In the Stock Market, You Must Forget Regret

The stock market is always trying to separate you from your money.  Everybody knows that.

What some people may not know is that the market is equally good at separating you from your sanity.

My favorite crazy-making tactic on the part of individual stocks is the issue that trades sideways for weeks and then breaks out with a 10% gain in one day.  I tell myself that I can’t buy it now because it’s too extended.  So I figure I’ll buy it when it corrects tomorrow.

Tomorrow comes and the stock continues to soar.  Now I really can’t buy it.

And when the stock finally corrects for a day or two, it’s so high above its moving averages that only a fool would buy it.

This isn’t just a random rueful comment.  This has actually happened to me more than once.

And it seems to me to be one of a matched set of frustrating regrets that can take the sun right out of the sky for growth investors.

The first regret is: “The stock has gone up, I can’t buy it.”  The second regret is: “The stock has gone down, I can’t sell it.”

If you’ve been following the advice and stories that Cabot’s growth analysts tell in these wealth advisories, you know that the second regret is not only not true, it’s actually dangerous to your portfolio.

Psychologically, of course, it makes a lot of sense.  If you own a stock that has gone down in price, it’s hard to do the right thing and just sell it when it triggers your sell discipline.  Selling at a loss forces you to admit to failure, and that’s tough on both your pocket book and your ego.

But, as we’ve said here time and time again, if you can’t set and stick to a sell discipline, you might just as well throw your money into the back yard and let the birds make nests out of it.  A portfolio without a sell discipline is like a bucket with a hole in it.

The first regret is a little less common, but it’s a good one for growth investors to spend some time with.  I took a long, long look at Baidu (BIDU) back in January when it dipped to 105, but it was just completing a retest of its November/December lows.  But at the time, the Cabot China-Timer was flashing a red light and then, when BIDU began its new run, there were stronger stocks available.  But now that I’ve watched it go all the way up to 246, I’m still regretting every day that it went up and I didn’t own it.

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At 246 BIDU may still be a good stock.  The Chinese market–especially the Chinese Internet market–is very strong and still has amazing growth potential, which means BIDU may be a great buy here.  But the memory of that 105 low sticks in my craw and keeps me from looking at Baidu as just another growth company.

I know there are lots more growth stocks out there.  With the bulls firmly in charge of the rudder, it’s a target-rich environment.  But regret isn’t rational.  I looked at BIDU at 105, and regret can chafe for a long time.

The cure?

As usual, a dose of tough love is the ticket.  If you can’t sell your stocks when you should, you’re going to have a tough time as a growth investor.  If you can’t find buy points for stocks that make sense to you, same thing.  There’s a kind of personality that is shared by every successful growth investor I know, and it is optimistic, forward-looking and able to shed disappointments like a meter maid sheds abuse.  Good traits to emulate … if you can.