Investor Psychology

Investor Psychology: What You Can Learn From The World’s Top Traders

By Dr. Steve Sjuggerud, Investment U Advisory Panelist
Thursday, October 24, 2002: Issue #182

You CAN become a substantially better investor in a very short period of time. You can do it the same way I did… I got to know Dr. Van Tharp…

Early on, I read a book called “Market Wizards: Interviews with Top Traders.” I figured that there must be some traits that are universal to all successful investors. And if this book had a dozen traders with 20 years of experience each, that’s 240 years of experience. I DID learn about what works for the best traders. But I didn’t learn it from a TRADER in that book…

The last interview in the book was with a trained psychologist, not a trader. It was Van Tharp. You see, Van has already done exactly what we all SHOULD do. He’s done all the hard work. He interviewed thousands of traders and determined exactly what is needed to make money in the markets. And he’s found what has worked: investor psychology. And he started his study with a “test” for investors.

In “Market Wizards,” he said, “I designed the test to predict who could win and who couldn’t. Now, I believe that anyone can win if they are committed to do so. Primarily, it’s just a matter of learning how.” During parts of four decades right up to today, Van has spent his career molding successful traders and investors from what he’s found administering his tests.

Two Basic Investor Psychology Problems: Risk Control and Stress

In “Market Wizards,” Van mentioned the two basic problems investors face are actually psychology issues: risk control and stress. For risk, most investors can’t follow the basic “cut your losses short and let your profits run” mantra, yet it’s crucial. For example, people have a hard time selling at a loss if necessary. And people always seem to cut profits short. If you always take profits when you’re up 15%, you’ll never have a 300% winner. And if you never sell losers, you’ll have a portfolio of mostly losers, with a few stocks up 10%. You’ll never make money that way.

One quick fix Van suggests is an emotional strategy that is remarkably simple: “If you think of trading as a game and that a mistake is not following the rules of the game, then it becomes much easier to follow these two rules.”

On the stress side of things, Van said, “Successful speculators have learned that an essential ingredient to winning is to make it OK to lose.” The numbers I’ve seen show that the greatest traders actually place losing trades 60% of the time – but their losses on those are small – the gains on the winners far outweigh the losers, even though they have more of them.

What Successful Investors Believe

When it comes to successful traders, Van found that they believe:

Money is not important.
It is OK to lose in the markets.
Trading is a game.
Mental “rehearsal” is important for success.
They’ve won the game before they even start.

All of the ideas I’ve shared with you today were in an old book. Because of that book, I contacted Van Tharp… and I’ve gotten to know him personally over the years. And I can tell you that Van has come a long way since then. I attended his Peak-Performance Seminar, which was a great help to me. And I went through his peak performance course. Recently, I’ve been speaking at his “Basic Stock Workshops.”

If you have a casual interest in Van, check out his book, “Trade Your Way to Financial Freedom.” If you have a deeper interest in these ideas, and are willing to seriously commit to becoming a better investor wait two days please, and I’ll tell you how Van’s psychology changed my investing life. I now KNOW I’ll make money in all markets. Do you?

I’ll tell you how to take the steps to get there on Saturday…

Good investing,

Steve

Today’s IU Crib Sheet

We’ve talked about the fundamentals of investor psychology and risk control in this space before – specifically cutting your losers short and letting your winners run. But – as Tharp suggests – this idea is difficult for most investors to embrace. Take Van Tharp’s advice: think of cutting losers short and letting winners run as “rules” that you must abide by at all times. By embracing these ideas as “rules” rather than just suggestions you’ll be much more disciplined and successful.
The second problem Tharp mentioned involved stress and for many investors, these are indeed stressful times. But Tharp’s findings were that successful traders realize ahead of time that they may lose money on as many as 60% of their trades but that their winners would be far more substantial than their losers. What do you think of this idea and the others mentioned today? Take a moment to “sound off” on our Investment U discussion board.

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