Seven Characteristics Of Winning Investors

Centeredness: There are three key components of our being: body, mind, and spirit. The winning trader is in complete harmony with all aspects of his or her being. Being centered allows him to analyze his own goals and methods, escaping the emotions of the crowd. This enables him to make rational decisions.

Acceptance: Total acceptance of the changing state of the markets and stocks is very important. By nature, the human mind is in a limbo, leaning in and out of decisions and opinions. But if the market is showing signs of distribution and leading stocks are breaking down, the winning trader accepts that and takes appropriate action.

On the other hand, if the market has just followed through on a new rally and leading stocks are breaking out, such an investor is not in denial of the new market uptrend and does not heed his emotions, which tell him to either wait for more confirmation, or wait for lower prices in stocks before buying. The winning trader is decisive, and totally accepts the state of the stock market in the here and now.

Patience: Jesse Livermore once said, "The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."

The winning investor diligently studies the markets every day, then waits patiently for the right market conditions. Investors greatly increase their odds of succeeding if they research carefully and intelligently define a potential entry point in advance, then wait for it to come to pass in the real-world markets. Patience eliminates the possibility of the dangerous impulse trades so common in daytrading.

Livermore also said that the big swing (the major trend) makes the big money, not the small fluctuations that occur in stocks. The winning investor studies general market conditions, takes his positions and, if he does not get stopped out on them, holds on to his positions without getting shaken out on normal reactions. The winning investor never loses his positions; he does not take small profits in what can be a big move in stocks. As Livermore said: "It was never my thinking that made the big money for me. It was always my sitting tight (with my winning positions)."

Trust: The winning investor has trust in himself. It follows that he trusts his chosen system, whether it is CANSLIM or any other system he has thoroughly researched. He knows that his system works, especially if followed diligently over time. No matter how the markets act in the short term, he never loses this trust, but is able to follow and apply his system, unattached to the results of his trades.

Note this does not mean the winning investor keeps making trades all the time; it simply means that when his investing system tells him to act or wait patiently, he follows the message of his system unquestioningly. The winning investor has traded and studied his system so thoroughly that the method's dynamics have become ingrained in his subconscious.

Humility: According to Livermore, "Markets are never wrong; opinions are." Not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. To make money, all a trader needs to know is to appraise current market conditions, hold onto his winners, and cut his losses short.

The winning investor is humble and knows that the market is always right. Therefore, he does not hold any preconceptions of where the market or stocks will be in the future. He knows that the market can prove him wrong anytime; he acknowledges a mistake in his analysis and judgment, and takes appropriate action.

Averaging up: Winning investors always average up; they never average down on any stock. Jesse Livermore, said: "When I am bullish and I buy a stock, each buy must be at a higher level than the previous buy price. I must buy on a rising scale. I don't buy long stock on a scale down, I buy on a scale up." For example, a winning investor might initially buy only half of his intended position in any stock, and only when that stock shows him a small profit by moving up or breaking out through a resistance area does he add to his existing position. He never buys more if the stock moves lower than his previous buy price. Not only does this reduce risk, but it also helps the investor have conviction in the positions that he accumulates.

Not listening to the news/analyst/public opinions: It is very important for investors to disregard the news as reported on television and newspapers, as well as any other analyst or public opinion. The winning investor follows only the action of the market itself, along with the action of the leading stocks; he is confident in his analysis of what the market is telling him. It is also important to interpret not the details of the news, but how the market and stocks react to it. If prevailing stock market sentiment is bullish, then bad news is ignored; if sentiment is bearish, then good news is disregarded.

Jesse Livermore said, "If there is a solid bull foundation... whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time."

Whether you invest on your own, or through a stockbroker or money manager, make sure to emulate the psychological characteristics of winning investors instead of relying on opinions, feelings, or emotions.

Avinash Agrawal lives in Menlo Park, California, where he contributes to the stock research process and participates in money-management discussions at SierraInvestor.com. Interviews with Mr. Agrawal have appeared on Working-Money.com and in the Smart Investor column of Investors Business Daily. He holds Masters degrees in Electrical Engineering and Management Science from Stanford University, where he majored in Finance, with an emphasis on pricing stocks and derivatives. He may be reached at 650-234-9611.

SUGGESTED READING
Yamanaka, Sharon [2005]. "Get The 'CAN' In CAN SLIM,". Working-Money.com, August 22.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.