The Avarice of Profit-Taking

“Make the most of your regrets…to regret deeply is to live afresh.” – Henry David Thoreau

Successful traders are those who spend extraordinary amounts of energy learning to do the right thing as often as possible.  Over the span of a trading career “doing the right thing” i.e. mindset, discipline, risk/reward recognition – will ultimately separate the wheat from the chaff as ultimately there is a very wide chasm between trading “right” and trading “wrong”.

Trading is far too complex for anyone to learn everything.  It stands to reason then, that a trader’s goal should be to learn as many of the right decisions as possible.

My colleague owned New York Rangers season tickets – an NHL hockey team that, after a 54-year drought, won the Stanley Cup Championship in 1994.  For only the second time since 1971 and only the tenth time overall, the final went to seven games and my colleagues ticket value (via ticket brokers) skyrocketed to an astounding $2,500 over its face value.

As the ticket price escalated, I recall asking him, “Would you pay that much for your seat?”  “Absolutely not!” he shot back.  Ignoring his cost basis – and completely discounting the sentimental/utility factor – little did my colleague comprehend that he was, theoretically, paying an exorbitant price for his seat solely predicated on the principal of what it would cost him to replicate that seat for that game.

The danger of empty words

At times the financial industry seems to enjoy ducking behind hollow buzzwords – applying idioms and watchwords tacked together like sections of a prefabricated cowshed; investment pamphleteers airbrushing their clientele with slogans and sayings without nary notice to their meaning or relevancy to the client’s capital.  Weak metaphors or similes can prove quite costly as they unwillingly tempt us to fall prey to a dreary pattern of dullish, unthinking trading routines.

Analysts, experts, and television pundits alike gum together ratings for equities using plain vanilla terminology including: “buy”, “sell”, or “hold”.  At first glance, the words seem innocuous enough; offering imagery of precision however, upon critical thought, what precisely is a “hold” rating and, more importantly, what does a “hold” rating imply?

Clarity is the Remedy

Example: Envision purchasing Apple (NASDAQ:AAPL) stock after the “Black Monday” crash (October 19, 1987) for $36.50 per share and, throughout 27 years of severe trials and travails, you’ve remained steadfast and unmovable in your investment certainty. Today, you can afford to applaud yourself as you first perceived the stock as that diamond in the rough and now enjoy taking part of a fabulous company narrative whose stock presently trades at $114.00 per share.

Imagine tomorrow, a long list of solid, trustworthy, market experts unexpectedly downgrade Apple from a “buy” rating to a “hold” rating.  Can you or should you take comfort in your stock holdings enormous cost basis (i.e. the purchase price of a stock adjusted for stock splits, dividends and return of capital distributions) as compared to the investor who owns the stock at its current  or even higher price?

Do you have the affordability to be just a smidgen more cavalier with your risk-management discipline as compared to someone who bought Apple last week? On a pure pedestrian level, due to one’s risk tolerance and risk-management plans, these are highly personal questions and there exists no one-size-fits-all answer however, on a much deeper and imperative level, a successful trader must begin each day, inspecting the innermost parts of a portfolio with two resultant words: buy or sell. For an active trader, “cost basis” is lingo to be singularly reserved for tax accountants while “hold rating” should be tossed to the rubbish heap altogether.

If milkshakes and mac-and-cheese are comfort foods then, I would suggest, words including “hold rating” or “cost basis” are comfort words as they provide us with an element of both.  Concise risk-management is the centrality of successful trading and that comes through the intentional practice of making hundreds of good, inconsequential decisions along the way.

This in time will eventually lead to generating positive payoff asymmetries (i.e. risking one dollar to make three) as opposed to being mixed up in the mire with vague idioms – ones that coerce its converts to recite doomed phrases including, “you can’t go broke taking a profit” and/or “if I could just get back to even” -  as its pledge.