You can’t predict a global stock market crisis, but you can prevent one of the personal stock market disasters that cost people millions of dollars every day. You do this by knowing which stocks to watch, and watching them the right way.
Of course, you need to know how to pick a winner. But you also need to know how to give your stock a chance to win, and/or walk away from it if it disappoints or underperforms.
Here’s how to know what moves to make and what stocks to watch.
Understand Human Psychology
The key is not to view stocks as sentient entities that will do what they want under their own control. They are under human control and are guided by human reactions (or over reactions) to loss or gain.
And the stock market is often driven by fear. You would think it would be driven by greed, but it’s actually more driven by fear. The fear of loss is more powerful than the desire for more.
Michel Villa put it well in a great blog where they asked if you would wager $100.00 on the 50-50 outcome of a coin toss.
“As maintained by psychologists Daniel Kahneman and Amos Tversky, the emotional pain felt by a financial loss is greater than the satisfaction derived from an equal profit.”
“This is why a person will require a potential gain at least twice as much as a loss to accept to play.”
That being said, fear of being wrong can also be a great influencer. People will hold on to a faltering (think slightly underperforming, not disastrous) stock far longer than they should have because they didn’t want to admit they were wrong.
They didn’t want to admit that they made a bad call, or that their decision-making process is flawed. Because that could spell bigger trouble. What about all of their other stocks? Were they wrong about them too?
Avoid the Overreactions That Cause Disasters
You can avoid a stock market disaster by learning from people who survived real life disasters like landslides or cave-ins. No, seriously.
One of the most helpful books you can ever read is Laurence Gonzales’s Deep Survival: Who Lives, Who Dies and Why. It has nothing to do with knowing which stocks to watch, but can teach you a lot about what people do when they panic.
In it, he recounts tales of pilots who refused to pull up, even though the tower was screaming at them to do so. Or divers who took their respirator out of their mouth, even when they knew they needed air.
Why did they do this? Often times, it’s the same reason someone will make a bad stock market move. It’s the fear that all the data and logic in front of them is wrong, and a feeling they have in their stomach is right. It’s crippling tunnel vision.
Gonzales wrote, “In the initial crisis, survivors are making use of fear, not being ruled by it. Their fear often feels like and turns into anger, and that motivates them and makes them sharper.”
“They understand at a deep level about being cool and are ever on their guard against the mutiny of too much emotions.”
Success on the stock market requires the same level of emotional control.
Know When to Play Off the Discard Pile
Take advantage of other people’s lack of emotional control.
It’s incredible, if you asked a 12-year-old how to win on the stock market, they would tell you “Buy low, sell high,” because they saw it on TV. So why is most of the market doing the total opposite?
Too many people will buy into a stock while it’s rising, with the promise that this stock is only going to go up from here. Which is fine-ish, because you’re buying low-ish.
But the real value is in buying a stock when a loss has caused people to abandon it at a bargain price. They all saw the decline and prematurely hit the panic button to cut their losses. But you’re smarter than that.
You’re looking beyond the decline to see the big picture. Ups and downs are inevitable in the life of any stock. It takes a true visionary in times of volatility to have the courage to stay the course, or to zag while everyone else zigs.
The Chipotle Crisis: Guac Is Extra, But the Lesson Is Free
For example, there was a reason Forbes named Chipotle’s restaurant chain one of the stocks to watch for 2017. They did so in the face of food poisoning scandals that saw them fall from $757.77 per share on Aug 5, 2015 to about $413.29 in January of 2016.
Why? Because they believed in the Chipotle brand and that they would right the ship. And it’s logic like that that should guide your decisions; not what everyone else is doing.
However, it’s important to use as much data as you can to back this decision up, and treat these possibilities as stocks to watch, not ones to buy… Yet.
Using the Chipotle example, if you would have bought into them when the Forbes article was published you would have taken some bruises.
At the time this article is written, their stock now sits even lower, at around $315.00, thanks in part to another serious health scandal in July of 2017.
This is why it’s important to have a clear distinction between stocks to watch and stocks to buy.
To see the big picture, you need to know you’re currently looking at the small one. That’s why you need to factor in everything we’ve talked about above to drive your decision-making process.
Understand the human reactions behind stock market moves, while you master your own reactions, and you will make better decisions in deciding what stocks to buy and what stocks to watch.
Follow the Right Stocks to Watch With the Right Tools
To watch stocks and make sound decisions, you need the right tools.
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