30 March 2010
All of us as humans obviously are born with different traits. One of them, of course, is feelings and emotions. We all have feelings and emotions that are very difficult to control. However, even though our feelings and emotions are difficult to control, almost impossible, our actions are something that we are wise to control.
And this is oftentimes what causes people to have such failures in investments is that they follow their emotions and particularly in the area of having a winning position or a winning trade as we’ll call it. Even if it’s a position you plan on holding for five years if it’s up we’ll call that a winning trade and what typically people will do is they will sell their winning positions too soon and because they had a gain they’re so excited about it that they end up selling it too soon.
The investing strategy that we have here at Eleven Two Fund Management is unemotional and based on a strategy that gives us a decision to make that is not based on my emotions and this allows us to oftentimes avoid the decisions that are being made by the herd. I will give you a perfect example of a decision that we made back on December 22nd.
On Thanksgiving of 2009 the dollar was at an all time low for consumer sentiment and gold was probably close to an all time high. Everyone was bad mouthing and trashing the dollar [and people are still doing that today]. However, on Thanksgiving Day of 2009 a rally started with the U.S. dollar that is still in effect today. If we are following our emotions and how we feel about the US dollar we would be shorting the dollar but the fact is that it has been proven over and over and over again that most trends begin at the height or at the bottom of the emotions of the herd. This concept, of restraining feelings, is also mentioned in the Bible.
In James 2 the Bible states that the tongues is difficult to temper. Here is what God says about controlling our tongues: "If anyone does not stumble in what he says, he is a perfect man, able to bridle the whole body as well. Now if we put the bits into horses’ mouths they will obey us when we direct their entire body as well. Look at the ships also. hough they are so great and are driven by strong winds are still directed by a very small rudder wherever the inclination of the pilot desires. So also the tongue is a small part of the body and yet it boasts of great things. See how great a force is set aflame by such a small fire and the tongue is a fire, the very world of inequity, the tongue is set among our members as that which defiles the entire body and sets on fire the course of our life and is set on fire by hell. For every species and beast and birds of reptiles and creatures of the sea is tamed and has been tamed by the human race but no one can tame the tongue. It is a restless evil and full of deadly close.”
Taming our tongue is similar to controlling our emotions because it is the way we feel that often causes us to say and do things we later regret. The same thought can be applied to our emotions in investing and in trading and that is why it is vital for us to have the humility to not trust ourselves or not trust our emotions and our feelings. We want to make sure that as an investor we implement an unemotional strategy for investing that will help us to know when we should be in markets and when we should be out. Sure we are sometimes going to make a move that is wrong; however, we will quickly get out of that move (cut losses) and try again.