Page 740 - How to Make Money in Stocks Trilogy

Sparring with the Opponent: Arguments with the Ego 41

By late January 2000, Lee’s position in JDS Uniphase was up more than
3,700% from a split adjusted initial position of $3.25 to over $125. This was
a time of tremendous excitement. What Lee didn’t realize, though, was that
the stock had just gone through an enormous climax run—after which most
stocks correct sharply.
Lee was surprised by the sharp pullback in JDS Uniphase and held the
stock until it plunged all the way back down to around $20 in May 2001. He
was so sure it would recover. Lee says his bad habits and “sloppy sell rules”
had caught up with him. “Looking back,” he says, “it is simply flabbergast-
ing that I held this stock all the way down from $150 to $20.”
Lee regrouped, attended several IBD Seminars, and went back to the
basics. He knew that he needed to approach investing in a more disciplined
way. Lee has learned that investing “is kind of like baking an apple pie. You
have a recipe, and you need to follow it. You must follow the rules to take
the emotions out of it.” Lee says he learned this the hard way, but it’s made
him a better investor in the long run.

Arguments with the Ego
“Aloha Mike,” as he is known in investing circles, followed every CAN SLIM
Investing rule when he was a newer investor. This led to several years of
substantial gains in the market, but the more successful he was, the more his
ego became a problem, and he began breaking the sell rules. “Instead of
taking a 7 to 8% loss in a stock, the supposedly smarter me was selling at 25
to 40% losses, because I was so sure I knew what I was doing.”
Reviewing how much money he lost by not keeping the 7 to 8% sell rule
“was a real shocker.”
“Aloha Mike” faced the fact that every trade he made could be a possible
mistake and that those mistakes must be corrected quickly, and all losses
must be kept small.
A firm set of rules helped “Aloha Mike” have a concrete way to deal with
the market that has nothing to do with his emotions. He has a plan for three
roads that the market can take. “Stocks can go up, they can go down, or they
can stay in a sideways trading range,” he says. “Keeping the three roads in
mind allows me to stay nimble and not get mentally stuck in one scenario
when another fork in the road or the market may occur.”