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Patience is an Successful Investor's Virtue

InvestorEducation / Learning to Invest May 02, 2008 - 11:26 AM GMT

By: Hans_Wagner

InvestorEducation

Best Financial Markets Analysis ArticlePatience is one of the most difficult skills to learn as an investor and trader. The best investors and traders understand the importance of patience. As one of Warren Buffett's rules of investing states:

"The Stock Market is designed to transfer money from the Active to the Patient." The best returns come from those who wait for the best opportunity to show it self before making a commitment. Those that chase the current hot stock are destined to loose more than they gain. Remain active in your analysis looking for quality companies at discounted prices, but be patient waiting for them to reach their discounted price before buying.


Dennis Gartman, a highly successful trader and publisher of The Gartman Letter as well as Rules of Trading has this to say about the value of patience:

Be Patient with good positions. If you miss an entry trade, wait until a correction occurs before entering. Often the price will return to its breakout point, so you do not have to chase the price. Also, your technical charts show support and resistance levels to help identify good entry points. Volume expansion and contraction also provides a good indication.

Be patient with good positions. Once a trade is entered, give it time to develop. Set your targets and stops and then let it perform. As the price moves up toward your first target, move the stop up to the next clear support level. When your first target is hit sell according to your plan and the market (1/2 of your position in a bull market, 3/4 of your position in a flat market). This creates capital for further investments and trades. Adjust your stops up to new support levels. Review your 2nd target and adjust if strength continues. The real money is made by letting your best positions to continue to perform. Taking small profits unnecessarily will not create wealth and most likely will lead to ultimate loss. Appropriate patience is needed throughout the life cycle of the trade, at entry, while holding and exit.

Waiting for Your Entry Point

You have done your homework, including identifying the entry point for a promising stock. Now you are waiting with anticipation for the price to reach your entry point. Instead of pulling back the price lunges upward. You panic, entering an order that is higher than your entry point. 

1. An impatient investor who violates their discipline starts down the path to ruin. Following the rules is what keeps the emotional side of trading and investing at bay. 

a. Patience in investing is similar to patience while fishing. There are many fish in the lake and it isn't necessary to catch every fish that swims by in order to be successful. In fact, it's only necessary to catch those few that bite. There are always many opportunities, even in a tough stock market. 
b. The difficulty is not so much finding trading opportunities but choosing among them. There will always be trades. 

2. And if you find that you have lost control and entered a stock before its time, there are two possible actions you can take. 

a. First, you can exit the position and return to your discipline. 

b. On the other hand, you can reevaluate the company and the trade to decide if it is worth holding or exiting. This approach helps you return to your discipline to make decisions your emotion. 

Giving the Position enough Time to Develop

1. One of the stocks you have been following hits your entry point and you pull the trigger. It starts its move up and you have a profitable trade. It un-expectantly retreats and falls below your original entry point, but has not hit you trailing stop. You panic and sell with a small loss. Then the price moves up again and reaches your target, only you are not participating. 

2. Rest assured, this is a common trait among many investors and traders. Exhibiting patience with a good trade setup is a difficult task. 

3. Keep in mind that losses are part of investing and trading. It is your discipline with good entry points, trailing stops and exit targets that lead to consistent profits and keep you from incurring unwarranted losses. 

Knowing When to Sell a Position 

1. There are times when you followed your discipline faithfully and the price barely moves. Now what do you do? 

2. Go back and re-examine your analysis of the company. If you should not be in the stock, then sell it immediately. 

3. On the other hand, if your analysis indicates that this stock meets all your criteria to own and the entry point is very close then it makes sense to continue to hold it. 

4. In many cases the price of your stock will approach your target. Being patient has worked out well for you. Now comes the time when you need to close out your position. Sell at least half of your position and move the trailing stop up to a near by support level and above your entry level. That way you have captured some profits and your stop will protect your much of your existing profits. If the price continues to climb you can profit further as well.

5. There is another reason to sell out of a position before it makes its move. You need capital to buy several good prospects. 

Summary

In summary, so much of trading is psychological. To use an overused phrase, patience is indeed a virtue for investors. Exhibiting patience when entering a trade and having patience while a trade develops are integral parts to trading and investing successfully. However, allowing patience to turn into stubbornness is something you must always guard against. Consistently exiting a trade according to predefined criteria is one of the best methods of improving ones success in trading.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas provides ideas on how to control ones attitudes and emotions that crucial if you are to be a successful trader. You also might find Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) by Vitaliy Katsenelson. The core of Katsenelson's strategy is to break down into three key pieces what you need to look at when analyzing a company: Quality, Valuation, and Growth (QVG). This helps you remain patient in your investing endeavors. 

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Hans Wagner Archive

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