Last week in
Part 1, we identified some of the meanings of money as they relate to the needs money satisfies in life. We also identified how these meanings may affect our decision-making during trading.
Just as we bring our values and associated meanings of money with us when we trade, we bring our past experiences with money into our current lives. Anything we have learned about money since childhood is consciously and unconsciously brought into the present.
Exposing Ghosts in the Financial Closet
How do our early experiences with money help shape our trading approach? Here's an example: The common tendencies to be either overly greedy or fearful in our thinking may both be introduced to our trading approach as a result of being influenced by any of the following:
Early experiences of poverty, hardship and deprivation as a child that may have had a scarring effect on self-esteem and self-worth, leading to insecurity and fear, or compensation in the form of greed; the impact of living through a depression or recessions, or the early loss of parental financial support through divorce or death; being adopted, living in foster homes, or brought up by relatives, or in blended families; anything that affected money flow or ways of relating to money.
Experiences of shame, humiliation and ridicule in elementary school, high school or college due to having less money, less fashionable clothes, or lower social status than classmates; parental beliefs taught regarding socio-economic status; racial or ethnic mores taught regarding money.
Family patterns of fiscal irresponsibility, such as heavy gambling losses, bankruptcies or reversals in fortune that changed lifestyle; parents unable to provide for family adequately; frequent job losses or loss of business; family modeling regarding savings and investment.
Personal inheritances and windfall gains from relatives or friends that changed lifestyle, allowing for up-leveling lifestyle; lottery wins, scholarships, gifts, and other windfalls and their effects on spending habits and investment patterns. How did the sudden gain affect one's thinking?
Feelings about past and present earnings, for example, recognition achieved or status attained through career; effects of career disappointments; loss of dreams and desires relating to money; unfulfilled parental expectations for earning power; resentments toward bosses and other authority figures; failure in entrepreneurial ventures or loss of a business; being "burned" in previous investments; trust or lack of it for banks, institutions, brokers, etc.
Personal gambling/risk-taking history, for example, horse racing, Las Vegas, sports betting, golf course betting, etc. How has past gambling behavior influenced trading and thinking about investments? How much is nonmonetary gambling or risk-taking a part of one's life? How much excitement in life does one crave? How much is "on-the-edge" thrill-seeking a part of one's life?
Attitudes regarding living beyond one's means: use of credit cards, bank loans, mortgage equity loans, car loans or loans from relatives; debts owed on taxes; overall credit history, including bankruptcies. How extended can one be and not have it become a major concern? How extensively can one use margin to buy stocks and still sleep at night? What did one's parents model regarding living beyond their means and the use of credit as the "American way"?How has one's generation (for example, baby boomer or generation X) affected one's sense of entitlement to "have it all now"?
Who You Gonna Call? An Example of Ghost Busting
Sometimes all it takes to get over a negative trading behavior is to realize why one's doing it.
John called me for trader coaching. He told me that when he is trading he is fearful of entering positions until it's too late. John is a position trader who likes to hold a stock from a few days to a couple of weeks.
He notices that he seems unable to enter a new position when his charts say that would be the best time; instead he waits for further confirmation from the stock moving in the desired direction. When John gets this confirmation, he is able to go ahead and make the trade. But he complains that by then, he has already given up at least a couple of points that could have increased his profit.
John reveals that 10 years before he had suffered a "first-degree stock burn" when a relative, who happened to be a stockbroker, talked him into buying
Long Island Lighting
, a New York power company. "It's nice and conservative, pays a good dividend -- you don't need to worry," his relative told him.
What his broker/relative had neglected to tell him was that this company happened to be close to a nuclear power plant. And at the time, this worked to drastically reduce the value of the stock and John lost a bundle. His relative didn't get him out of the position.
And while he wasn't consciously aware of it, this one losing investment continued to make John feel like he couldn't trust his own judgment and that he needed to be absolutely sure about an investment before making a move. When I brought this to his attention, he was able to see how he had altered his whole style of trading just to compensate for that one incident.
The moral of the story? Simply this: Pay attention when you find yourself stubbornly refusing to look at new information regarding positions in your portfolio. The stronger you find yourself refusing to consider a change in the stock story, sector or market trend as a whole, the more likely you are a victim of this confirmation bias.
Steven J. Hendlin, Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996. He is the author of
The Disciplined Online Investor
recently translated into Spanish. He is pleased to receive your comments and questions for publication in his public forum columns at
firstname.lastname@example.org, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.
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