Can You Keep Your Cool?
The Dynamic Wealth Report
May 12, 2010
by Justin Bennett, Editor
The past week has been a challenging one for traders and investors. The
markets have been going up and down like a yo-yo on steroids. No doubt
about it, it’s been a heckuva wild ride.
The frantic behavior reminds me of the best piece of advice I ever got.
It came from a good family friend who passed away a few years back.
Bill was a great friend and a quality guy. He told me one day, “No
matter what happens… always keep your cool.”
Now he wasn’t talking about trading and investing. He was just talking
about life in general.
He gave me this advice many years ago and it’s stuck with me through
thick and thin. It has a simple truth that resonates with me. No matter
what the situation, always keep a level head. Letting your emotions get
the best of you can cause you to make poor decisions.
This advice is also very timely for investors right now…
Why? The recent swings in the markets can turn investing into a highly
emotional activity. If you don’t keep your cool, you can make decisions
you’ll regret.
Here’s a great example of what not to do…
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There’s a guy (we’ll call him George) who bought a large chunk of
Apple
(AAPL) a few weeks ago. George got in at $260 a share. He believed AAPL
would top $300 by the end of the year.
Now I’m not going to say it was a bad idea to buy AAPL at $260. I
haven’t been tracking the stock. I don’t know the fundamentals and I
don’t watch the technicals.
But what he did next teaches a great lesson…
The market started acting weak last Tuesday. George was already starting
to get a little nervous. By the time Thursday morning rolled around, he
was sweating bullets. AAPL was trading at $250 and falling. We all know
what happened next…
Pure chaos hit the markets. The major indexes plunged. Just about every
stock was in free fall.
And AAPL was no exception…
George panicked… in an emotional frenzy, he convinced himself he had to
get out. He put in an order to sell all his AAPL shares at $235. George
just lost $25 per share in AAPL.
Did George make the “right” decision? Well, AAPL went all the way down
to $200 before reversing.
But as of today, AAPL is trading around $262. Yep, it’s back above
George’s original buy price.
And this brings me to my point…
It’s nearly impossible to make the “right” decision during a meltdown
like last Thursday. What separates the winners from the losers is
what
they did before the meltdown.
The winner accounts for all possibilities before they enter a trade. The
loser doesn’t.
What I mean is this…
You have to take into account all the possibilities of what could happen
before you put your money on the line.
In the case of George, he thought AAPL was going straight to $300
without a hiccup. It never crossed his mind AAPL could pull back to
$235. When it did, he panicked along with everybody else. He didn’t know
what to do. His emotions told him to sell.
What should George have done?
If George was truly bullish on AAPL, he should have been open to AAPL
pulling back to $235 or lower. Maybe he could have used it as a buying
opportunity.
After all, even though it may seem impossible at the time, anything can
happen. If he wasn’t open to it, he shouldn’t have bought AAPL in the
first place.
The bottom line is this…
If you’re not open to all the possibilities, you panic when the
impossible happens. You can’t keep a level head about you.
You can’t follow the advice of my friend Bill and “keep your cool, no
matter what…”
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• Silver (Over $19 an ounce)
Silver prices are jumping in recent days on European debt worries. Silver is approaching the 2008 highs of around $21 an ounce. With gains
of around 12% in the last few trading days, it’s easily outperforming
gold. If silver makes a break above the $21 resistance level, it could
get very interesting for silver investors.
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