Smart Investing Daily – Five Personal Strategies to Control Market Greed

Jared Levy, Editor, Smart Investing Daily
Friday, 07 January 2011

Many of us (myself included) are drawn to the markets by the same force that can destroy our accounts: greed. While there are several ways in which greed can hurt us, there are five personal strategies that we can employ to control the market greed that is woven into our social fabric.

Personal Strategy 1: Be Aware That Greed and Fear Drive Price

Some may argue this über-simplistic view of the equity markets, but when you reduce that statement down to its purest form, it’s true! When someone is willing to pay a higher price for a stock, that person, most likely on some level, is satisfying his or her greed instinct, in that they want to profit from their belief that the stock is moving higher. This works the same when fear sets in and you are driven to sell a stock at a lower price because of whatever fear you may have at that moment.

The problem with the word greed is that it carries a negative connotation and most of us don’t like to admit our negatives.

Webster’s Dictionary defines greed as “a selfish and excessive desire for more of something (as money) than is needed.”

But what do we “need”? Is it bad to want to make a better life for yourself, pay your bills, and pay off your home or credit cards? Are we really being greedy? Maybe it should be that “need” and fear drive prices.

You see, for most of us who invest, we do so in order to make a better life for ourselves or our families, and enhance our way of life and retirement. The real problem is that these “wants” and “needs” in life, which are perfectly normal, sometimes end up getting in the way of our being a successful trader or investor.

Personal Strategy 2: Get to Know Yourself a Little Better

When I first started out as a trader, I had a lot to prove. I grew up from humble beginnings in Philadelphia, and I was always scared of being poor. I remember making my first trades thinking, “This could be the one that makes me a millionaire.” I learned quickly that a thought process like that was a surefire way to miss my mortgage payment and even worse, lose my job as a trader.

The truth is, I was lucky enough to be taught at an early age from my mentor that the game is all about getting as many “hits” as you can and just staying on base as much as possible.

Translated into market talk, that means that you should strive to make as many good trades as you can (there will be losers), and once you are in a good trade, have a realistic profit target and either protect, scale out or simply exit the trade and walk with your profits, even if they are small. Staying on base means keeping your loss amounts minimal and moving on.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market for you with our easy-to-understand investment articles.)

Personal Strategy 3: Listen to Your Gut

You would think that many retail investors fail because they don’t have some secret knowledge or technology at their fingertips, but the truth is that the Internet offers you more resources now than when I started and I was able to prosper.

Having good technology and knowledge helps, but it’s not the key to real success.

If you have been investing for over two years, you have probably got the basics down and can sense when stocks are being overbought or oversold. Follow those instincts and read the commentary from analysts and editors of reputable financial publications to confirm.

Usually the first clue is when your mother (who doesn’t know finance) starts talking about the stock market. By the time it reaches someone who has minimal interest, the trend is probably coming to an end.

Personal Strategy 4: You Don’t Have to Make That Trade

Yesterday, over 2 billion shares changed hands on the Nasdaq stock market alone; 9,500 of those trades were in blocks of 10,000 shares or more (generally there is some motivation if you are buying or selling 10,000 shares).

The point is that there is always opportunity long or short in the market — don’t force a trade because you feel like you “missed out.” Trust me, there will be thousands more investment possibilities to come.

I remember from March-April 2009, the S&P 500 rose about 23% in a month’s time. People couldn’t believe it; they thought they missed it. Then after rallying some more, there was another 17.5% pop from July to August. At this point, many thought the rally was surely over, but then from its August 2009 highs until the end of the year, the S&P rallied another 13%… See what I mean!

Personal Strategy 5: Fix the Problem

The bottom line is that it’s not technology, information, computers, account size, age or lack of intuition that is the biggest success culprit; it is our own greed and lack of action (or overaction) that gets us in trouble.

One exercise you can do to work on this is open up a virtual trading account at your brokerage firm (most offer them for free). In that account, I want you to make the investments you would make in your regular account, with the same typical investment size. But in this account, once you are in a profit of at least 5%, sell your position, and once you are in a loss of 4%, do the same. Also, once you get profitable in a trade, move your stop-loss just above where you would breakeven in the trade to prevent going back into the red.

Test this method out on paper and see if it helps or hurts you. It’s OK to take losses; just don’t let them overrun your winners. If you are 50/50 at picking your investments, this simple tip should help ensure you stay in the green.

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