Selling Stocks Short: Get the Emotions Out of Your Decisions

Selling Stocks Short; March 30, 2008

I’ve never been a big proponent of emotion investing, but given the number of phone calls this past week, I thought now might be a good time to address it.

Buying stocks is pretty easy. People do it all the time. Knowing when to sell is something else entirely and most investors miss the boat on this one. The talking heads remind us daily that selling shouldn’t be an emotional process. No kidding.

(Note: Most of the talking heads don’t own any stock or mutual funds at all. Those that espouse the most are ones who have their money in money market funds and CDs. They want you to heed their wisdom, but these folks don’t eat their own cooking.)

Professional traders and investors use an array of tools to set selling objectives. Sometimes they work and sometimes they don’t. Trust me – I know this from experience. I’ve had a number of stops jumped recently and have the scars to prove it. I use a number of charts and technical indicators to set selling points on both positions and the entire portfolio. Sometimes this works like a charm and sometimes it doesn’t. The one thing that I don’t do is to let my emotions get in the way of things. I trust the numbers – period.

Everyday investors don’t have the luxury of knowing what I do, nor do they have my experience. When emotions enter the fray, they wreak havoc on a portfolio. The two most dominant emotions people have are fear and hope. When it comes to deciding whether to hold onto a stock or to get out, fear and hope are the worst of all combinations.

If one of your stocks is losing money, you have two options – hope it turns around or be afraid of losing more money. The thing to do is to cut your loss and wait for a better opportunity to present itself.

If one of your stocks is making money, you have two options – hope to keep making money or be afraid that you’ll leave points on the table by not getting out at the top. The thing to do is hope that you keep making money.

The idea in all of this is to get out of stocks that are falling and to stay in ones that are rising. The problem is that this is easier said than done because a winner that stops going up causes you to fear losing money.

So the question is this – how do you separate your emotions and your investment portfolio? I’m not a psychologist or a behavioral scientist. I am a student of human behavior. If you want to keep your emotions out of your investment portfolio, consider the following:

1. Step one is to get to know the face in the mirror. It’s the one with wrinkles and blood-shot eyes looking back at you every morning. That’s your best friend and your worst enemy. How emotional are you? How much risk do you really want to take? In other words, how much of loss can you take before you walking the halls at night screaming like a land starved longshoreman?
2. Make it hard for you to screw up. If you use a broker, place sell stop orders with them in advance. If you trade online, use GTC (good-till-cancelled) orders. If you place the orders in advance, don’t change them. Also, give yourself plenty of room to maneuver. In days of yore, it was common to use stops of 5 to 7 percent. With today’s gyrations, daily moves of 12-15 percent aren’t uncommon. If your stops are too close, you’ll get stopped out prematurely – leading to too much trading activity.
3. Understand this – THIS IS YOUR MONEY THAT YOU ARE DEALING WITH. It’s your future and your families. If you don’t keep your eye on it, know one will. The more you know and understand what you’re doing, the more successful that you’ll be.

You need to know the upside potential, the downside risks, how will my portfolio behave if interest rates go up or down, what happens if the dollar gets stronger or weaker, and a host of other things. Do you need to be an expert? No you don’t. But, don’t be in the dark either. Your cousin’s latest tip or the one from the guy with the awful necktie at work don’t cut it. That’s not a strategy – it’s a bet. Ordinary people don’t win many bets. If you don’t believe me, just hop a plane to Las Vegas, Reno or Atlantic City.

Look – I’ve been in this game since 1982 and this is a fact - your emotions will either make you or break you. It’s that simple. You will never conquer all of your emotions, but you can get your arms around them. Stock trading isn’t about picking the right stocks – that’s a really small part of the overall picture. It’s about coming to grips with your hopes and fears. Once you have your emotions under control, you’re well on your way to being successful.

Investing isn't about conquering your emotions. It's about handling them. If you have a handle on your emotions without using any of the above tools (or other tools of your choosing), you're the rare investor indeed. As for the rest of us, letting our money management and investment tools guide and control our financial decisions is a necessary step toward successful investing.

RAC
The Intelligent Trader

The Slump Worsens for US Auto Makers

The Slump Worsens for US Auto Makers

which is good news for us. We are SHORT General Motors (GM) and will remain so.

From the Wall Street Journal ....

The Big Three U.S. auto makers are preparing cost cuts and other belt-tightening measures in case a slumping U.S. economy hurts sales more than expected.

General Motors Corp. has pushed some capital expenses from the first quarter to later in the year to make sure it has enough cash if the downturn in the U.S. market worsens, the company's chief financial officer said yesterday.

Ford Motor Co. executives said the auto maker is considering options to cut costs further to reach its goal of becoming profitable by 2009.

Chrysler LLC, meanwhile, said it completed previously planned moves that will lower production at several plants in anticipation of weak sales this year.

Most auto makers have been forecasting industry sales of 15.5 million to 15.7 million cars and light trucks this year, down from nearly 17 million two years ago. But turmoil on Wall Street has raised concerns that vehicle sales could come in even lower. A new forecast by J.D. Power & Associates earlier this week put industry-wide sales of light-duty cars and trucks this year at 14.95 million, the lowest level since 1994.

Speaking at an analyst conference, GM Chief Financial Officer Ray Young said his company is sticking with its forecast that vehicle sales will pick up in the second half of the year. GM expects total U.S. vehicle sales, including heavy trucks, in the low 16 million-unit range, meaning light-vehicle sales of roughly 15.7 million.

Mr. Young said GM has taken about $500 million in "management actions" to mitigate a possible downside scenario. To conserve cash and help its liquidity amid tight credit markets, he said, GM will look to take advantage of government-funding programs in certain capital-spending programs in some countries, including Brazil, that could provide needed capital.

GM ended 2007 with liquidity of $27.3 billion and access to about $7 billion of undrawn U.S. credit facilities. Mr. Young said he is monitoring liquidity on a quarter-by-quarter basis.

GMAC LLC, in which GM owns a 49% stake, is adequately capitalized, and the auto maker doesn't plan on making a cash injection, Mr. Young said. Concerns that GM might have to contribute money to its former lending unit have sent its share price down in recent weeks.

RAC
The Intelligent Trader

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I've been a baseball umpire for 32 years and and a stock trader for 25 years. Along the way, I have learned a lot about what it takes to be successful not only on the playing field but also in life.

You'll find my talks to be light, humorous and chock full of common sense.

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Robert Christy is a professional stock trader, money manager, speaker, author, and baseball umpire. Mr. Christy serves as the President/ CEO of Christy Investment Group, Ltd., a registered investment advisory firm and is the editor/publisher of The Intelligent Trader, a premier stock trading newsletter service. He's the father of 2 grown children (a son who is a chef and a daughter) and calls Roswell, GA. home.

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On March 1st, we changed our name to The Intelligent Trader because today we trade more than just stocks. We also trade options, commodities, futures and foreign exchange (forex).

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