Before investing in the stock market – and before getting married – you must make it a point to sit down and write out a “Mission Statement”. If you don’t, tax on wealth and death of health are inevitable. Here is what your stock market mission should look like (we’ll tackle your Marriage Mission in another piece):
1. I Will Never Try To Time The Market: Timing the market is impossible – you cannot get in at the lowest point and you cannot offload your holdings at the highest point – so, forget about timing the market and just go with the flow and be satisfied about whatever investment decision you make.
2. I Will Not be Stubborn: The stock market is extremely volatile and in a constant state of flux. It is always in such a fluid state that you cannot afford to adopt a stubborn attitude towards the market or a particular stock. For example, if you are holding on to a stock for over 12 months and that stock is stuck in a small groove, and its industry trends point towards negative growth, then you must not hold on to the stock – you must book your loss and exit the counter. A stubborn attitude is for mules, not for enlightened guys like you.
3. I Will Take Profits And Pay My Taxes: Profits never ever made anyone lose money, and the same goes for you. Booking profits is a healthy sign even if the stock you sold appreciates after you sold it – hey, don’t worry about it, because you had a good fling with it, had your fun and succeeded in coming out the relationship without making any babies or laying any eggs. Smile. Okay, taxes are important too – don’t forget to pay your taxes on what profits you make!
4. I Will Not Follow The Herd – I Will Not Panic, I Will Not be Over-Exuberant: You’d have seen that many a time the markets are driven by a herd mentality: There’s some hot tip going around and half of America is buying that stock. But you don’t do that – Because hot tips can burn hands, legs and other important parts of your body. Think rationally and calmly – If you follow the herd, you will get crushed in the stampede. Remember Enron?
5. I Will Not Get Emotional About Any Stock: You may fall in love with a stock or you may hate a company intensely – whatever the case may be, do not act on your emotions. Act on research or on a recommendation from a professional.
6. I Will Trade Or Buy Only The Best Companies: Take a look and study the stock price movement of the best companies and you will find that these companies have rewarded their investors and traders with phenomenal gains, while the small caps and the penny stocks have made duds out of investors. So, either hang out with the best companies or get hanged by the duds – it’s your choice.
7. I Don’t Expect The Stock Market To Climb Up Daily: The stock market is like a roller coaster ride – you cannot expect your shares to climb up continuously; price corrections are bound to happen. In fact, you must factor in price corrections in your mind and you must not panic if a correction sets in either the market or on a stock that you’re holding.
This, then, is what your Stock Market Mission Statement must look like. Remember – playing the stock market is a volatile game and the only thing that is stationary out there in the market is the paper – it would do you a world of good if you laid out your mission statement and played by your rules.