Shrink Rap: Hard Knocks and Jitters

This Shrink Rap forum addresses questions from two novices on individual stock trading; both investors are trying to cope with the difficult conditions of a bear market. The striking difference in my responses is based on the different levels of anxiety expressed, and on the first investor's level of stock exposure.

School of Hard Knocks

Dr. Hendlin, I have been buying and selling stocks for a little less than two years. Yes, I entered the game at the worst possible time. I thought I would wait for the bubble to burst, then play the recovery. Well, I am down about 20% overall because I played every bear-market rally, going long at the top each time. The past year or so, I have seen myself as a swing trader, but occasionally I give in to bottom-fishing or buy-and-hold impulses, which have always cost me. I am trading very lightly right now.

Now for my question: Having lost 20% to date, every time I have a losing trade I am torn between two scenarios. One is that I am a sucker, losing all this money and paying commissions to do so. According to this view, I should just pull the biggest stop-loss of all and liquidate my brokerage account, putting all my money in tax-free bonds or somewhere safe. The other viewpoint is that I have been losing because I am a novice in a tough market, and when I learn more and exercise the discipline that comes from experience, and the market starts to improve, I will make back all my losses. I can look at my losses to date as tuition in the school of hard knocks.

The problem is that I am aware that the latter viewpoint is not far removed from the addicted gambler's perpetual goal to "make it back"; the more he loses, the more he is compelled to gamble in order to make it back.

I am 46 years old, have $500,000 in tax-free bonds, $100,000 in money markets and $128,000 in my brokerage account. Only about $20,000 of that is in stocks; the rest is parked in the money-market portion of the account. I have about $300,000 debt in commercial real estate that I occupy. No other debt. So I really have been playing it safe, but I just don't want to see the $128,000 keep dwindling if am just kidding myself about being able to win this game.

-- K.

Shrink Rap: I vote for the second choice: You are a novice in a tough market who needs to learn more and exercise the discipline that comes from experience.

As the market trend reverses (as it may now be in the early stage of doing), maybe you will make back all your losses -- and maybe you won't. Even if you don't, this alone should not determine whether you continue to trade individual stocks. You say you are trading very little, so addiction does not appear to be a justified concern.

Read my lips: Stop worrying! From the profile you present, you appear to be in good shape. You are heavily underweighted in stocks, compared with bonds and cash, and this indicates you have already learned something about diversification. And although being down 20% may feel like a lot, it is relatively modest compared with the losses of those who were overweighted in individual tech stocks and funds.

Your conservative allocation means you will be in excellent position to increase your stock holdings as you gain confidence and the upside trend becomes your friend. Accept the more accurate assessment of your low-risk profile that I am pointing out.

Plagued With Anxiety

Dear Dr. Hendlin, I've lost a tremendous amount of investment capital over the past year, and as a result, I'm fearful of owning a stock. Last year, when I first started, I would buy stocks that I thought were cheap, and watched them go down 50% or more before doing anything; that scenario happened over and over again.

Now I've done more research and know what kind of stocks I want to buy and when to be in the market. However, whenever I put in a buy order and own that stock, my heart beats very fast and fear lingers all over my body. The risk of losing capital is too much to take, yet I know that I have an opportunity of gaining capital. It affects the way I think; it affects the way I act; it affects everything in my life.

The only way I can rid myself of this feeling is to sell the stock. So if I'm in a winning position, I sell the stock way too early; if I'm in a losing position, I try and wait it out longer than I should (20% stop-loss instead of 10%). Any advice is appreciated in advance, thanks.

-- N. T.

Shrink Rap: It is common to feel excitement or mild anxiety while placing your order. But it is uncommon for the anxiety to linger beyond the trade, become "too much to take" and affect "everything" in your life. I am further concerned when you say the only way you can rid yourself of anxiety is by selling the stock. This is not a good sign. It sounds like the steep early losses you suffered have shell-shocked you from now being able to hold a position without undue anxiety and dread. You may be in over your head, risking money in the market that you can't afford to lose and that would be better kept elsewhere, in a safer investment.

Try taking at least one month off from all trading. You need to be away from it long enough to let the losses pass and to evaluate whether individual stock trading is something your personality can handle. This is not a game for everyone. During your break from trading, watch the market trend. Then, after the month passes, do some "paper" trading, with no real money at risk. See how you do and watch how you handle your emotions when no money is on the line. If you then decide you want to resume live trading but cannot do so without the same anxiety reaction, perhaps it would be best to let a professional manage your investments. An alternative would be to experiment in holding mutual funds to see if this is more bearable for you.