Shrink Rap: Better to Miss a Chance Than Lose Money

Refusal to Chase Performance: Discipline or Obstinacy?

Dr. Hendlin, I was hoping you could help me with a problem I have. First off, let me inform you that [I] am more of a position trader. I like to hold stocks for intermediate-term moves, i.e., one to 12 months. Many times when I have a strong conviction about the direction of a stock, I fail to execute because I wait for the perfect entry point. Then if it starts moving in the direction I predicted, I refuse to chase it, even though I know it will probably move much more in that direction. This causes me to get really frustrated with myself as the stock takes off without me. What can I do to overcome this? It has cost me thousands of dollars in missed opportunities.

-- G.L.

Shrink Rap: Trader Todd Harrison is fond of saying, "Missed opportunities are made up more easily than losses." I agree, and have remembered this when watching a stock that took off without me. Sometimes there is a fine line between showing the discipline to hold off for a better price vs. being stubborn and unwilling to commit to enter a position. Given the current environment, my own preference is to hold off until I am convinced that I have a good entry point, and to be very cautious when taking intermediate-term positions.

Severe bear markets tend to go lower than we ever thought possible. I suggest investors caught in the dilemma outlined above continue to err on the side of missing an opportunity. Don't get trapped into believing there is just one perfect price moment for a good entry, or that missing a short rally is the end of the world.

Since March 2000, every rally has only given us false hope that things are going to improve. And most investors who jumped in for anything more than a trade have regretted it, as the market sucked in more capital, only to resume its downward spiral. Especially for those holding for the intermediate term who are risk-averse, I think it's best to wait for clear signs that the trend has changed and the geopolitical and economic climate have stabilized.

But to answer your question with my Shrink Rap hat on rather than my market-opinion hat, here are two suggestions: First, give yourself an upper limit at which you will make the purchase and then put in a limit order "good until canceled." This order will address whatever fear you may have lurking behind your quest for the perfect entry. If it hits, fine. If it doesn't, view it as being prudent rather than lost opportunity. Value capital preservation above lost opportunity.

Second, because your horizon is the intermediate term, scale into your position over time, not all at once. This will help combat your concern about paying too much for the ticket when the train is pulling away from the station.

Bouncing Down the Stairs

Dr. Hendlin, you're probably well aware of the change lately among the individual investor population [and] the steady decline in percentage of active conservative individuals, resulting in a steady increase in the percentage of active short-term traders. Would you agree that the loss of a significant population who wanted to "buy and hold" the recovery is contributing to the current "bouncing down the stairs" trading trend?

And a parallel question: Assuming investor psychology is as significant as corporate earnings toward market trend reversal, what do you think will provide the impetus for the current psychology (buy the dips, sell the lifts) to change? Thanks.

-- J.L.

Shrink Rap: I think the downward trend has had relatively little to do with the number of "buy-and-hold" investors. And I disagree that the activity of individual short-term traders is substantially contributing to the market's decline. More central is the aggressive and relentless shorting of stocks by major institutional players and hedge fund managers -- that's where the real money and volume resides. Also, the severe ratcheting down of earnings projections by analysts has had a negative effect.

As to what will change the current psychology, let me give you a macro-level answer. And that is: time. I see a psychological parallel between the trauma experienced by investors and traders in taking big hits to their capital and net worth over the past 20 months, and the trauma our country has experienced as a result of the terrorist strikes.

This market apprehension by investors is a mini-facsimile of the larger insecurity now felt as our personal freedoms and safety are threatened. Both require a conscious and unconscious process of healing. Technicians maintain that when certain internal indicators are violated, it takes a long time for the market to recover. It is no different with the national psyche.

We are now being forced to comprehend, interpret and respond to chilling events that used to be confined to films, novels, science-fiction comic books and video games. Disbelief, suspicion, anxiety and depression need to be reduced before we will again be comfortable taking risks.

We can try to pretend that the trauma hasn't affected us all that much. But our denial will always catch up to us -- in our dreams (and nightmares) of violence and safety seeking, mood swings, spending habits, sexual acting out, eating habits ("comfort" foods) and travel patterns. And in the disgust and loss of interest many feel about the market.

Only with time (and the change in trend that comes with it) will the long-term investor be willing to risk again. And only with time will the country heal the deep emotional and psychic wounds that come with the shock of monumental catastrophe and living life on "highest alert."

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