him to sell.

What should George have done?

If George was truly bullish on AAPL, he should have been open to AAPL pulling back to $235 or lower.  Maybe he could have used it as a buying opportunity.

After all, even though it may seem impossible at the time, anything can happen.  If he wasn’t open to it, he shouldn’t have bought AAPL in the first place.

The bottom line is this…

If you’re not open to all the possibilities, you panic when the impossible happens.  You can’t keep a level head about you.

You can’t follow the advice of my friend Bill and “keep your cool, no matter what…”

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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