“Have some self-control!”
Try telling that to a toddler who’s completely lost it. You might have as much luck with that as reminding an investor of self-control when the stock market is moving decisively in one direction—whether up or down.
We can lose composure buying an overvalued stock too high, giving in to FOMO (Fear Of Missing Out), or succumb to panic and incur a permanent loss by selling an undervalued stock too low.
The Devil’s Financial Dictionary, a satirical compendium, defines self-control as:
SELF-CONTROL, n. The secret to success as an investor; within you lurk an angel, a devil, a scholar, and an idiot. If the angel and the scholar ever let down their guard, the devil and the idiot will wreak havoc that will take years of work to undo. Those investors who control their own behavior and abandon the futile effort to control the markets around them are the only ones who will ultimately prevail.1
This virtue can be elusive even for professional investors.
Jesse Livermore, a stock trader in the early twentieth century, tragically embodies this struggle. Michael Batnick summarizes Livermore’s significant investing mistakes:
Being on the bear side when he should have been on the bull side and then flipping to the bull side when he should have stayed on the bear side cost him everything…It is somewhat ironic that the most quoted trader of all time exhibited such poor risk management. All the sayings and lessons he learned didn’t save him from blowing up four times.2
Sadly, Livermore took his own life in 1940.
You will never control the market. Trying to control yourself is hard enough. Even with all his experience, Livermore was unable to do either. He said:
It seems incredible that knowing the game as well as I did, and with an experience of twelve or fourteen years of speculating in stocks and commodities, I did precisely the wrong thing.3
We know self-control is the right thing. But knowing is not the same thing as doing.
Successful investors must learn—often through failure—the necessity of self-control.
Will you?
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Sources:
1. Zweig, Jason. (p. 187). PublicAffairs. Kindle Edition.
2. Big Mistakes: The Best Investors and Their Worst Investments, p. 22.
3. Quoted by Batnick, p. 20.