Immediate Profits vs. Delayed Rewards
Although it is easy to forget after several months of strong advances, 2006 started as an extremely difficult trading year. Until early summer, the markets were in a trading range that we doubt was profitable for very many.
But the late year rally changed all that and by the close on December 29, the stock market had solid gains. The FibTimer timing strategies also beat their respective benchmarks (again) and some, like the Small Cap Timer and REIT Timer had huge gains.
The Small Cap Timer ended 2006 with a + 24.7% gain vs. a + 15.1% gain for the Russell 2000 Small Cap Index. The REIT Timer realized a + 28.7% gain and the Conservative S&P Timer jumped + 21.9% in 2006.
Not too shabby a year.
But in the early months of 2006 we had several bouts of heavy selling on expanding volume that reminded investors just how quickly the market can turn.
But market timers should not be affected by relatively short term events. Our eyes should be focused on future profits. That is what market timing is all about. Following a strategy that beats the market "over time," and protects capital during bad times.
In this commentary we look at the psychology of trading. The need for immediate rewards and the inability of so many to recognize the value of delayed rewards and follow a plan to achieve them.
Why do so many investors and traders fail to achieve profits? One of the reasons is below.
The Need For Immediate Winning Trades
The term "impulsive" is often used to describe people who "can't wait. They can't delay; they've got to have it now." So they are willing to forgo something better that comes later in order to get something right away.
This is NOT a trait you want to have as a market timer.
If someone offered you a choice between a smaller amount of money ($100) available immediately and a larger amount ($1,000) that could be received after a specified delay (3 years), which would you take?
"...Why is it people engage in behaviors, the long-term consequence of which is worse for them?"
You would be surprised at how many would take the $100. In fact, a great deal of the buying and selling going on in the stock market every day is by those who are looking for that quick $100. Very few are thinking about the $1,000 and even fewer have a strategy to achieve it.
Why is it people engage in behaviors, the long-term consequence of which is worse for them? Why do you have that incredible chocolate cake right "now" when you're trying to lose weight, or trying to stay healthy, or trying to stay fit?
One of the reasons is that being healthy or being fit is a "delayed reward." It occurs later.
While the desire to succeed in market timing is perfectly fine, the desire for immediate profits and winning trades is not. It clouds the real goal. Making large profits over time. A goal few investors ever achieve.
Motivated By Immediate Rewards
The market is unlikely to hand "immediate awards" to you. Although market timing is all about being profitable, it is not about satisfying our emotional needs. Rather, it is the following of a rational plan to create wealth over time.
A winning market timer must tirelessly execute a trading strategy that will often come into conflict with the timer's emotions.
The outcome of any one buy or sell may not produce a profit. It's quite possible that the overall outcome of a series of buys or sells may not produce a profit. It is essential that these possibilities be acknowledged.
People are motivated by rewards and in modern society that usually means money. The more money we are offered, the harder we work.
Perhaps you were attracted to market timing because of the large potential profits you would make in the future. It's natural to want to receive a reward for your hard work. But if you expect an immediate reward for your effort and it isn't forthcoming, you'll be frustrated and disappointed. And when it comes to market timing, immediate rewards aren't always there.
For example, everyone expects to get paid on the date their paycheck is due, but have you observed what happens when a paycheck is late? Everyone is quite frustrated and some people can get very angry. People were expecting a hard earned reward but received no reward.
Unless one has the right perspective, market timing can feel that way also. One may put in an enormous effort and receive no "immediate" reward for it.
"...The more trades you make with a winning trading strategy, the more the law of averages will work in your favor, and across the series of trades, you'll be profitable. "
If one is "expecting" an immediate reward, it can be frustrating and disappointing when it does not appear. That is why it is important to take the proper perspective with market timing, and the proper perspective can only be based by looking at timing results over a long time frame.
The Big Picture And Laws Of Probability
It is essential for a market timer to think in terms of the big picture, and in terms of probabilities. You must realize that the outcome of any one buy or sell signal is not significant. It's the outcome over time that matters.
The more trades you make with a winning trading strategy, the more the law of averages will work in your favor, and across the series of trades, you'll be profitable.
Market conditions, as we all know, are not always conducive to our plans. This is a reality of market timing and it's necessary to prepare for it. If you are aware of this, you'll be less likely to react emotionally to losing trades, and also less likely to make bad decisions when they occur.
Seeing the big picture, and sticking to the trading plan, are the keys to timing success.
Conclusion
If you anticipate that you won't win on a single buy or sell signal, you will not feel disappointed when it happens.
If you acknowledge that you may not profit even after a series of buy or sell signals, you will similarly be able to deal with it, bounce back, and be ready to take the next trade.
But on the other hand, if you aren't prepared for these possibilities, you'll feel frustrated and disappointed. You may feel like giving up on timing.
Some market timers hit the jackpot and start right at the beginning of a profitable trend. Those who started in early to mid summer 2006 made immediate and substantial profits.
But typically, we start our market timing during difficult market conditions.
The right perspective goes a long way in coping with the inevitable hard balls that the market throws at us.
Those who stay the course reap the rewards over time.
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