There aren't many things in common between professional share traders and retail investors with the former often being viewed as gamblers who are in the game for quick profits and an easy lifestyle, while the ordinary investor is saving for a comfortable retirement.
This means the tools and tricks used by full-time share traders often aren't useful in helping retail investors and SMSFs to generate superior and sustainable returns from their share investment portfolio.
I am not here to try to improve the image of stock traders but there are two things that disciplined traders do that can make a big difference to your investment performance.
Don't get distracted by the glitz
I'm not referring to technical analysis, or the use of charts to plot your entries or exits from a stock. Technical analysis is often regarded as the "sexy" part of being a trader as colourful lines and rapidly changing numbers can be hypnotic.
That's probably the only part of a trader's job that most people think about although if you asked any successful trader, he or she will tell you that chart reading only constitutes a small part of their routine.
It's a bit like the tip of an iceberg. It's the most visible part of the job but there's lots that go on under the surface that others do not see.
It's these less visible and way less glamorous tasks and processes that is a bigger determinant of how long a trader stays in business!
Many novice traders make the mistake of overlooking these unsexy tasks as they can be tedious and mundane – and that's probably one reason why most traders don't last beyond a year or two.
Two habits you should adopt
As I mentioned, many of these tasks aren't directly applicable to investors looking to build their retirement savings over the long-term – but there are two that I believe can make a big difference to the everyday investor.
- Log Book: One good habit a trader should have is to keep a log of all their trades. The log typically will have information you'd expect, like the entry price and date, but it should also have a column to explain why he/she entered or exited a trade.You probably don't need as much detail about prices and dates (you often can print such reports from your online brokering platform anyway), but it's good practice to record why you bought a stock. There are two key reasons why this is important.The first is that it stops you from buying a stock on impulse. Many investors often buy stocks based on what they hear at a BBQ or from on their Uber ride.
Having to write down the reasons for an investment will force you to articulate the fundamental factors that are driving your decision. Naturally, if you write "because Uncle Bob told me", you should kick yourself.
The second reason for having a log is because it can help you determine when to sell. Selling is much harder than buying. It's a psychological shortcoming many people have, including myself.
I won't delve into the psychology of why, but this issue is the reason why some fund managers split the tasks. They will have one person (or team) to do the buying and another to decide when to do the selling.
Most SMSFs and retail investors do not have the luxury of splitting the job functions and that makes having a log more import.
If the fundamental reasons behind your buying decisions cease to exist, you know it's time to think about selling. I would even go so far as to encourage you to write approximately when you would sell the stock and under what conditions as it will prompt you to think about your exit strategy and not get too attached to the stock.
Your log book doesn't have to be a physical book or dairy. You can use Excel or Word (or other software) to help you keep track of your investment decisions.
The log isn't meant to be a prescriptive set of rules as things can change for the better and give you more reasons to hold the stock. But I find having a log an invaluable tool to help remove the emotion from investing.
- Mark-to-Market: Very few retail investors can tell you what the value of their portfolio is at the end of the previous trading day. Disciplined traders can as they tally up their wins and losses every day to track their performance (it's a process called mark-to-market).Long-term DIY investors won't need to undertake this task quite as often, but they should regularly and frequently take stock of their investment performance.I am not suggesting you watch the share prices like a hawk as that is unhealthy too but knowing the value of your portfolio and your best and worst performing stocks can help you make better decisions on when to buy or sell.
This ties in with having a logbook. If one of your worst performing stocks is giving you grief, you should look at the reasons why you bought it in the first place. If the fundamental reasons are still valid, it could be a cue for you to hang tight.
On the other hand, if those reasons have changed, it's often a sell signal – or at the very least a sign that you should take a more detailed look at the company.
There's another good reason why regular monitoring of your portfolio is useful. From my experience, whenever the value of my portfolio jumps very substantially higher from three or six months ago, it's usually a signal for me to take profit with the view of reinvesting the proceeds when the market dips.
This works better for those with a reasonably large and diversified portfolio of stocks and plays to the concept of "mean revision".
As I've tracked my portfolio for many years, I know when the increase in value looks out of the ordinary.
This is the reason why I sold a large chunk of my shares after the August 2018 reporting season as history has taught me that such gains are not sustainable and prices are likely to correct.
If I didn't regularly track my shares, I would be none the wiser.
Happy investing fellow Fools!